Economic Policymaking

Chapter 17

Economic SystemsEconomic Systems Definitions:

Market Economy: An economic system in which individuals and corporations, not the government, own the principle means of productions and seek profits. Vs.

Command Economy 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.

Definitions: Market Economy:

An economic system in which individuals and corporations, not the government, own the principle means of productions and seek profits. Vs.

Command Economy 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.

Measuring the EconomyUnemployment 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 to the rise in prices over time.

Government and the Economy

Elections and the Economy– Economic trends affect how voters

make choices– Unemployment rates affect presidential

votes Political Parties and the Economy

– Republicans tolerate unemployment– Democrats tolerate inflation

Monetary and Fiscal policy influence the economy but cannot control it.

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

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.

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

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 willingness to run a deficit help the economy weather its normal ups and downs.

Government’s job to increase demand for goods

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 willingness to run a deficit help the economy weather its normal ups and downs.

Government’s job to increase demand for 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 for businesses to expand

Reduce taxation and government regulation then people will work harder, and thus create economic growth

Obstacles to Controlling the Economy

Some think politicians manipulate the economy to win reelection.

But there are problems with that… The budget is prepared in advance

of when it goes 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

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.

Corporations battle for profits in the new technology economy.

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

Business and Public Policy: Subsidies Amid Regulations The changing Face of Corporate Capitalism. Lots of mergers and acquisitions since 1980- some creating transnational corporations.

Corporations battle for profits in the new technology economy.

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

Arenas of Economic Policymaking

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 (Obama bailouts)

Government collects data that businesses use.

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 (Obama bailouts)

Government collects data that businesses use.

Arenas of Economic Policymaking

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.

• 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

Taft-Hartley

Arenas of Economic Policymaking

Arenas of Economic Policymaking

New Economy, New Policy Arenas The new economy is more information centered

Also more emphasis on service industries

New Economy, New Policy Arenas The new economy is more information centered

Also more emphasis on service industries