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Chapter 17 Economic Policymaking

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

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Chapter 17 Economic Policymaking

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  1. Chapter 17 Economic Policymaking

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

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

  4. 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

  5. Underemployment Rate • Unemployment Rate + Discouraged workers rate

  6. 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)

  7. History • 1789-1929: Laissez-faire • 1929-present: regulatory and activist • 2 Tools to influence economy: • Monetary Policy and Fiscal Policy

  8. 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

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

  10. 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.

  11. 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

  12. 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

  13. 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

  14. Arenas of Economic Policymaking

  15. Business Policy • Protectionism • Anti-Trust Policy • Preserve competition

  16. Consumer Policy • FDA • CPSC • FTC • To prevent harm to consumers

  17. Labor Policy • NLRB • To protect workers

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