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, (Figure 17.1)

Government, Politics, and the Economy Inflation: Increases in the Cost of Living, (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

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 20 th Century – In 20 th 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