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ECONOMIC POLICYMAKING
CHAPTER 17 OUTLINE
I. GOVERNMENT, POLITICS, AND THE ECONOMY
A. In the United States, the political and economic sectors are closely intermingled in a
mixed economy, where the government, while not commanding the economy, is still
deeply involved in economic decisions.
1. The United States operates under capitalism an economic system in which
individuals and corporations own the principal means of production, through
which they seek to reap profits.
2. Yet the American system is not one of pure capitalism; it actually has a mixed
economy a system in which the government, while not commanding the
economy, is still deeply involved in economic decisions.
3. Americans also draw sharp distinctions between “our economy” and “the world
economy.” Our new economy is also an international and global economy.
Government and the economy in the United States have always been closely
linked.
4. Multinational corporations—businesses with vast holdings in many countries
such as Disney, Coca-Cola, and Microsoft—dominate the world’s economy.
B. A look at Wal-Mart illustrates two key points.
1. The government’s long arm of regulation affects Wal-Mart, as it does the
hundreds and thousands of other U.S. companies.
2. Wal-Mart epitomizes the imbedding of the U.S. economy in the global economy,
a trend that will continue to have an enormous impact on the domestic economy
and the politics of economic policy.
C. Studies by political scientists have reaffirmed Harry S. Truman’s observations about
voters and their pocketbooks.
1. Policymakers worry constantly about the state of the economy, and voters often
judge officeholders by how well the economy performs.
2. Traditionally in American politics, Democrats stress the importance of
employment while Republicans are worried about inflation. This reflects their
constituencies.
D. Measuring how many and what types of workers are unemployed is one of the major
jobs of the Bureau of Labor Statistics (BLS) in the Department of Labor.
1. No one questions using a survey to determine the unemployment rate, but
some economists do challenge the BLS’s definition of this rate (the proportion
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of the labor force actively seeking work but unable to find a job).
E. The problem of inflation is the other half of policymakers’ regular economic
concern.
1. The Consumer Price Index (CPI) is the key measure of inflation.
2. Few things are more worrisome to consumers and politicians alike than the
combined effects of inflation and unemployment marching upward together,
referred to by Jimmy Carter as the “misery index.”
II. POLICIES FOR CONTROLLING THE ECONOMY
A. The impact of government on the economic system is substantial, but it is also
sharply limited by a basic commitment to a free enterprise system.
1. When the stock market crash of 1929 sent unemployment soaring, President
Herbert Hoover clung to the laissez-faire principle that government should not
meddle with the economy.
2. In the next presidential election, Hoover was handily defeated by Franklin D.
Roosevelt, whose New Deal experimented with dozens of new federal policies
to put the economy back on track.
3. Government has been actively involved in steering the economy since the Great
Depression and the New Deal.
4. The American political economy uses two important tools to guide the
economy—monetary policy and fiscal policy.
B. Monetary policy and the Fed.
1. Monetary policy involves the manipulation of the supply of money and credit in
private hands.
a. An economic theory called monetarism holds that the supply of money is
the key to the nation’s economic health.
b. Monetarists believe that having too much cash and credit in circulation
generates inflation.
2. The main agency for making monetary policy is the Board of Governors of the
Federal Reserve System (otherwise known as “the Fed”).
a. Created by Congress in 1913 to regulate the lending practices of banks and
thus the money supply, the Federal Reserve System is intended to be
formally beyond the control of either the president or Congress.
b. Its seven-member Board of Governors is appointed by the president (and
confirmed by the Senate) for 14-year terms—a length of the time designed to
insulate them from political pressures; the general finding is that the Fed
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actually is responsive to the White House, but at times the chief executive
can be left frustrated by the politically insulated decisions of the Fed.
3. The Fed sets discount rates for the money that banks borrow from the Federal
Reserve banks; by raising or lowering the rate that banks pay, these increased
(or decreased) costs will be passed on to people who take out loans, and thus
affect the amount of money in circulation.
a. The Fed can also exercise control over the money supply by buying and
selling government securities in the market (open market operations),
thereby either expanding or contracting the money supply.
C. Fiscal policy: Keynesian versus supply-side economics.
1. Fiscal policy describes the impact of the federal budget—taxing, spending, and
borrowing—on the economy.
2. Fiscal policy is shaped mostly by the Congress and the president.
3. Whether bigger government or smaller government best ensures a strong
economy has become the central issue in economic policymaking.
4. On the side of big government, Democrats lean more toward Keynesian
economic theory, which holds that government must stimulate greater demand,
when necessary, with bigger government (such as federal job programs).
5. Many Republicans advocate supply-side economics, which calls for smaller
government (such as tax cuts) to increase the incentive to produce more goods.
a. Rather than public works programs to stimulate demand, Americans
received tax cuts under President Reagan and President George W. Bush to
stimulate supply.
III. WHY IT IS HARD TO CONTROL THE ECONOMY
A. Some scholars argue that politicians manipulate the economy for short-run
advantage to win elections; however, no one has shown that decisions to influence
the economy at election time have been made on a regular basis.
