Bell Work Who would you be more likely to vote for – a politician who promised to raise taxes, or a politician who promised to reduce taxes? Why?
Today I will… State reasons why the use of fiscal policy has declined Examine ways in which the prevailing economic theory is a product of the times Explain why the opinions and theories of economists may differ
Key Vocabulary Quantitative Easing Passive Fiscal Policies Baby Boomers Council of Economic Advisors
Economics and Politics Chapter 16, Lesson 3
Changing Nature of Economic Policy Decline of Discretionary Fiscal Policy Discretionary Fiscal Policy – the government should use its power to influence the economy Was popular from WWII through the 1970s Frustrations with stagflation made people look for different approaches Lags Recognition – it takes time to realize that there is a problem Legislative – it takes time to create a solution to the problem Implementation – it takes time to put the plan into place and see if it is working Ideology Politicians are often so sure that their ideas are the only correct ones that they are unwilling to compromise
Changing Nature of Economic Policy Rise of Monetary Policy Gave the Fed the responsibility for conducting monetary policy Was believed to be less political and could be implemented with minimum delays Recession of 2001 The Fed lowered interest rates to stimulate the economy Congress never acted The recession only lasted 8 months The Fed doesn’t always get it right Raising interest rates in 2000 to head off inflation may have contributed to the recession in 2001 Lowering interest rates in 2004 may have contributed to the housing boom and bust
Changing Nature of Economic Policy Popularity of Supply-Side Policies The idea of lower taxes is appealing Some people like the philosophy of smaller government and fewer regulations Not designed to deal with short term fluctuations in the business cycle, so was unable to help when the 2008 recession began
Changing Nature of Economic Policy Macro Policies and the Great Recession Recession of 2008-2009 was the longest since the Great Depression – 18 months GDP fell 4.5% Unemployment rose to 10% Banks were unwilling to lend money
Changing Nature of Economic Policy Macro Policies and the Great Recession Monetary Policy The Fed kept interest rates as low as possible Quantitative Easing The Fed purchased large quantities of riskier securities and other investments from private banks Money that was pumped into the economy kept interest rates low The Fed absorbed some of the risk that banks held so that they would be more inclined to lend again
Changing Nature of Economic Policy Macro Policies and the Great Recession Quantitative Easing Congress and the President responded quickly President Bush sponsored and Congress passed a $700 billion Troubled Asset Relief Program (TARP) that purchased potentially bad loans and investments from banks President Obama sponsored and Congress passed the American Recovery and Reinvestment Act that bailed out companies like GM and provided funding for projects that would create jobs quickly
Changing Nature of Economic Policy Macro Policies and the Great Recession Passive Fiscal Policies Don’t require new or special legislation to go into effect Automatic Stabilizers Unemployment Insurance Job Training Programs Social Security
Economics and Politics Today Economic Politics Most of the major debates in Congress today involve Spending Taxes Other budgetary measures
Economics and Politics Today Why Economists Differ Economists choose one policy over another because of which problem they think is most critical Unemployment v. Inflation Times and situations change – new situations influence economists views
Economics and Politics Today Council of Economic Advisers A 3 member group that reports on economic developments and proposes strategies Politicians listen to their advice but may be unwilling or unable to follow it
Economics and Politics Today Increased Public Understanding Economists have been able to describe, analyze and explain via mass media Use of models