ECONOMIC POLICY.

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Presentation transcript:

ECONOMIC POLICY

The Roots of Government Participation in the Economy For the first 100 years of our nation, most economic issues were controlled by the states not the national government. The national government's roles were limited to public lands policies public works projects and the encouragement of business through the use of taxes and tariffs, including land grants for railroads The states were quite active in promoting and regulating private business activities. They built the Erie Canal, roads, and railroads. States licensed, regulated, and inspected many factories and businesses.

Industrialization Following the Civil War, the US moved from an agrarian to a manufacturing based economy: as the US industrialized many large-scale factories were created. This shift lead to many national economic problems.

Industrialization National problems such as… fluctuations between periods of economic prosperity and economic downturn Industrial accidents Disease outbreaks Labor conflict Unemployment and the exploitation of workers were too large and complex for state governments alone.

Laissez-Faire Doctrine A French term meaning “to allow to do, to leave alone.” It is a hands-off governmental policy that is based on the belief that governmental regulation of the economy is counter-productive Economy too big and complex for government to manage. Large government role in regulating economy may allow corruption and politically based, rather than economically based, decisions: less economic growth for all.

The Progressive Era (1901-1917) The Progressive Movement was a middle class reform movement designed to change the political, economic, and social system of the United States. In general, Progressive reformers like Mother Jones wanted to rein in corporate power and make it more responsive to society and the democratically elected government.

The Great Depression / New Deal The Great Depression (a catastrophic worldwide economic downturn) began with a stock market collapse bank failures dropping prices falling production followed by rising unemployment Rising tariffs and other protectionist trade barriers President Hoover announced nothing was wrong and the economy was fundamentally sound. He was correct, but PSYCHOLOGICAL Panic ensued. FDR called for and Congress enacted a "New Deal" for Americans. This legislation allowed for strong government participation in the economy.

The Post-World War II Era As WWII came to an end, many policymakers worried that the conversion from a wartime to a peacetime economy might trigger yet another great depression. With the passing of The Employment Act and the The Taft-Hartley Act (to deal with unemployment) the US government became deeply involved in maintaining high levels of employment.

The Social Regulation Era In the 1960s and 1970s our government turned to social regulations. Social regulations deal with the quality and safety of products. Agencies such as the Consumer Product Safety Commission Occupational Safety and Health Administration Environmental Protection Agency National Transportation Safety Administration were created to protect consumers and citizens from a variety of threats.

Deregulation A reduction in market controls over some industries. In theory, deregulation would increase market competition and lead to lower prices for consumers. Ford administration made deregulation a major objective. Conservative Republican Priority of the Carter and especially Reagan Administrations Airlines, Telecommunications and Banking, to name a few Significant price reductions and increase in product choices followed Agricultural regulation still controversial. 2002 Bush signed into law a six-year agricultural bill with a price tag of $100 billion. Economy & incomes grew significantly

Stabilizing the Economy Since FDR and the Great Depression, the government has taken a participatory approach to macroeconomic problems. Goals: Economic Stability Balanced, sustained economic growth & rising national income High job employment Low inflation (steadiness in the general level of prices)

The Circular-Flow Diagram of an Economy The $ flow expresses people’s willingness to pay for something (Demand) The flow of goods & services express people’s willingness to provide (Supply) Land, labor, capital

Simulated Small Economy Practical Exercise

The Circular-Flow Diagram of an Economy: Depicting Growth

Supply, Demand, and Equilibrium Finding the Equilibrium Price and Quantity

Tools for the Goals The US government primarily uses three instruments to influence the economy… Monetary policy Fiscal policy Trade Policy

Monetary Policy Monetary policy involves the regulation of the country's money supply and interest rates. Low or decreasing money supply: Economy & inflation may shrink High or increasing money supply: Economy & inflation may grow, especially if money supply and consumer demand outrun production The primary responsibility for monetary policy rests with the Federal Reserve Board (Fed). The Federal Reserve System was created in 1913 consists of: the Federal Reserve Board the Federal Open Market Committee 12 Federal Reserve Banks

The Federal Reserve System The Fed is made up of seven members appointed by the president for 14 year overlapping terms with approval of the Senate. The Fed has a number of tools including: manipulating the reserve requirement changing the discount rate open market operations – the buying and selling of securities by the Fed

Fiscal Policy Following the economist John Maynard Keynes government spending has sometimes been used to offset a decline in private spending and help maintain levels of spending production employment. Fiscal policy involves taxation and government spending policies to influence the operation of the economy. John Kennedy was the first president to actively use fiscal policy. He deliberately cut taxes, continued to spend and ran a deficit in order to fuel economic growth. There are some limits to how well this works.

Taxes & Outlays of the Federal Government (2012)

Global Trade Around $20 TRILLION worth of goods and services trade crosses international borders each year (2011). Almost $4 trillion with the United States alone The global system of production is both deepening and broadening. There are now 63,000 transnational companies with about 700,000 affiliates.

Who are the United States’ major trading export partners? Figure 19.2 Who are the United States’ major trading partners? The United States exports more goods to Canada than any other country. China, Mexico, and Japan also comprise large shares of U.S. exports.

The Global Economy While we are moving into a truly global economy industrialized trading blocks – regional free-trade areas – have developed in Asia Europe North America Free trade and globalization have been beneficial to many Americans and to some foreign economies but they are not supported by all. For example, labor unions and some domestic manufacturers have been critical of free trade initiatives.

The Circular-Flow Diagram, Revisited and Expanded The Flow of Money Through the Economy

Trade Issues Economists generally believe in Free Trade Claim cheaper products bring greatest good Go with Comparative Advantage in production Free vs Fair Trade: Dumping & Barriers Subsidies, Tariffs, Quotas, VER, Distribution Balance of Payments Environmental & Human Rights Protectionism for Political Gain National Security Industries? Steel, Arms, Aircraft, computers

Simulated International Trade Practical Exercise

The Economics of Regulating Environmental Activity Environmental policy has many economic trade-offs. If we want clean air we must pay more for cars that have emission controls. If we want clean rivers and lakes we have to pay more for plastics and manufactured products because it is more expensive to get rid of wastes in environmentally friendly ways. We may decide that the jobs of loggers are more important than the habitat of the spotted owl.

The Circular-Flow Diagram of an Economy The $ flow expresses people’s willingness to pay for something (Demand) The flow of goods & services express people’s willingness to provide (Supply) Land, labor, capital

The Circular-Flow Diagram of an Economy: Depicting Growth

The Circular-Flow Diagram, Revisited and Expanded The Flow of Money Through the Economy