1. CHAPTER 17 Economic Policymaking Government in America: People, Politics, and Policy Updated with 15 th Edition Edwards/Wattenberg/Lineberry

2. Government, Politics, and the Economy Introduction  Capitalism:  An economic system in which individuals and corporations, not the government, own the principal means of productions and seek profits  Profits determine production and prices  Mixed Economy:  An economic system in which the government is deeply involved in economic decisions through its role as regulator, consumer, subsidizer, taxer, employer and borrower  Multinational Corporations:  Businesses with vast holdings in many countries – Microsoft, Disney, Coca-Cola. Products flow between regions and jobs go to where they can be done cheaply

3. The Dilemma of Wal-Mart Pearson Education, Inc., Longman © 2008 Third largest company in the world in 2009 ($406 billion in revenue) Low prices for products, low wages for workers Government regulation affects WM –  SECminimum wagediscourage unions  forbidden from hiring undocumented workers Globalization  Almost all goods they sell are foreign (good for consumers, bad for jobs)

4. Voters, Politicians and the Economy Economic conditions are the best single predictor of how voters perceive the president is doing his job (pocketbook voting) Economy in 2008 was a major factor in Obama taking office (“It’s the Economy, Stupid”) Democrats stress keeping unemployment low (who are their constituents?) Republicans worry about inflation (who are their constituents?)

5. Unemployment  Unemployment Rate: measured by the Bureau of Labor Statistics (BLS) defined as the proportion of the labor force actively seeking work, but unable to find jobs.  Bad economy = social problems (higher suicide and homicide rates, drug and alcohol related deaths, depression, etc.)  Unemployment impacts minorities 2-3 times more than whites, young more than middle aged  BLS now also releases an UNDERemployment rate

6. Inflation  Inflation: the rise in prices for consumer goods  Consumer Price Index: the key measure of inflation. Goal is to reflect changes over time in the amount consumers need to spend to maintain a certain standard of living. How is CPI measured?  Three major time periods of inflation:  1973 and 1974 – OPEC cut oil supplies because of US support of Israel during war with Egypt and Syria  1979 - Iranian revolution – oil supply cut from Middle East  1991 – Iraq invaded Kuwait, people worried that oil supplies would be affected  People on fixed incomes are hit particularly hard by inflation

7. Government, Politics, and the Economy What do you think this graph would look like if it were extended out to today?

8. Government, Politics, and the Economy What has happened to the cost of consumer goods recently? Do you notice any changes?

9. Instruments for Controlling the Economy - The government has great impact on the economy but it is limited by a commitment to the free enterprise system Historically – 1929 Stock Market Crash – Hoover, Laissez faire policies New Deal – federal policies aimed at putting the US economy back on track Government has been very active in steering the economy since the Great Depression and the New Deal US Government has 2 tools to help guide the economy  Monetary policy  Fiscal policy

10. Policies for Controlling the Economy Monetary Policy and “the Fed”  The head of the Federal Reserve Board is Janet Yellen. She has more power over the US economy than even the president  Monetary Policy: the manipulation of the supply of money and credit in private hands; controlled by “the Fed”  Monetarism – economic theory that holds that the supply of money is the key to the country’s economic health  Too much cash and credit produces inflation, too little and we see credit tighten and unemployment rise  The money supply affects the interest rates we pay for houses, cars, businesses, etc.

11. The Federal Reserve System  Main policymaker is the Board of Governors of the Federal Reserve System–the “Fed”  Created in 1913 to regulate lending practices of banks and thus the money supply  They are beyond the control of the President and the Congress  Seven member board appointed by the President, for 14 year terms. From the board members, a chairman is chosen. Current chairperson of the Fed is Janet Yellen.

12. Policies for Controlling the Economy Monetary Policy and “the Fed” (continued)  The Fed’s instruments to influence the supply of money in circulation:  Sets the discount rate (rate at which banks borrow money from the Fed)  Sets reserve requirements (how much money banks have to have on reserve at all times)  Buys and sells government bonds  Through the use of these actions, the Fed can affect the economy.

