Chapter 17 Economic Policymaking

Capitalism Private individuals own the principal means of production Prices and wages determined by Supply and Demand “Free Market” = no government intervention of economy

“It’s the economy, Stupid.” Economic conditions drive voting behavior Democrats = priority is to decrease unemployment Republicans = priority is to decrease inflation

Unemployment Those people seeking work but unable to find it Compiled by Bureau of Labor Statistics (BLS) via monthly surveys of 60,000 households New jobs must be ~125,000/month just to keep pace with new workers “Discouraged workers” = given up job hunt or taken part-time jobs

Underemployment Rate Unemployment Rate + Discouraged workers rate

Inflation Increase in prices for goods and services BLS complies Consumer Price Index (CPI) by measuring the change in a fixed basket of goods and services (80,000)

History : Laissez-faire 1929-present: regulatory and activist 2 Tools to influence economy: Monetary Policy and Fiscal Policy

Monetary Policy Control over money supply held in private hands Federal Reserve Board – Prime % rate – Sells Bonds – Sets deposit reserve levels These can influence expansion/contraction of the money supply

Fiscal Policy Federal Budget to influence economy Taxing, Spending, Borrowing Keynesian Economic Theory vs. Supply-Side Economics

Keynesian Theory Government spending stimulates the economy by creating demand for goods and services “Pump-Priming” (New Deal/FDR) Favored by Democrats Considers deficit spending allowable, even necessary at times.

Supply-Side Economics Key task of policy is to stimulate supply, not demand First adopted under Reagan, favored by Republicans Lowering tax rates, de-regulating businesses, and decreasing government spending

Regardless of strategy … The concept of a free market economy / passive government re: economy is now virtually gone … Government’s responsibility to use fiscal policy to control/influence the economy

Then why is it so hard to control the economy? Policies are slow to enact “Uncontrollable expenditures” limit fiscal options Free Enterprise system / philosophy limits government actions Government spending / influence relatively small compared to billions of economic decisions made by consumers and business

Arenas of Economic Policymaking

Business Policy Protectionism Anti-Trust Policy – Preserve competition

Consumer Policy FDA CPSC FTC – To prevent harm to consumers

Labor Policy NLRB – To protect workers