Download Ch 17 Economic Policy

Economic Policymaking
Chapter 17
Preview

What do you know?
– Capitalism
 In what ways is the U.S. a capitalist system and in
what ways are we NOT?
– Inflation / Unemployment
– Recession / Depression
 What’s the difference between these terms?
– The Federal Reserve (Fed)
*Activity: Recessions
Government, Politics, and the
Economy

Introduction
– Capitalism:

An economic system in which individuals and corporations,
not the government, own the principle means of productions
and seek profits.
– Mixed Economy:

An economic system in which the government is deeply
involved in economic decisions through it role as regulator,
consumer, subsidizer, taxer, employer and borrower.
– Multinational Corporations:

Businesses with vast holdings in many countries.
Government, Politics, and the
Economy
-Economic trends affect who the voters vote for.
– Economic conditions are the best predictor of
voters’ evaluation of the president.
– Republicans worry about inflation.
– Democrats stress importance of unemployment.
Instruments for Controlling the
Economy
US Government has two tools to affect economy
1. Monetary Policy


Controlling the amount of money (money supply) in
circulation
Federal Reserve Board has these tools
2. Fiscal Policy:


Managing the federal budget (raising or lowering taxes,
for example; modifying government spending)
Congress and President have these tools
Government, Politics, and the
Economy

Two Major Worries: Unemployment and
Inflation
– Unemployment rate: Measured by the BLS, the
proportion of the labor force actively seeking
work, but unable to find jobs.
– Inflation: The rise in prices for consumer
goods.

Consumer Price Index: The key measure of inflation
that relates the rise in prices over time.
Government, Politics, and the
Economy

Unemployment: Joblessness in America, 1960-2002 (Figure 17.1)
Government, Politics, and the
Economy

Inflation: Increases in the Cost of Living, 1960-2002 (Figure 17.2)
Policies for Controlling the
Economy

Monetary Policy and “the Fed”
– Monetary policy: monitoring and controlling
the amount of money in circulation
– Too much available cash and credit produces
inflation.
– Not enough cash produces recession
*Film Clip: How the Fed Works
http://www.time.com/time/specials/packages/article/0,28804,1946375_1947930_1947942,00.html
Federal Reserve
The Federal Reserve System: was created to
manage monetary policy (the money supply)
– Its Board of Governors– the “Fed”– is
appointed by the President and confirmed by
Senate but the Fed acts fairly independently
– The Fed manages the government run central
bank
Monetary Policy and “the Fed”
continued
Money Supply:
The Fed influences the supply of money in
circulation by:



Influencing the rate at which loans are given which
influences decisions about borrowing
Controlling the amount of money banks have
available and the rate at which people can borrow
Adding to the money supply by buying and selling
government bonds and printing more money
– Through the use of these actions, the Fed can
affect the economy.
Quick Review

What is monetary policy?
 What is the Fed (Federal Reserve)?
 What do they do?
 Why are they needed?
 What problems might arise if we didn’t
have a Federal Reserve?
 Activity: You are the Fed
Interest Rates

Lower interest rates= easier to get money,
more money available, risk of inflation but
better employment opportunities

Raise Interest Rates= harder to get
money/more costly; risk higher
unemployment; addresses inflation risk
Policies for Controlling the
Economy

Fiscal Policy
– Is enacted by regulating revenues and
expenditures through the federal budget;
– This is determined by Congress and the
President
– Keynesian Economic Theory (liberal)
– Supply-side Economics (conservative)
Instruments for Controlling the
Economy: Fiscal Policy
– Keynesian Economic Theory: Encourages
government’s active participation in the
economy
– Believes that government spending helps the
economy weather its normal ups and downs.
– Government’s job is to increase demand of
goods by spending.
Instruments for Controlling the
Economy: Fiscal Policy

Supply-Side economics: By decreasing
government involvement in the economy,
people will be forced to work harder and
save more
– Reduce taxation and government regulation,
then people will work harder, and thus create a
greater supply of goods.
– Cutting taxes increases the money supply
Obstacles to Controlling
the Economy

Some think politicians manipulate the
economy to win reelection…but:
 It is difficult to predict the economy far
enough in advance to make and implement
policy
 Events abroad can affect the economy
 The economy is grounded in the private
sector, which is harder to regulate
Politics, Politics, and the
International Economy

Protectionism: The economic policy of
shielding an economy from imports.
 World Trade Organization (WTO): The
international organization that regulates
international trade.
 Free trade is controversial as jobs have
increasingly been outsourced.
Economic Policymaking

Business and Public Policy
– A few transnational corporations control most of the country’s
assets and play a large role in the world economy
 They have formed though corporate mergers
-Antitrust laws: designed to ensure competition and
prevent monopoly by breaking up the company; open
the market to competition.
-The government participates in the economy by assisting
failing industries with subsidies and loans and by
funding product research
Arenas of Economic
Policymaking
Consumer Policy:
 Consumers historically have had little
government protection but it has increased
recently.
– FDA: Created in 1913; 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 business
over labor unions prior to 20th Century
– In 20th Century, labor wins some:



Government now provides unemployment
compensation
a minimum wage
Safety standards, the regular workweek
Labor Acts to Know


Wagner Act, 1935 (National Labor Relations Act)
– Guaranteed workers the right of collective bargaining
– Sets rules to protect unions
– Created the National Labor Relations Board to regulate
labor-management relations
Taft-Hartley Act, 1947
– Kept collective bargaining but limited it
– Gave the President power to halt major strikes
– Permitted states to pass laws that forbid unions from
requiring employees become members
Understanding Economic
Policymaking
Economic Policymaking and the Scope of
Government
– Liberals tend to favor more government
involvement in the economy.
– Conservatives tend to favor less government
involvement in the economy.
Debrief Word Pairs
Discuss the following word pairs:
-Fiscal policy / monetary policy
(monetarism)
-Keynesian Theory / Supply-side
Economics
-Unemployment / Inflation
-The Fed / Bonds / Interest rates
-Wagner Act / Taft Hartley Act