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Economic Policymaking
Chapter 17
Government and the Economy

Definitions:
– Capitalism:
 An economic system in which individuals and
corporations, not the government, own the principle
means of production and seek profits.
– Mixed Economy:
 An economic system in which the government is
deeply involved in economic decisions through its
role as regulator, consumer, subsidizer, taxer,
employer and borrower.
Government and the Economy

Unemployment and Inflation
– Unemployment rate: Measured by the BLS, it is
the proportion of the labor force actively
seeking work, but unable to find jobs.
– Inflation: The rise in prices for consumer
goods.
– CPI: Consumer Price Index- The key measure
of inflation that relates the rise in prices over
time.
Government and the Economy
Figures 17.1 and 17.2
Government and the Economy

Elections and the Economy
– Economic trends affect what the voters vote for
– Unemployment rates affect presidential votes

Political Parties and the Economy
– Republicans tolerate unemployment
– Democrats tolerate inflation
Instruments for Controlling the
Economy

Monetary Policy and “the Fed”
– The manipulation of the supply of money in
private hands- too much cash and credit
produces inflation.
– Money supply affects the rate of interest paid.
– Main policymaker is the Board of Governors of
the Federal Reserve System- the “Fed.”
Instruments for Controlling the
Economy

Monetary Policy and “the Fed” continued…
– The Feds instruments to influence the supply of
money in circulation:



Setting discount rates
Setting reserve requirements
Buying / selling government bonds
– Through the use of these actions, the Fed can
affect the economy.
Instruments for Controlling the
Economy

Fiscal policy: Keynesian Versus SupplySide Economics
– Fiscal Policy: The policy that describes the
impact of the federal budget on the economy.
– Keynesian Economic Theory: Government
spending and deficits help the economy weather
its normal ups and downs.
– Government’s job to increase demand of goods
Instruments for Controlling the
Economy

Fiscal policy: Keynesian Versus SupplySide Economics, continued…
– Supply-Side policy: The policy that says there
is too much taxation and not enough money to
purchase goods and services.
– Reduce taxation and government regulation
then people will work harder, and thus create a
greater supply of goods.
Obstacles to Controlling the
Economy

Some think politicians manipulate the economy to
win reelection.
 But there are problems with that…
– Things like the budget are prepared in advance of when
they go into effect.
– Some benefits are indexed.
– Foreign problems can affect our economy.
– Capitalism can also affect the economy.

So it is difficult for politicians to control the
economy.
Arenas of Economic
Policymaking

Business and Public Policy: Subsidies Amid
Regulations
– The Changing Face of Corporate Capitalism.
 Lots of mergers and acquisitions since 1980- some
creating transnational corporations.
 Corporation battle for profits from the new
technology economy.
 Government must find ways to control the excess
power in this new economy.
Arenas of Economic
Policymaking

Business and Public Policy: Subsidies Amid
Regulations, continued…
– Regulating Business.
 Antitrust policy: policy designed to ensure
competition and prevent monopolies.
 Antitrust cases are lengthy and expensive.
– Benefiting Business.
 Government may loan businesses money.
 Government collects data that businesses use.
Arenas of Economic
Policymaking

Consumer Policy: The Rise of the
Consumer Lobby
– Consumers historically had little government
protection.
– FDA: Created in 1913 and approves foods and
drugs sold in the U.S.
– FTC: Responsible for regulating false and
misleading trade practices, which now includes
consumer lending practices.
Arenas of Economic
Policymaking

Labor and Government
– Government historically sided with businesses
over labor unions.
– NLRB: regulates labor-management relations.
– Collective bargaining: union representatives
and management determine pay & working
conditions.
– Government now provides unemployment
compensation and a minimum wage.
Arenas of Economic
Policymaking

New Economy, New Policy Arenas
– The new economy is more information centered
– There are still differences in information
equality


More men than women have access.
More whites than minorities have access.
Differences are getting wider between the races.
Understanding Economic
Policymaking

Democracy and Economic Policymaking
– As voting power increased, so did the demands for
government action to restrict business.
– Some economic freedoms were given up for the greater
good of society.

Economic Policymaking and the Scope of
Government
– Liberals and conservatives have different policy ideas.
– One wants less government, the other wants more.
Internet Resources

Council of Economic Advisors
 Federal Reserve Board
 Federal Trade Commission
 DOJ Antitrust Division