ECONOMIC POLICYMAKING

U.S. economy:

Most important issue facing politicians #1 indicator of political success is economy’s success Capitalism

Free market system; individuals & corporations own the principal means of production

Socialism? Mixed Economy – U.S.

Free market system based on supply & demand BUT gov’t plays a regulatory role regulator, consumer, tax collector, employer, borrower

Two major economic worries: #1 - UNEMPLOYMENT

Always stays at about 3% - due to job turnover (5% or less is average)

Politicians worry as it nears double digits

Which party is most willing to accept higher inflation to keep unemployment down? Democrats - have broad

appeal to working class U.S. current rate – 7.0% FL current rate – 6.4%

Two major economic worries: #2 – INFLATION

Too much $ in circulation – prices up

Republicans, who appeal to many in investor/business class, seek to avoid inflation at risk of rising unemployment

Measured by the CPIMeasures the change in cost of a fixed basket of goods & services(90,000 items from eggs to doctor visits to energy costs)

CONTROLLING THE ECONOMY TWO TOOLS: Monetary &

Fiscal Policy What’s the difference?

Monetary Policy Money Supply Private control since Fed

controls the amount of $ in circulation

Fiscal Policy The Budget Fed. government regulating

taxes & expenditures

MONETARY POLICY Managed by the Federal Reserve Board (1913)

Board of Governors appointed by P and confirmed by Senate & serve 14-yr. terms (insulation from political pressure)

Acts independently & regulates monetary policy in 3 ways

1. Manipulating the interest rate at which loans are given

2. Manipulating the amount of reserves --- $ banks must have available (also controls interest rates)

3. Adds to the money supply by selling bonds

Greenspan was Chairman under Ps from

Reagan – Bush #43; now Ben Bernanke

FISCAL POLICY – The Budget

Taxing & Spending & Borrowing By Congress & P (although

Constitution gives Congress the most economic power)

Liberal theory – KEYNESIAN John Maynard Keynes Government as active participant –

spend $ to stimulate demand & help a lagging economy

Deficit spending not a problem

Keynesian Economic Theory:• Government should be responsible for

spending more money in order to boost demand.• The government could make up for the drop in private spending by buying goods and services on its own.

• Laissez-faire?• FDR; Obama?

Conservative theory – SUPPLY-SIDE ECONOMICS Decrease government’s

involvement Big government taxes too heavily,

spends too freely, regulates too tightly, and thereby actually curbs economic growth

Stimulate supply of goods so cost of goods declines

Greater production accomplished through tax cuts & spending cuts on social programs

Based on the idea that the supply of goods drives the economy.

Supply-side economists believe that taxes have a strong negative impact on economic output.

• Argument is that a tax cut increases total employment so much that the government actually collects more in taxes at the new, lower rate.

• Fiscal Policy History:• In the 1940s – spending up or down?

• Did Keynesian economics work?• Economy’s condition between 1945 and 1960?• JFK & LBJ?• Ronald Reagan – 1980s?

Obstacles to Controlling the Economy: “Government can do about as much to control the economy

as the average parent can do to control the average teenager.” PRESIDENT:

could try to manipulate economy before elections… rarely happens GOVERNMENT:

WORKS SLOW! UNCONTROLLABLE EXPENDITURES:

like Social Security; no control over amount CAPITALISM:

private sector larger than public sector & so dominates economy

Business control of the economy:

Multinational corporations control much of country’s assets Microsoft, GE, Coca Cola, AOL Time-Warner Wal-Mart - world’s largest company; China’s biggest

customer Mergers have flourished since early 1980s

Only 2 credit giants: Visa and Mastercard Antitrust laws allow Justice Dept. to sue monopolies – to

ensure free competition Microsoft case – Clinton -- Gates “loses” but…. SEC (Securities & Exchange Commission) regulates business

practices

CONSUMER PROTECTIONS“Let the Buyer Beware!”

FDA (Food & Drug Administration), 1906 Monitors health safety of food Approves drugs based on safety &

effectiveness FTC (Federal Trade Commission)

Regulate trade & enforces truth in advertising 1960s-70s, consumer groups seeking

increased regulation over product safety and advertising RALPH NADER! (the nation’s “nag”) “Unsafe At Any Speed” – Corvair Goes after unsafe products & false ads

Nader’s Crusade, “Nation’s Nag”

Convinced that the law placed too much emphasis on driver mistakes and not enough on the unsafe design of cars.

Unsafe at Any Speed, charged that automakers stressed styling, comfort, speed, power, and a desire to cut costs at the expense of safety – particular target was the Corvair

Get two dozen landmark consumer protection laws, including the National Traffic and Motor Vehicle Safety Act, Occupational Safety and Health Act, Consumer Products Safety Act, and the Freedom of Information Act