Economic Policy Making

Two Major Worries Regarding The U.S. Economy Unemployment Rate Inflation Consumer Price Index (CPI)

Instruments for Controlling the Economy Since the Great Depression and the New Deal, government has been actively involved in steering the economy. The principle of laissez-faire, keeping government out of the economy, is largely gone. The most important tool the government has to manage the economy is its control over the money supply.

Monetary Policy An economic theory called monetarism holds that the supply of money is the key to the nation’s economic health. Monetarists believe that government should control the money supply to encourage economic growth and restrain inflation. Politicians worry constantly about the money supply because it affects the interest rates we (constituents) all pay.

The Federal Reserve System Created by Congress in 1913 to regulate the lending practices of banks (the money supply). The Federal Reserve System is intended to be beyond the control of the president and Congress. Its 7 member Board of Governors is appointed by the president and confirmed by the Senate Board members are given 14 year terms

How the Fed Works Federal Open Market Committee studies vast amounts of economic data. The FOMC sets the “federal funds rate” which is the rate banks charge each other for overnight loans. The Fed purchases and sells government bonds from banks. By buying or selling bonds from banks, the Fed determines whether banks have more or less money to lend out. The more money banks have to lend out, the cheaper borrowing is. If banks have less to loan, loans become more expensive and interest rates rise.

The Fed Can Profoundly Influence the State of the Economy

Fiscal Policy Describes the impact of the federal budget- taxing, spending, and borrowing- on the economy. Congress and the president shape fiscal policy. The use of fiscal policy to stimulate the economy is most often associated with advocates of big government.

Keynesian Economic Theory Named after English economist John Maynard Keynes. “Demand-side economics” 1936: Keynes emphasized that government spending could help the economy weather its normal ups and downs. If businesses were not able to expand, it would be up to the government to pick up the slack. If no jobs were available, government should create them. Democrats and Republicans alike adhered to the basic tenets of Keynesian economics until Reagan.

Supply-side Economics Reagan’s economic advisors proposed a radically different theory based on the premise that the key task for government economic policy is to stimulate the supply of goods, not their demand. To supply-siders, government soaked up too much of the Gross Domestic Product By taxing too heavily, spending too freely, and regulating too tightly, government curtailed economic growth. Republicans have come to accept supply-side economics, especially the policy of tax cuts.

Obstacles to Controlling the Economy “Political business cycle” Government makes economic policy very slowly. Budget process is dominated by “uncontrollable expenditures.” Private sector dominates the U.S. economy.

Economic interests far outnumber any other kind of interest groups Business Consumers Labor

Business and Public Policy: Regulation Suspicions over concentrated power has led to government regulations over business. Multinational Corporations- businesses with vast holdings in many countries with huge budgets. Antitrust policy: to ensure competition and prevent monopoly. Government can sue a company in court. The main regulatory agency responsible for regulation of business practices is the Securities and Exchange Commission (SEC). They regulate stock fraud and keep an eye on business accounting practices

Business and Public Policy: Subsidies Federal Government is the principle source of research and development funding in the U.S. The Department of Commerce serves as a storehouse of assistance for businesses: data on products and markets; helps businesses export their wares, protects inventions

Consumer Policy Years ago the motto was “let the buyer beware.” Consumers and their interests were ignored. The first major consumer protection policy in the U.S. was the Food and Drug Act of 1906, which prohibited interstate transportation of dangerous or impure foods and drugs. Today the FDA (Food and Drug Administration) has broad regulatory powers over the manufacturing, contents, marketing and labeling of food and drugs. Consumerism was a sleeping political giant until the 1960’s and consumer advocate Ralph Nader. 1960’s and 1970’s saw a flood of consumer protection legislation and the CPSC was created. Consumer Credit Protection Act: Stipulates that whenever you borrow money, you must be informed of the exact amount of interest you’ll pay

Labor and Government 1935 National Labor Relations Act (Wagner Act) guaranteed workers the right to collective bargaining. Taft-Hartley Act tipped legislation the other way in 1947; government was given some power to halt strikes and states could adopt “right to work” laws (free-rider problem is the result). Some big victories for minimum wage and unemployment compensation. Unions have fallen on hard times

Liberals vs. Conservatives What they argue about when it comes to economic policymaking is the scope of government involvement in the economy. Liberals favor more regulations over businesses, conservatives favor less. Whereas liberals focus on the imperfections of the market and what government can do about them, conservatives focus on the imperfections of government.