B. “Managing” the economy is more difficult than many politicians (and citizens)
believe.
1. Politicians—and even economists—do not understand the workings of the
economy sufficiently well to always choose the correct adjustments to ensure
prosperity.
2. Most policies must be decided upon a year or more before their full impact will
be felt on the economy.
3. The American capitalist system presents a restraint on controlling the economy:
because the private sector is much larger than the public sector, it dominates the
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economy.
4. The increasingly interdependent world activities of other nations can interfere
with the American government’s economic plans.
5. Fiscal policy is hindered by the budgetary process: most of the budget
expenditures for any given year are “uncontrollable.”
6. Economic policy in the United States is decentralized: the president and
Congress may not agree on taxes or spending, and neither may agree with the
Fed.
IV. ARENAS OF ECONOMIC POLICYMAKING
A. Economic interests far outnumber any other kind of interest groups.
1. Liberal or conservative, most interest groups seek benefits, protection from
unemployment, tax breaks, or safeguards against some other economic evil.
2. Business, consumers, and labor are three of the major actors in, and objects of,
government economic policy.
B. Americans have always been suspicious of concentrated power, whether in the hands
of government or business. In both the old economy and the new, government policy
has tried to control excess power in the corporate world.
1. Corruption and concentration of economic power are two major concerns of
government regulation.
a. The corruption scandals of the twenty-first century followed a binge of
corporate concentration in the last century.
b. Corporate giants have also internationalized in the postwar period.
Some multinational corporations, businesses with vast holdings in
many countries, have annual budgets exceeding that of many foreign
governments.
c. Since the early 1980s, a new form of entrepreneurship has flourished,
merger mania.
2. The purpose of antitrust policy is to ensure competition and prevent
monopoly (control of a market by one company).
a. Government regulation of business is at least as old at the Sherman
Antitrust Act of 1890.
3. Although business owners and managers complain about regulation, the
government also sometimes comes to the aid of struggling businesses.
4. The main regulatory agency responsible for regulation of business practices
is the Securities and Exchange Commission (SEC).
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C. Consumer policy.
1. The first major consumer protection policy in the United States was the Food
and Drug Act of 1906, which prohibited the interstate transportation of
dangerous or impure food and drugs.
2. Today the Food and Drug Administration (FDA) has broad regulatory powers
over the manufacturing, contents, marketing, and labeling of food and drugs.
a. It is the FDA’s responsibility to ascertain the safety and effectiveness of new
drugs before approving them for marketing in America.
3. “Consumerism” was awakened in the 1960s by consumer activists such as Ralph
Nader, who argued that it was the government’s responsibility to be a watchdog
on behalf of the consumer.
a. The Consumer Product Safety Commission (CPSC) has broad powers to
ban hazardous products from the market.
4. The Federal Trade Commission (FTC)—which has traditionally been
responsible for regulating trade practices—also jumped into the business of
consumer protection in the 1960s and 1970s; Congress also made the FTC the
administrator of the new Consumer Credit Protection Act (which enforces
“truth in lending”).
D. Labor and government.
1. Until the Clayton Antitrust Act of 1914 exempted unions from antitrust laws,
the federal government spent more time busting unions than trusts.
2. The major turning point in government policy toward labor took place during
the New Deal.
a. In 1935, Congress passed the National Labor Relations Act (often called
the Wagner Act), which guaranteed workers the right of collective
bargaining—the right to have labor union representatives negotiate with
management to determine working conditions—and set rules to protect
unions and organizers.
b. The Taft-Hartley Act of 1947 continued to guarantee unions the right of
collective bargaining, but also prohibited various unfair practices by unions.
(1) The law permitted states to adopt what union opponents call rightto-work laws—laws that forbid labor contracts from requiring workers
to join unions in order to hold their jobs.
3. Unions have had two notable successes.
a. Partly as the result of successful union lobbying, the government provides
unemployment compensation.
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b. Since the era of the New Deal, government has guaranteed a minimum wage
for hourly employees.
V. UNDERSTANDING ECONOMIC POLICYMAKING
A. In America, solutions to many of the problems of a free enterprise economy were
achieved through the democratic process.
B. It would be an exaggeration to say that democracy regularly facilitates an economic
policy that looks after general rather than specific interests.
1. One of the consequences of democracy for economic policymaking is that
groups that may be adversely affected by an economic policy have many
avenues through which they can work to block it.
2. The decentralized American political system often works against efficiency in
government.
C. Economic policymaking and the scope of government.
1. Liberals and conservatives disagree about the scope of government involvement
in the economy.
2. Liberals focus on the imperfections of the market and what government can do
about them; conservatives focus on the imperfections of government.
3. The two parties have different economic policies, particularly with respect to
unemployment and inflation; Democrats try to curb unemployment more than
Republicans, though they risk inflation in so doing, and Republicans are
generally more concerned with controlling inflation.
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