Economic Policymaking Chapter 17

Government and the Economy Definitions: – 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.

Government and the Economy Unemployment and Inflation – Unemployment rate: Measured by the BLS, it is the proportion of the labor force actively seeking work, but unable to find jobs. – Inflation: The rise in prices for consumer goods. – CPI: Consumer Price Index- The key measure of inflation that relates the rise in prices over time.

Figures 17.1 and 17.2 Government and the Economy

Elections and the Economy – Economic trends affect what the voters vote for Political Parties and the Economy – Republicans focus on inflation – Democrats focus on unemployment

Instruments for Controlling the Economy Monetary Policy and “the Fed” – The manipulation of the supply of money and credit in private hands- too much cash and credit produces inflation. – Money supply affects the rate of interest paid. – Main policymaker is the Board of Governors of the Federal Reserve System- the “Fed.”

The Fed – 7 board members appointed by Congress, confirmed by Senate Chair, Ben Bernanke 14 year staggered terms (chair – 4 year terms) – The Feds instruments influence the supply of money in circulation: Sets discount rates Sets reserve requirements Selling government bonds – Through the use of these actions, the Fed can affect the economy.

Fiscal policy: Keynesian Versus Supply-Side Economics – Fiscal Policy: The policy that describes the impact of the federal budget on the economy. – Keynesian Economic Theory: Government spending and deficits help the economy weather its normal ups and downs. – Government’s job to increase demand of goods – Policies called “Keynesian”

Fiscal policy: Keynesian Versus Supply-Side Economics, continued… – Supply-Side policy: The policy that says there is too much taxation and not enough money to purchase goods and services. – Reduce taxation and government regulation then people will work harder, and thus create a greater supply of goods.

Obstacles to Controlling the Economy Some think politicians manipulate the economy to win reelection. But there are problems with that… – But things like the budget are prepared in advance of when they go into effect. – Foreign problems can affect our economy. – Capitalism can also affect the economy. So it is difficult for politicians to control the economy.

Arenas of Economic Policymaking Business and Public Policy: Lots of mergers and acquisitions since some creating transnational corporations. Government finds ways to control the excess power in this new economy. – Regulating Business. Antitrust policy: policies designed to ensure competition and prevent monopolies. Antitrust cases are lengthy and expensive – Benefiting Business. Government may loan businesses money Government collects data that business use.

Arenas of Economic Policymaking Consumer Policy: Consumers historically had little government protection. – Food and Drug Administration (FDA): Created in 1913 and approves foods and drugs sold in the U.S. – Federal Trade Commission (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. – National Labor Relations Act (Wagner Act) 1935: regulates labor-management relations Collective bargaining: union representatives and management determine pay & working conditions Government now provides unemployment compensation and a minimum wage. – Taft-Harley Act, 1947 Allows states to adopt right to work laws

Understanding Economic Policymaking Democracy and Economic Policymaking – As voting power increased, so did the demands for government action to restrict business. Economic Policymaking and the Scope of Government – Liberals and conservatives have different policy ideas. – One wants less government, the other wants more.