1. ECONOMIC POLICY

2. 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.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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.

9. 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.

10. 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

11. 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)

12. 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

13. Simulated Small Economy Practical Exercise

14. The Circular-Flow Diagram of an Economy:
Depicting Growth

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

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

17. 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

18. 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

19. 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.

20. Taxes & Outlays of the Federal Government (2012)

21. 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.

22. 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.

23. 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.

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

25. 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

26. Simulated International Trade Practical Exercise

27. 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.

29. 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

30. The Circular-Flow Diagram of an Economy:
Depicting Growth

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