chapter 17 economic policymaking government in america: people, politics, and policy updated with 15...

CHAPTER 17

Economic Policymaking

Government in America: People, Politics, and PolicyUpdated with 15th Edition

Edwards/Wattenberg/Lineberry

Government, Politics, and the Economy

Introduction Capitalism:

An economic system in which individuals and corporations, not the government, own the principal means of productions and seek profits

Profits determine production and prices 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

Multinational Corporations: Businesses with vast holdings in many countries –

Microsoft, Disney, Coca-Cola. Products flow between regions and jobs go to where they can be done cheaply

The Dilemma of Wal-Mart

Pearson Education, Inc., Longman © 2008

Third largest company in the world in 2009 ($406 billion in revenue)

Low prices for products, low wages for workers

Government regulation affects WM – SEC minimum wage discourage unions forbidden from hiring undocumented workers

Globalization Almost all goods they sell are foreign (good for

consumers, bad for jobs)

Voters, Politicians and the Economy

Economic conditions are the best single predictor of how voters perceive the president is doing his job (pocketbook voting)

Economy in 2008 was a major factor in Obama taking office (“It’s the Economy, Stupid”)

Democrats stress keeping unemployment low (who are their constituents?)

Republicans worry about inflation (who are their constituents?)

Unemployment

Unemployment Rate: • measured by the Bureau of Labor Statistics (BLS)• defined as the proportion of the labor force

actively seeking work, but unable to find jobs.

Bad economy = social problems (higher suicide and homicide rates, drug and alcohol related deaths, depression, etc.)

Unemployment impacts minorities 2-3 times more than whites, young more than middle aged

BLS now also releases an UNDERemployment rate

Inflation

Inflation: the rise in prices for consumer goods Consumer Price Index: the key measure of inflation.

Goal is to reflect changes over time in the amount consumers need to spend to maintain a certain standard of living. How is CPI measured?

Three major time periods of inflation: 1973 and 1974 – OPEC cut oil supplies because of US

support of Israel during war with Egypt and Syria 1979 - Iranian revolution – oil supply cut from Middle

East 1991 – Iraq invaded Kuwait, people worried that oil

supplies would be affected People on fixed incomes are hit particularly hard by

inflation


What do you think this graph would look like if it were extended out to today?


What has happened to the cost of consumer goods recently? Do you notice any changes?

Instruments for Controlling the Economy

- The government has great impact on the economy but it is limited by a commitment to the free enterprise system

Historically – 1929 Stock Market Crash – Hoover, Laissez faire policiesNew Deal – federal policies aimed at putting the US

economy back on trackGovernment has been very active in steering the economy

since the Great Depression and the New DealUS Government has 2 tools to help guide the economy

Monetary policy Fiscal policy

Policies for Controlling the Economy

Monetary Policy and “the Fed” The head of the Federal Reserve Board is Janet

Yellen. She has more power over the US economy than even the president

Monetary Policy: the manipulation of the supply of money and credit in private hands; controlled by “the Fed”

Monetarism – economic theory that holds that the supply of money is the key to the country’s economic health

Too much cash and credit produces inflation, too little and we see credit tighten and unemployment rise

The money supply affects the interest rates we pay for houses, cars, businesses, etc.

The Federal Reserve System

Main policymaker is the Board of Governors of the Federal Reserve System–the “Fed” Created in 1913 to regulate lending

practices of banks and thus the money supply

They are beyond the control of the President and the Congress

Seven member board appointed by the President, for 14 year terms. From the board members, a chairman is chosen. Current chairperson

of the Fed is Janet Yellen.


Monetary Policy and “the Fed” (continued) The Fed’s instruments to influence the supply of

money in circulation: Sets the discount rate (rate at which banks

borrow money from the Fed) Sets reserve requirements (how much money

banks have to have on reserve at all times) Buys and sells government bonds

Through the use of these actions, the Fed can affect the economy.



Fiscal Policy of Presidents and Parties Fiscal Policy: the policy that describes the

impact of the federal budget on the economy (How much is the government taxing, borrowing and spending?)

Fiscal policy is controlled by the President and the Congress

There are 2 different schools of thought: Keynesian Economic Theory: government spending

helps the economy weather its normal ups and downs, creation of federal jobs programs, etc may be necessary

Supply-side economics: tax cuts will stimulate the supply

Instruments for Controlling the Economy


Fiscal Policy of Presidents and Parties, (continued) Supply-Side Economics: the policy that says there is

too much taxation and not enough money to purchase goods and services. Favored by Republicans (Reagan, Bush, etc.)

Reduce taxation and government regulation then people will work harder, and thus create a greater supply of goods

Also called “trickle down economic theory”

Why It Is Hard to Control the Economy


Some think politicians manipulate the economy to win reelection.

But there are problems with that thought pattern: Things like the budget are prepared in

advance of when they go into effect Government makes economic policy slowly Politicians do not always choose the correct

path to ensure American prosperity Capitalism can also affect the economy;

private sector, not the public sector dominates the economy. Federal government spends less than 20 percent of GDP

Politics, Politics, and the Internat’l 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. But short-term pain equals long-term gain

Arenas of Economic Policymaking


Business and Public Policy Corporate Corruption and Concentration

Increased incidence of bankruptcy and scandals Increased number of corporate mergers Antitrust policy: a policy designed to ensure

competition and prevent monopoly, which is the control of a market by one company



Business and Public Policy (continued) Regulating and Benefiting Business

New wave of regulation Congress passed law in 2002 that toughened

penalties for stock fraud Creation of Accounting Oversight Board to

regulate accounting industry Businesses benefit from regulation, too

Copyrights and patents Government may loan businesses money. Government collects data that business use.



Consumer Policy: The Rise of the Consumer Lobby Consumers historically have had little

government protection. Food and Drug Administration (FDA): created in

1913; regulates the manufacturing, contents, marketing, and labeling of food and drugs

“Consumerism” – Ralph Nader, 1960s Federal Trade Commission (FTC): responsible for

regulating false and misleading trade practices, which now includes consumer lending practices



Labor and Government Government historically sided with business over

labor unions. National Labor Relations Board (NLRB): regulates

labor-management relations; created in 1935 by the Wagner Act, guarantees workers the right of collective bargaining

The Taft-Hartley Act (1947) continued to guarantee unions the right of collective bargaining, but prohibited various unfair practices by unions. President can halt major strikes through court

injunction States are permitted to pass “right to work” laws

Two notable successes gained by unions are that the government now provides unemployment compensation and a minimum wage.

Understanding Economic Policymaking


Democracy and Economic Policymaking Voters expect more of politicians that they can

control Sometimes economic theory and democratic

theory may be at cross purposes. It is difficult to make decisions that hurt groups

or involve short-term pain for long-term gain.Economic Policymaking and the Scope of

Government Liberals tend to favor more while conservatives

favor less government involvement in the economy.

Summary


Political and economic sectors are closely intermingled.

Voters expect a lot from politicians, more than they can deliver on the economy

Two major instruments available to government for managing the economy—monetary and fiscal policies

chapter 17 economic policymaking government in america: people, politics, and policy updated with 15...

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