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The proper role of the U.S.
government in the economy
A constitutional and Ideological
debate
The Question
What is the proper role of the U.S.
government in the American
Economy?
In your opinion, should the government help stabilize the
economy, create jobs and help the people during a recession or
should it allow the market fix itself through the business cycle
• 1) government should
help
• 2) market should be left
alone
THE DEBATE
• The Business cycle, or the regular ebbs and
flows of the market are naturally occurring.
Left alone, it leads to regular cycles of
recessions and prosperity.
Is it constitutionally proper for the government
to regulate economic activities? How does
economic stabilization work? Is it economically
wise to regulate the economy?
The Business Cycle
Two Debates:
1 ) The constitutional debate:
Strict Construction vs. Loose Construction
2) The ideological debate:
Progressivism or big government vs. Laissez
Faire or small government (free market)
Historical Review
• Jefferson versus Hamilton debate concerning
the1st bank of the United States
• Strict construction: If the constitution does
not say yes it means no
• Loose construction: if the constitution does
not say no it means yes.
• Enumerated versus implied powers
Constitutional basis for strict
construction
The Tenth Amendment:
The powers not delegated to the United States
by the Constitution, nor prohibited by it to the
States, are reserved to the States respectively, or
to the people.
Constitutional Basis for Loose
Construction
•
•
General welfare clauses:
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the
Debts and provide for the common Defense and general Welfare of the United States; but all
Duties, Imposts and Excises shall be uniform throughout the United States;
•
•
preamble
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure
domestic Tranquility, provide for the common defense, promote the general Welfare, and secure
the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for
the United States of America.
•
•
Necessary and Proper clause:
The Congress shall have Power - To make all Laws which shall be necessary and proper for carrying
into execution the foregoing powers, and all other Powers vested by this Constitution in the
Government of the United States, or in any Department or Officer thereof
•
•
The Commerce Clause:
The Congress shall have Power To regulate Commerce with foreign Nations, and among the several
States, and with the Indian tribes
Strict construction/ Laissez Faire in action
•
•
•
President Grover Cleveland once told a
friend that he saw his chief legislative duty
to be stopping bad bills from becoming law,
One of Cleveland’s most famous vetoes was •
his veto of the Texas Seed Bill in 1887.
A long and severe drought had stricken
areas of Texas. Congress authorized a
special appropriation to send seeds to the
drought-stricken farmers. The amount
($10,000, or approximately $223,000 in
•
today’s dollars)
“I can find no warrant for such an
appropriation in the Constitution, and I do
not believe that the power and duty of the
general government ought to be extended
to the relief of individual suffering which is
in no manner properly related to the public
service or benefit. A prevalent tendency to
disregard the limited mission of this power
and duty should, I think, be steadfastly
resisted, to the end that the lesson should
be constantly enforced that, though the
people support the government, the
government should not support the
people.”
Furthermore, Cleveland said, it would
weaken the “bonds of a common
brotherhood” for the government to
provide assistance to individuals where
individuals, families, communities and
private charities otherwise would.
What do you think of Cleveland’s policy ?
1. It was cruel unwarranted
by the constitution and
unwise
2. It was appropriate reading
of the constitution but
socially unwise
3. It was appropriate reading
of the constitution and
both socially and
economically wise.
Loose Construction and big government in action
•
•
•
•
•
1900-2011:
The Progressive Era
The Great Depression and the New Deal
The Great Society
Universal Health Care and the Stimulus
Fiscal and Monetary Stabilization Policies
1) Monetary Policy
• The monetary policy is the act of regulating the
money supply by the Federal Reserve Board of
Governors. One of the main responsibilities of
the Federal Reserve System is to regulate the
money supply so as to keep production, prices,
and employment stable.
• The "Fed" has three tools to manipulate the
money supply. They are the 1)reserve
requirement, 2)open market operations, and
3)the discount rate
2)Fiscal Policy
• The second way to influence the money
supply lies in the hands of the government
with the Fiscal Policy. The fiscal policy consists
of two main tools. The changing of tax rates,
and changing government spending. The main
point of fiscal policy is to keep the
surplus/deficit swings in the economy to a
minimum by reducing inflation and recession.
In summary:
• Fiscal Policy is performed by Congress,
President, Department of the treasure, Office
of management and budget.
• Monetary policy is performed by a relatively
independent bureaucracy called the Federal
Reserve Board.
Fiscal Policy
Pie chart of discretionary part of the budget
Summary
• Fiscal Policy involves changing government spending and
taxation. It involves a shift in the governments budget
position. e.g. Expansionary fiscal policy involves tax cuts,
higher government spending and a bigger budget deficit.
• Monetary policy involves influencing the demand and supply
of money, primarily though the use of interest rates. It can
also involves unorthodox policies such as open market
operations and quantitative easing
Fiscal and monetary policies during
recession/inflation
Market condition/ideology Progressive/loose
construction/keynesian
Laissez faire/strict
construction/ conservative
Recession/unemployment
Fiscal policy: Increase the
budget, run deficit,
stimulus
Monetary policy: lower
discount rate, lower
reserve requirement, buy
back government bonds
Fiscal Policy: lower taxes
Monetary policy: lower
discount rate, lower
reserve requirement, buy
back government bonds
Inflation/ overheated
market
Fiscal policy: increase taxes
Reduce spending
Monetary policy:
Increase discount rate,
increase reserve
requirement, sell
government bonds
Fiscal policy: cut the
budget reduce government
spending as part of GDP.
Monetary policy: reduce
the money supply, increase
discount rate, increase
reserve requirement, sell
government bonds
Problems with Fiscal/Monetary
• Problems with fiscal policies and monetary policies:
• Federal reserve is an independent bureaucracy,
congress is ideologically politically motivated. They
may pursue contradictory policies:
• During recession, the fed may lower interest rates and
buy bonds, while congress may run a deficit stimulus
which requires borrowing money by selling bonds and
raising interest rates.
• Tomorrow: Keynesian demand side vs Arthur Laffer
supply side vs Milton Friedman Monetarism
Homework
• Synthesis level analysis: Imagine you were an
advisor to President Obama, write a policy
program advising the president how to end
the recession. Make sure you properly address
the debate and use the fiscal and monetary
policy tools
Which policy would you pursue during
recession?
1.
2.
3.
4.
5.
Congress expands the budget
through stimulus, Fed reduce
interest rates, buys back
government bonds.
Congress cuts the budget contracts
economic policy. Fed reduces
interest rates and buys back bonds.
Congress lowers taxes, cuts the
budget, fed lowers rates, buys back
government bonds
Congress increases taxes, passes
stimulus, fed buys back bonds
Congress lowers taxes, Fed expands
money supply by printing money