Economic Policymaking Chapter 17

Government and the Economy  Definitions: – Capitalism:  An economic system in which individuals and corporations, not the government, own the principle means of productions and seek profits.

– Mixed Economy:  An economic system in which the government is deeply involved in economic decisions through it role as regulator, consumer, subsidizer, taxer, employer and borrower.

Government and the Economy  Unemployment and Inflation – Unemployment rate: Measured by the BLS, it is the proportion of the labor force actively seeking work, but unable to find jobs.

– Inflation: The rise in prices for consumer goods.

– CPI: Consumer Price Index- The key measure of inflation that relates the rise in prices over time.

Government and the Economy Figures 17.1 and 17.2

Government and the Economy  Elections and the Economy – Economic trends affect what the voters vote for – Unemployment rates affect presidential votes  Political Parties and the Economy – Republicans tolerate unemployment – Democrats tolerate inflation

Instruments for Controlling the Economy  Monetary Policy and “the Fed” – The manipulation of the supply of money in private hands- too much cash and credit produces inflation.

– Money supply affects the rate of interest paid.

– Main policymaker is the Board of Governors of the Federal Reserve System- the “Fed.”

Instruments for Controlling the Economy  Monetary Policy and “the Fed” continued… – The Feds instruments to influence the supply of money in circulation:  Sets discount rates  Sets reserve requirements  Buying / selling government bonds – Through the use of these actions, the Fed can affect the economy.

Instruments for Controlling the Economy  Fiscal policy: Keynesian Versus Supply Side Economics – Fiscal Policy: The policy that describes the impact of the federal budget on the economy.

– – Keynesian Economic Theory: Government spending and deficits help the economy weather its normal ups and downs.

Government’s job to increase demand of goods

Instruments for Controlling the Economy  Fiscal policy: Keynesian Versus Supply Side Economics, continued… – Supply-Side policy: The policy that says there is too much taxation and not enough money to purchase goods and services.

– Reduce taxation and government regulation then people will work harder, and thus create a greater supply of goods.

Obstacles to Controlling the Economy   Some think politicians manipulate the economy to win reelection.

But there are problems with that… – But things like the budget are prepared in advance of when they go into effect.

– – – Some benefits are indexed.

Foreign problems can affect our economy.

Capitalism can also affect the economy.

 So it is difficult for politicians to control the economy.

Arenas of Economic Policymaking  Business and Public Policy: Subsidies Amid Regulations – The changing Face of Corporate Capitalism.

 Lots of mergers and acquisitions since 1980- some creating transnational corporations.

 Corporation battle for profits from the new technology economy.

 Government must find ways to control the excess power in this new economy.

Arenas of Economic Policymaking  Business and Public Policy: Subsidies Amid Regulations, continued… – Regulating Business.

 Antitrust policy: policies designed to ensure competition and prevent monopolies.

 Antitrust cases are lengthy and expensive – Benefiting Business.

 Government may loan businesses money  Government collects data that business use.

Arenas of Economic Policymaking  Consumer Policy: The Rise of the Consumer Lobby – Consumers historically had little government protection.

– FDA: Created in 1913 and approves foods and drugs sold in the U.S.

– FTC: Responsible for regulating false and misleading trade practices, which now includes consumer lending practices.

Arenas of Economic Policymaking  Labor and Government – Government historically sided with business over labor unions.

– – NLRB: regulates labor-management relations Collective bargaining: union representatives and management determine pay & working conditions – Government now provides unemployment compensation and a minimum wage.

Arenas of Economic Policymaking  New Economy, New Policy Arenas – The new economy is more information centered – There are still differences in information equality – More men than women have access – More whites than minorities have access – Differences are getting wider between the races

Understanding Economic Policymaking  Democracy and Economic Policymaking – As voting power increased, so did the demands for government action to restrict business.

– Some economic freedoms were given up for the greater good of society.

 Economic Policymaking and the Scope of Government – Liberals and conservatives have different policy ideas.

– One wants less government, the other wants more.

Internet Resources  Council of Economic Advisors  Federal Reserve Board  Federal Trade Commission  DOJ Antitrust Division