Download Chapter 17 Economic Policymaking

Chapter 17
Economic Policymaking
Capitalism
• Private individuals own the principal means of
production
• Prices and wages determined by Supply and
Demand
• “Free Market” = no government intervention
of economy
“It’s the economy, Stupid.”
• Economic conditions drive voting behavior
• Democrats = priority is to decrease
unemployment
• Republicans = priority is to decrease inflation
Unemployment
• Those people seeking work but unable to find
it
• Compiled by Bureau of Labor Statistics (BLS)
via monthly surveys of 60,000 households
• New jobs must be ~125,000/month just to
keep pace with new workers
• “Discouraged workers” = given up job hunt or
taken part-time jobs
Underemployment Rate
• Unemployment Rate + Discouraged workers
rate
Inflation
• Increase in prices for goods and services
• BLS complies Consumer Price Index (CPI) by
measuring the change in a fixed basket of
goods and services (80,000)
History
• 1789-1929: Laissez-faire
• 1929-present: regulatory and activist
• 2 Tools to influence economy:
• Monetary Policy and Fiscal Policy
Monetary Policy
• Control over money supply held in private
hands
• Federal Reserve Board
– Prime % rate
– Sells Bonds
– Sets deposit reserve levels
• These can influence expansion/contraction of the
money supply
Fiscal Policy
• Federal Budget to influence economy
• Taxing, Spending, Borrowing
• Keynesian Economic Theory vs. Supply-Side
Economics
Keynesian Theory
• Government spending stimulates the
economy by creating demand for goods and
services
• “Pump-Priming” (New Deal/FDR)
• Favored by Democrats
• Considers deficit spending allowable, even
necessary at times.
Supply-Side Economics
• Key task of policy is to stimulate supply, not
demand
• First adopted under Reagan, favored by
Republicans
• Lowering tax rates, de-regulating businesses,
and decreasing government spending
Regardless of strategy …
• The concept of a free market economy /
passive government re: economy is now
virtually gone …
• Government’s responsibility to use fiscal
policy to control/influence the economy
Then why is it so hard to control the
economy?
• Policies are slow to enact
• “Uncontrollable expenditures” limit fiscal
options
• Free Enterprise system / philosophy limits
government actions
• Government spending / influence relatively
small compared to billions of economic
decisions made by consumers and business
Arenas of Economic Policymaking
Business Policy
• Protectionism
• Anti-Trust Policy
–Preserve competition
Consumer Policy
• FDA
• CPSC
• FTC
–To prevent harm to consumers
Labor Policy
• NLRB
–To protect workers