Economic PolicymakingEconomic Policymaking

Chapter 17

PreviewPreview

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 Government, Politics, and the EconomyEconomy

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 Government, Politics, and the EconomyEconomy

-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 Instruments for Controlling the EconomyEconomy

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 Government, Politics, and the EconomyEconomy

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 Government, Politics, and the EconomyEconomy

Unemployment: Joblessness in America, 1960-2002 (Figure 17.1)

Government, Politics, and the Government, Politics, and the EconomyEconomy

Inflation: Increases in the Cost of Living, 1960-2002 (Figure 17.2)

Policies for Controlling the Policies for Controlling the EconomyEconomy

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 ReserveFederal 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” Monetary Policy and “the Fed” continuedcontinued

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 ReviewQuick 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 RatesInterest 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 Policies for Controlling the EconomyEconomy

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 Instruments for Controlling the Economy: Fiscal PolicyEconomy: 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 Instruments for Controlling the Economy: Fiscal PolicyEconomy: 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 Obstacles to Controlling the Economythe 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 economyThe economy is grounded in the private

sector, which is harder to regulate

Politics, Politics, and the Politics, Politics, and the International EconomyInternational 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 PolicymakingEconomic 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 Arenas of Economic PolicymakingPolicymaking

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 Arenas of Economic PolicymakingPolicymaking

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 KnowLabor 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 Understanding Economic PolicymakingPolicymaking

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 PairsDebrief 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