Chapter 17 Economic Policymaking. Capitalism Private individuals own the principal means of...
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Transcript of Chapter 17 Economic Policymaking. Capitalism Private individuals own the principal means of...
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Chapter 17 Economic Policymaking
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Capitalism
• Private individuals own the principal means of production
• Prices and wages determined by Supply and Demand
• “Free Market” = no government intervention of economy
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“It’s the economy, Stupid.”• Economic conditions drive voting behavior• Democrats = priority is to decrease
unemployment• Republicans = priority is to decrease inflation
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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
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Underemployment Rate
• Unemployment Rate + Discouraged workers rate
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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)
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History
• 1789-1929: Laissez-faire• 1929-present: regulatory and activist
• 2 Tools to influence economy:• Monetary Policy and Fiscal Policy
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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
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Fiscal Policy
• Federal Budget to influence economy• Taxing, Spending, Borrowing• Keynesian Economic Theory vs. Supply-Side
Economics
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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.
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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
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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
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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
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Arenas of Economic Policymaking
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Business Policy• Protectionism• Anti-Trust Policy–Preserve competition
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Consumer Policy• FDA• CPSC• FTC–To prevent harm to consumers
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Labor Policy• NLRB–To protect workers