Download economic policymaking

ECONOMIC
POLICYMAKING
U.S. economy:

Most important issue facing politicians
#1 indicator of political success is economy’s success
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Capitalism
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Free market system; individuals & corporations own the
principal means of production
Socialism?
Mixed Economy – U.S.
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Free market system based on supply & demand BUT gov’t
plays a regulatory role
 regulator, consumer, tax collector, employer, borrower
Two major economic worries:
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#1 - UNEMPLOYMENT
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Always stays at about 3% due to job turnover (5% or
less is average)
Politicians worry as it nears
double digits
Which party is most willing
to accept higher inflation to
keep unemployment down?
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Democrats - have broad appeal
to working class
U.S. current rate – 7.0%
FL current rate – 6.4%
Two major economic worries:
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#2 – INFLATION
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Too much $ in
circulation – prices up
Republicans, who
appeal to many in
investor/business class,
seek to avoid inflation
at risk of rising
unemployment
Measured by the CPI
Measures the change in cost of a fixed basket of goods & services
(90,000 items from eggs to doctor visits to energy costs)
CONTROLLING THE ECONOMY

TWO TOOLS: Monetary &
Fiscal Policy
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Monetary Policy
Money Supply
 Private control since Fed
controls the amount of $ in
circulation
Fiscal Policy
 The Budget
 Fed. government regulating
taxes & expenditures
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What’s the difference?
MONETARY POLICY

Managed by the Federal Reserve Board (1913)
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Board of Governors appointed by P and confirmed by
Senate & serve 14-yr. terms (insulation from political
pressure)
Acts independently & regulates monetary policy in 3 ways
1.
Manipulating the interest rate at which loans are given
2.
Manipulating the amount of reserves --- $ banks must
have available (also controls interest rates)
3.
Adds to the money supply by selling bonds
Greenspan was Chairman under Ps from
Reagan – Bush #43; now Ben Bernanke
FISCAL POLICY – The Budget
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Taxing & Spending & Borrowing
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By Congress & P (although
Constitution gives Congress the most
economic power)
Liberal theory – KEYNESIAN
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John Maynard Keynes
Government as active participant –
spend $ to stimulate demand & help
a lagging economy
Deficit spending not a problem
Keynesian Economic Theory:
•
Government should be responsible for
spending more money in order to boost
demand.
• The government could make up for the drop
in private spending by buying goods and
services on its own.
• Laissez-faire?
• FDR;
Obama?
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Conservative theory –
SUPPLY-SIDE ECONOMICS

Decrease government’s
involvement
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Big government taxes too heavily,
spends too freely, regulates too
tightly, and thereby actually curbs
economic growth
Stimulate supply of goods so cost
of goods declines
Greater production
accomplished through tax cuts &
spending cuts on social programs
Based on the idea that the supply of goods drives the
economy.
 Supply-side economists believe that taxes have a strong
negative impact on economic output.
• Argument is that a tax cut increases total employment so
much that the government actually collects more in taxes
at the new, lower rate.
• Fiscal Policy History:
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In the 1940s – spending up or down?
•
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Did Keynesian economics work?
Economy’s condition between 1945 and 1960?
JFK & LBJ?
Ronald Reagan – 1980s?
Obstacles to Controlling the Economy:

“Government can do about as much to control the
economy as the average parent can do to control
the average teenager.”
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PRESIDENT:
 could try to manipulate economy before elections…
rarely happens
GOVERNMENT:
 WORKS SLOW!
UNCONTROLLABLE EXPENDITURES:
 like Social Security; no control over amount
CAPITALISM:
 private sector larger than public sector & so dominates
economy
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Business control of the
economy:
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Multinational corporations control much of country’s assets
 Microsoft, GE, Coca Cola, AOL Time-Warner
 Wal-Mart - world’s largest company; China’s biggest
customer
Mergers have flourished since early 1980s
 Only 2 credit giants: Visa and Mastercard
Antitrust laws allow Justice Dept. to sue monopolies – to
ensure free competition
Microsoft case – Clinton -- Gates “loses” but….
SEC (Securities & Exchange Commission) regulates business
practices
CONSUMER PROTECTIONS
“Let the Buyer Beware!”
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FDA (Food & Drug Administration), 1906
 Monitors health safety of food
 Approves drugs based on safety &
effectiveness
FTC (Federal Trade Commission)
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Regulate trade & enforces truth in advertising
1960s-70s, consumer groups seeking
increased regulation over product safety and
advertising
 RALPH NADER! (the nation’s “nag”)
 “Unsafe At Any Speed” – Corvair
 Goes after unsafe products & false ads
Nader’s Crusade, “Nation’s Nag”
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Convinced that the law placed too much emphasis on driver mistakes and not
enough on the unsafe design of cars.
Unsafe at Any Speed, charged that automakers stressed styling, comfort, speed,
power, and a desire to cut costs at the expense of safety – particular target was the
Corvair
Get two dozen landmark consumer protection laws, including the National Traffic
and Motor Vehicle Safety Act, Occupational Safety and Health Act, Consumer
Products Safety Act, and the Freedom of Information Act