Chapter 17 Economic Policymaking

Capitalism

• Private individuals own the principal means of production

• Prices and wages determined by Supply and Demand

• “Free Market” = no government intervention of economy

“It’s the economy, Stupid.”• Economic conditions drive voting behavior• Democrats = priority is to decrease

unemployment• Republicans = priority is to decrease inflation

Unemployment

• Those people seeking work but unable to find it

• Compiled by Bureau of Labor Statistics (BLS) via monthly surveys of 60,000 households

• New jobs must be ~125,000/month just to keep pace with new workers

• “Discouraged workers” = given up job hunt or taken part-time jobs

Underemployment Rate

• Unemployment Rate + Discouraged workers rate

Inflation

• Increase in prices for goods and services• BLS complies Consumer Price Index (CPI) by

measuring the change in a fixed basket of goods and services (80,000)

History

• 1789-1929: Laissez-faire• 1929-present: regulatory and activist

• 2 Tools to influence economy:• Monetary Policy and Fiscal Policy

Monetary Policy

• Control over money supply held in private hands

• Federal Reserve Board– Prime % rate– Sells Bonds– Sets deposit reserve levels• These can influence expansion/contraction of the

money supply

Fiscal Policy

• Federal Budget to influence economy• Taxing, Spending, Borrowing• Keynesian Economic Theory vs. Supply-Side

Economics

Keynesian Theory

• Government spending stimulates the economy by creating demand for goods and services

• “Pump-Priming” (New Deal/FDR)• Favored by Democrats• Considers deficit spending allowable, even

necessary at times.

Supply-Side Economics

• Key task of policy is to stimulate supply, not demand

• First adopted under Reagan, favored by Republicans

• Lowering tax rates, de-regulating businesses, and decreasing government spending

Regardless of strategy …

• The concept of a free market economy / passive government re: economy is now virtually gone …

• Government’s responsibility to use fiscal policy to control/influence the economy

Then why is it so hard to control the economy?

• Policies are slow to enact• “Uncontrollable expenditures” limit fiscal

options• Free Enterprise system / philosophy limits

government actions• Government spending / influence relatively

small compared to billions of economic decisions made by consumers and business

Arenas of Economic Policymaking

Business Policy• Protectionism• Anti-Trust Policy–Preserve competition

Consumer Policy• FDA• CPSC• FTC–To prevent harm to consumers

Labor Policy• NLRB–To protect workers