1. Chapter 16: Economic Policy
American Democracy Now, 3/e

2. Economic Health and the American Dream
Many U.S. citizens desire a healthy economy so that they can achieve the American dream —a financially secure, happy, and healthy life, with upward social mobility, attained through an individual’s hard work and persistence.
For most individuals the ability to earn enough money to attain the American dream is the product of several factors, including their education level, their work ethic, and the availability of well-paying jobs.
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3. Economic Health and the American Dream
Personal income is positively correlated with educational attainment.
Race and sex are also correlated with personal income.
Although achieving the American dream depends on individual attributes and opportunities to develop those attributes, the health of the national economy also plays a major role.
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The American Economy
The U.S. economy is not an example of pure capitalist economy.
A pure capitalist economy has government-free marketplace.
Because of the many national policies enacted to influence the economy, the U.S. economy is an example of a regulated capitalist economy (mixed economy).
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5. Economic Theories That Shape Economic Policy
Initial public support for laissez-faire economic policy.
Over time, as the national economy evolved and experienced ups and downs, economists developed new theories about the proper role for governments in creating and maintaining a healthy economy: Keynesian economics, supply-side economics, and monetarism.
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6. Laissez-Faire Economics: An Unrealized Policy
Until the late 1800s, a majority of the American people believed that the national government should take a relatively laissez-faire, or “hands-off,” stance with regard to the marketplace.
Adam Smith, Wealth of Nations (1776).
However, the national government never fully implemented laissez-faire.
As the national economy grew with industrialization, Americans accepted and even called for a mixed economy featuring regulated capitalism.
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Keynesian Economics
Before the Great Depression of the 1930s, government officials and economists believed that a balanced budget.
Keynesian economics recommends that during a recession the national government should increase its spending (to create jobs) and decrease taxes (so that people have more money to spend) to stimulate the economy.
During times of rapid economic growth—an economic boom—Keynesian theory recommends cutting government spending and possibly increasing taxes.
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Keynesian Economics
Keynesian economic theory advocates using fiscal policy, the combination of tax policy and spending policy, to ensure a healthy economy.
Fiscal policies of George W Bush and Barack Obama.
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9. Supply-Side Economics
President Reagan introduced the nation to a competing economic theory, supply-side economics, which advocates tax cuts and a decrease in government regulation to stimulate the economy in times of recession.
Supply-siders argue that the government collects so much money in income taxes from workers that they are discouraged from working more than they absolutely need to.
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10. Supply-Side Economics
High taxes drain the economy because they diminish people’s ability to save and corporations’ ability to invest to increase productivity.
Support for deregulation— reducing or eliminating restrictions on business— to increase supply of goods.
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Monetarism
Monetarism advocates that the government’s proper role in promoting a healthy economy is the regulation of the money supply to ensure that the rate of inflation remains low.
Inflation refers to a rising price level for consumer goods, which decreases the purchasing power of money.
Monetarists target an inflation rate of 1–3 percent per year to ensure an adequate money supply for a healthy economy.
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12. Should One Economic Theory Predominate?
There is perpetual debate over how involved the government should be in the economy and what specific policy actions it should take.
Each theory supports the use of different government policies to promote a healthy economy.
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13. Measuring Economic Health
Economists and government officials describe a healthy economy as one that has these characteristics: expanding gross domestic product (GDP); low unemployment rate; low inflation rate.
Other measures of economic health focus on the general well-being of the people by accounting for factors such as rates of poverty and literacy and the financial situation of households.
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14. Traditional Measures of Economic Health
Gross domestic product (GDP) is the total market value of all goods and services produced within a country’s borders.
The consumer price index (CPI) measures the average change in prices over time of a “market basket” of goods and services, including food, clothing, shelter, fuel, transportation costs, and selected medical costs.
A low unemployment rate, 5 percent or less, is also characteristic of a healthy economy.
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15. Other Measures of Economic Health
The United Nations (UN) created the Human Development Index (HDI) to measure the standard of living of the people of various nations.
The HDI assesses three components of human development that people in prosperous nations should be able to enjoy: a long and healthy life, educational opportunities, and a decent standard of daily living.
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16. Other Measures of Economic Health
Median household income is the income level in the middle of all household income.
Income inequality is calculated by measuring changes in the percentage of the total income held by each quintile of American households
The poverty rate is the percentage of the population with income below the nationally designated poverty level.
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17. Fiscal Policy and Economic Health
National government expenditures accounted for 24 percent of the GDP of the United States in 2011.
Although government spending certainly can create jobs, its primary goal is to provide the services necessary to fulfill the Constitution’s mission.
The other side of the coin, tax policy, raises revenue needed by the national government to serve the people.
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Tax Policy
Today, the national tax on individual income is the largest revenue source for the national government.
The second-largest revenue category, social insurance, includes taxes collected for Social Security and Medicare.
