1. 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?

2. 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

3. Key Vocabulary Quantitative Easing Passive Fiscal Policies
Baby Boomers
Council of Economic Advisors

4. Economics and Politics
Chapter 16, Lesson 3

5. 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

6. 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

7. 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

8. Changing Nature of Economic Policy
Macro Policies and the Great Recession
Recession of was the longest since the Great Depression – 18 months
GDP fell 4.5%
Unemployment rose to 10%
Banks were unwilling to lend money

9. 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

10. 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

11. 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

12. Economics and Politics Today
Economic Politics
Most of the major debates in Congress today involve
Spending
Taxes
Other budgetary measures

13. 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

14. 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

15. Economics and Politics Today
Increased Public Understanding
Economists have been able to describe, analyze and explain via mass media
Use of models