Chapter Fifteen

Economic Policy What do we mean when we say “economy”? What type of economic system do we have? What theories are there about the economy and the role the government should play? (4) What are characteristics of a “healthy” economy? What does “fiscal policy” mean? How does the government play a role in creating fiscal policy? What is meant by “monetary policy”? How does the government play a role in that? Give examples of different regulatory policy and different trade policies.

The Nature of the American Economy - Capitalism Economic Health and the American Dream

Should the Government Act to Ensure a Healthy Economy? Laissez-Faire Economics Laissez-Faire Economics – The government should neither encourage or discourage, through laws, business practices that affect economic health. Keynesian Economics Keynesian Economics – During a recession, the government should increase its spending to stimulate the economy (deficit spending). Supply-Side Economics Supply-Side Economics – Advocates tax cuts to stimulate the economy in times of recession. Monetarism Monetarism – Advocates that government’s proper role in promoting a healthy economy is the regulation of the supply of money to ensure that the rate of inflation remains low.

Keynesian economics

Traditional Measures of Economic Health: Gross Domestic Product (GDP) Consumer Price Index (CPI) Unemployment Other Measures of Economic Health Other Measures of Economic Health: The Human Development Index (HDI) Real median household income Measuring Economic Health

National Debt National Debt Clock What is the sequester?National Debt ClockWhat is the sequester?

Consumer Price Index CPI Inflation Calculator

Human Development Index

Poverty Rate U.S. Poverty Rate

Tax Policy: Progressive tax Progressive tax – Takes a larger percentage of income of higher-income earners and a smaller percent from lower- income earners Proportional tax (flat) Proportional tax (flat) – Takes the same percentage of each taxpayer’s income Regressive tax Regressive tax – Takes a greater percentage of income of lower-income earners than higher-income earners Fiscal Policy

Spending Policy: Mandatory Spending Discretionary Spending Fiscal Policy

Federal Budget (2007) From the Washington Post Total Federal Budget (2007): $2.77 trillion

Pearson Education, Inc., Longman © 2008 Government, Politics, and the Economy “It’s the Economy, Stupid”: Voters, Politicians, and Economic Policy –Economic trends affect who voters vote for. –Economic conditions are the best predictor of voters’ evaluation of the president. –Republicans worry about inflation. –Democrats stress importance of unemployment.

Creating Fiscal Policy Through the National Budget Process

Budget officially starts a year and a half before beginning of fiscal year Office of Management and Budget sends the president’s budget priorities to the executive agencies Executive agencies use Presidents guidelines to formulate their funding requests The OMB and Pres work together to create fiscal plan for national government = drafts budget document : EXECUTIVE BUDGET This then goes to Congress

Creating Fiscal Policy Through the National Budget Process

Deficit Spending, Debt, and Economic Health

GDP: Growth of 2-2.5% economy considered strong

Monetary Policy and the Federal Reserve System Regulatory Policy to Prevent Market Failure: Business Regulation (SEC, National Labor Relations Act (Wagner Act), Interstate Commerce Commission (ICC) Business Regulation (SEC, National Labor Relations Act (Wagner Act), Interstate Commerce Commission (ICC) Social Regulation (Pure Food and Drug Act, Meat Inspection Act, Fair Labor Standards Act, Consumer Product Safety Act) Social Regulation (Pure Food and Drug Act, Meat Inspection Act, Fair Labor Standards Act, Consumer Product Safety Act) Deregulation Deregulation Federal Reserve: Sets Monetary Policy/Body of Government Policies Aimed at Maintaining Price Stability --Raise or lower the reserve requirement, raise or lower the discount rate, buy or sell U.S. Treasury bonds

Trade Policy Two Forms of Trade Policy: Protectionist Trade Policy Protectionist Trade Policy - Tariffs – a special tax on imported goods - Non-tariff trade barriers & subsidies Free Trade Policy (GATT and WTO, NAFTA, G-8) Free Trade Policy (GATT and WTO, NAFTA, G-8) Trade Deficit Trade Deficit – the gap between the value of a nation’s exports and the value of its imports

The U.S. Economy and the American Dream Today A Healthy Economy with Growing Income Inequality A Healthy Economy with Growing Income Inequality The Elusive American Dream The Elusive American Dream

THINK ABOUT: Policymaking in the federal system: How does it work? (How do all national institutions get involved? --branches) What role do the national institutions play in policy implementation and interpretation?

PRACTICE FRQ A.Define fiscal policy B.Describe one significant way the executive branch influences fiscal policy C.Describe one significant way the legislative branch influences fiscal policy D.Define monetary policy E.Explain two reasons why the Federal Reserve Board is given independence in establishing monetary policy

A. Taxing and/or spending The budget B. The president proposes/prepares the federal budget The president signs/vetoes legislation (related to taxing, spending, and borrowing) The White House Office of Management and Budget (OMB) recommends the budget) C. Congress passes the federal budget Congress acts on tax and spending legislation The Congressional Budget Office advises Congress on economic policies

D. Regulating the money supply Controlling inflation/deflation Adjusting interest rates to regulate the economy Adjusting bank reserve requirements The cost of money E.It removes politics from monetary policy decision making Congress/the president can abdicate responsibility for difficult decision-making power The Federal Reserve Board relies on expertise when making decisions The Federal Reserve Board makes economic policies efficiently

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