The national government also collects excise taxes, which are taxes levied against a specific item such as gasoline or liquor, estate and gift taxes, and customs duties (import taxes).
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Tax Policy
The national income tax is a progressive tax because it takes a larger percentage of the income of wealthier taxpayers and a smaller percentage of the income of less-well-off taxpayers.
A proportional tax (flat tax) takes the same percentage of each taxpayer’s income.
A regressive tax takes a greater percentage of the income of lower-income earners than of higher-income earners.
Taxes may affect various taxpayers differently because the government grants tax expenditures.
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Spending Policy
Programs granted budget authority through annual appropriation acts are discretionary spending programs.
The largest share of the national budget pays for mandatory spending , which includes programs whose budget authority is provided in laws other than annual appropriation acts.
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21. Creating Fiscal Policy Through the National Budget Process
The President’s Executive Budget
Congressional Action
The concurrent budget resolution.
Budget reconciliation.
Continuing resolution.
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22. Deficit Spending, Debt, and Economic Health
Deficit spending has become the norm.
The long-term impact of debt is the legal obligation to pay back not only the money initially borrowed (the principal ) but also interest, an additional amount of money equal to a percentage of the amount initially borrowed.
Future generations must pay back the debt of their parents and grandparents.
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Economic Policy
Where Do You Stand?
Is your personal standard of living better or worse today than it was five years ago, or is it about the same?
a. Better
b. Worse
c. The same
d. No opinion
Source: “Four in 10 Americans See Their Standard of Living Declining,”
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24. Monetary Policy and the Federal Reserve System
Board of Governors
Twelve Federal Reserve Banks
Federal Open Market Committee (FOMC)
Today, the Fed’s responsibilities include
setting monetary policy
supervising and regulating banking institutions;
maintaining the stability of financial markets;
providing financial services to depository institutions, the national government, and foreign official institutions
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Monetary policy
The Fed can raise or lower the reserve requirement —the amount of money that financial institutions must keep out of circulation.
It can also raise or lower the discount rate —the interest charged to financial institutions that borrow money from the Federal Reserve bank.
The Fed action that most influences the money supply is its decision to buy or sell Treasury Securities.
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Economic Policy
Regulatory Policy
Business Regulation
Social Regulation
Early Social Regulation
Consumer and Environmental Protection
The Costs of Regulation
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Regulatory Policy
Business regulation includes government policies that aim to preserve competition in the marketplace.
Social regulation refers to government policies directed at protecting workers, consumers, and the environment from the harm caused by marketplace competition.
Early Social Regulation
Consumer and Environmental Protection
The Costs of Regulation
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Economic Policy
Trade Policy in the Global Economy
Trade Policy: Protectionist or Free Trade?
International Trade Agreements
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29. Trade Policy in the Global Economy
To navigate in the global economy, each nation has its own trade policy —a collection of tax laws and regulations that support the country’s international commerce.
The goal of trade policy is ostensibly to promote prosperous economies.
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30. Trade Policy: Protectionist or Free Trade?
Protectionist trade policy aims at protecting domestic producers and businesses from foreign competition through tariff s and nontariff trade barriers.
A tariff is a special tax on imported goods
Nontariff trade barriers include government social and business regulations as well as government subsidies.
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31. Trade Policy: Protectionist or Free Trade?
After World War II, the United States and its international partners gradually shifted toward a free trade policy, which aims at lowering or eliminating tariffs and nontariff barriers to trade.
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32. International Trade Agreements
The 1947 General Agreement on Tariff s and Trade (GATT).
In 1995, the World Trade Organization (WTO) came into being.
The 1993 North American Free Trade Agreement (NAFTA).
Growing public concerns about possible damage to living standards and the health of the global environment.
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Economic Policy
Where Do You Stand?
Do you view foreign trade as a positive opportunity for U.S. businesses or as a threat to the U.S. economy?
a. Positive opportunity
b. Threat to economy
Source: “More Americans See Threat, Not Opportunity, in Foreign Trade,”
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Economic Policy
The U.S. Economy, the Global Economy, and the American Dream Today
A healthy economy with growing income inequality
The elusive American dream
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35. The U.S. Economy, the Global Economy, and the American Dream Today
Is the American dream doing better economically than your parents?
Is it being rich?
Is it living in a nation that has a stable, healthy economy and an equal opportunity to achieve (measured by home ownership, high levels of education, and comfortable retirement) according to your ability and effort?
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36. The U.S. Economy, the Global Economy, and the American Dream Today
Can government policies ensure a healthy national economy in today’s interdependent global economy?
Can government domestic policies ensure equal opportunity for citizens to achieve according to their ability and effort?
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Economic Policy
Where Do You Stand?
In your opinion, what is the United States’ most serious economic problem today?
a. Prices of gas and oil
b. Cost of housing/mortgages
c. Unemployment/jobs
d. Personal finances
e. Government spending on the war and defense
f. Other
Source: “Americans’ Views of the Economy and the State of the Country,”
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