13. Policies for Controlling the Economy Pearson Education, Inc., Longman © 2008 Fiscal Policy of Presidents and Parties  Fiscal Policy: the policy that describes the impact of the federal budget on the economy (How much is the government taxing, borrowing and spending?)  Fiscal policy is controlled by the President and the Congress  There are 2 different schools of thought:  Keynesian Economic Theory: government spending helps the economy weather its normal ups and downs, creation of federal jobs programs, etc may be necessary  Supply-side economics: tax cuts will stimulate the supply

14. Instruments for Controlling the Economy Pearson Education, Inc., Longman © 2008 Fiscal Policy of Presidents and Parties, (continued)  Supply-Side Economics: the policy that says there is too much taxation and not enough money to purchase goods and services. Favored by Republicans (Reagan, Bush, etc.)  Reduce taxation and government regulation then people will work harder, and thus create a greater supply of goods  Also called “trickle down economic theory”

15. Why It Is Hard to Control the Economy Pearson Education, Inc., Longman © 2008 Some think politicians manipulate the economy to win reelection. But there are problems with that thought pattern:  Things like the budget are prepared in advance of when they go into effect  Government makes economic policy slowly  Politicians do not always choose the correct path to ensure American prosperity  Capitalism can also affect the economy; private sector, not the public sector dominates the economy. Federal government spends less than 20 percent of GDP

16. Politics, Politics, and the Internat’l Economy Pearson Education, Inc., Longman © 2008 Protectionism: the economic policy of shielding an economy from imports World Trade Organization (WTO): the international organization that regulates international trade Free trade is controversial as jobs have increasingly been outsourced.  But short-term pain equals long-term gain

17. Arenas of Economic Policymaking Pearson Education, Inc., Longman © 2008 Business and Public Policy  Corporate Corruption and Concentration  Increased incidence of bankruptcy and scandals  Increased number of corporate mergers  Antitrust policy: a policy designed to ensure competition and prevent monopoly, which is the control of a market by one company

18. Arenas of Economic Policymaking Pearson Education, Inc., Longman © 2008 Business and Public Policy (continued)  Regulating and Benefiting Business  New wave of regulation Congress passed law in 2002 that toughened penalties for stock fraud Creation of Accounting Oversight Board to regulate accounting industry  Businesses benefit from regulation, too Copyrights and patents Government may loan businesses money. Government collects data that business use.

19. Arenas of Economic Policymaking Pearson Education, Inc., Longman © 2008 Consumer Policy: The Rise of the Consumer Lobby  Consumers historically have had little government protection.  Food and Drug Administration (FDA): created in 1913; regulates the manufacturing, contents, marketing, and labeling of food and drugs  “Consumerism” – Ralph Nader, 1960s  Federal Trade Commission (FTC): responsible for regulating false and misleading trade practices, which now includes consumer lending practices

20. Arenas of Economic Policymaking Pearson Education, Inc., Longman © 2008 Labor and Government  Government historically sided with business over labor unions.  National Labor Relations Board (NLRB): regulates labor-management relations; created in 1935 by the Wagner Act, guarantees workers the right of collective bargaining  The Taft-Hartley Act (1947) continued to guarantee unions the right of collective bargaining, but prohibited various unfair practices by unions.  President can halt major strikes through court injunction  States are permitted to pass “right to work” laws  Two notable successes gained by unions are that the government now provides unemployment compensation and a minimum wage.

21. Understanding Economic Policymaking Pearson Education, Inc., Longman © 2008 Democracy and Economic Policymaking  Voters expect more of politicians that they can control  Sometimes economic theory and democratic theory may be at cross purposes.  It is difficult to make decisions that hurt groups or involve short-term pain for long-term gain. Economic Policymaking and the Scope of Government  Liberals tend to favor more while conservatives favor less government involvement in the economy.

22. Summary Pearson Education, Inc., Longman © 2008 Political and economic sectors are closely intermingled. Voters expect a lot from politicians, more than they can deliver on the economy Two major instruments available to government for managing the economy—monetary and fiscal policies