I. Government and the Economy (542-545)
The United States operates under capitalisman economic system in which individuals and corporations own the principal means of production, through which they seek to reap profits. America has a mixed economya system in which the government, while not commanding the economy, is still deeply involved in economic decisions.
B. Unemployment and Inflation
Economic problems create social problems. Unemployment and inflation especially have political and social repercussions. The unemployment rate is the percentage of Americans actively seeking employment but unable to find work. Inflation is the rise in prices for consumer goods. The consumer price index (CPI) measures the change in the cost of buying a fixed basket of goods and services. Many economists and politicians believe that methods for calculating the CPI need to be revised in order to avoid overestimating inflation. Few things are more worrisome to consumers and politicians alike than the combined effects of inflation and unemployment marching upward together.
C. Elections and the Economy
Voters pay attention to economic trends in making up their minds on election day. Voters who experience unemployment are more likely to support Democratic candidates. Concern over inflation has had less impact on voter choices.
D. Political Parties and the Economy
Republicans are willing to risk higher unemployment and recession, whereas Democrats are willing to tolerate high inflation. The Democratic coalition is made up heavily of groups who worry the most about unemployment. The Republican coalition rests more heavily on a base of people who are most concerned about steady prices for their goods and services.
II. Instruments for Controlling the Economy (545-549)
Especially since the Great Depression, government has been actively involved in steering the economy. Prior to this the government pursued a laissez-faire policythe principle that government should not meddle with the economy.
B. Monetary Policy and the Fed
Monetary policy is the manipulation of the supply of money and credit in private hands. Monetarism holds that the supply of money is the key to the nations economic health. The main agency for making monetary policy is the Fed, whose formal title is the Board of Governors of the Federal Reserve System. The Fed uses three instruments to control the money supply. First, they set discount rates for the money that banks borrow from the Federal Reserve banks. Second, they set reserve requirements that determine the amount of money that banks must keep in reserve at all times. Third, they buy and sell government securities in the market, thereby expanding or contracting the money supply. The amount of money available, interest rates, inflation, and the availability of jobs are all affected by the Fed. Presidents try to persuade the Fed to pursue policies in line with the presidential agenda.
C. Fiscal Policy: Keynesian versus Supply-Side Economics.
Fiscal policy describes the impact of the federal budget on the economy. Keynesian economic theory envisions and activist government with a large scope. This has been the dominant economic philosophy in American since the Great Depression. According to Keynesian theory the governments job is to increase the demand when necessary and the supply would take care of itself. President Reagan believed that the key task for government economic policy is to stimulate the supply of goods, not their demand. Supply-side economics argues that big government soaked up too much of the gross domestic product by taxing too heavily, spending too freely, and regulating too tightly, government curtailed economic growth. Supply-siders believed that cutting taxes would pull business out of its doldrums.
III. Obstacles to Controlling the Economy (549-550)
Controlling unemployment and inflation with precision is very difficult. It is difficult to implement programs since most policies must be decided upon a year or more before they will have their full impact on the economy. A major restraint on governments ability to control the economy is the fact that the private sector is much larger than the public sector and dominates the economy. The budgetary process, because of the fact that much of the budget is uncontrollable, also hinders fiscal policy.
IV. Arenas of Economic Policymaking (550-556)
A. Business and Public Policy: Subsidies Amid Regulations
The corporation has long stood at the center of the American economy. Some transnational corporations, businesses with vast holdings in many countries, have annual budgets exceeding that of many foreign governments. Since the early 1980s billions have been spent by conglomerates buying out other companies. Competition in todays economy is often about which corporations control access to, and profits from, the new economy. In the old and new economy, Americans have always been suspicious of concentrated power. In both the old and new economy, government policy has tried to control excess power in the corporate world. Antitrust policy is designed to ensure competition, prevent monopoly and, prevent restraints on trade. Antitrust suits are more often threatened than carried out. In a few cases government loans or buyouts have made government an actual partner or owner in corporate America. The Department of Commerce serves as a veritable storehouse of assistance for business.
B. Consumer Policy: The Rise of the Consumer Lobby
Years ago public policy ignored consumers and their interests. Today, the Food and Drug Administration (FDA) has broad regulatory powers over the manufacturing, contents, marketing, and labeling of food and drugs although funding cuts have left it overburdened and understaffed. Consumerism rose in the 1960s under the leadership of activists such as Ralph Nader. The Federal Trade Commission (FTC), traditionally responsible for regulating trade practices, became involved in consumer protection as a defender of consumer interests in truth in advertising.
C. Labor and Government
Perhaps the biggest change in economic policymaking has been the about-face turn in public policy toward labor unions over the past century. The major turnabout in policy toward labor took place during the New Deal. The National Labor Relations Act (1935) guaranteed workers the right of collective bargaining. The Taft-Hartley Act of 1947 continued to guarantee unions the right of collective bargaining, but also prohibited unfair practices by unions. One section of the law allows states to adopt right-to-work laws that forbid labor contracts from requiring workers to join unions to hold their jobs. Partly as a result of successful union lobbying, the government provides unemployment compensation and guarantees a minimum wage.
D. New Economy, New Policy Arenas
The last few decades have seen a shift in focus from the old industrial economy to a new information economy. Three million Americans work in technology-producing industries. Access to technology is uneven. The old economy generated issues of income inequality, but the new economy involves issues of information equality. The racial and ethnic gaps in information access are widening.
V. Understanding Economic Policymaking (556-558)
A. Democracy and Economic Policymaking
Through the ballot box, Americans essentially decided to give up certain economic freedoms for the good of society as a whole. The decentralized American political system often works against efficiency in government. One of the consequences of democracy for economic policymaking is that it is difficult to make decisions that hurt particular groups or that involves short-term pain for long-term gain.
B. Economic Policymaking and the Scope of Government
Liberals and conservatives disagree most about the scope of government involvement in the economy. Liberals favor an expanded role of government in stimulating the economy during times of recession. Conservatives argue against government intervention. Whereas liberals focus on the imperfections of the market and what government can do about them, conservatives focus on the imperfections of government.