Economic Policy

Anthony, McKenzie, and Whitney

Before the Depression

• Followed the policy of Adam Smith, social philosopher who helped pioneer political economics

• Wrote Wealth of the Nations which emphasized the “invisible hand”

• “invisible hand” describes the self regulating nature of the economy

After the Depression

• More government regulation and involvement in business, unions, and trade

• Increased government limitation of the power and corruption of business through anti-trust policies

• Gave workers ability to unionize and collective bargain

Fiscal Policy

• Fiscal Policy: Economics U$A• Policy in which government regulates

economy with its powers to tax and spend• Determined by Congress and the president

• Through the Budget1. Recommended funding levels for the

next fiscal year (October to September)

2. Appropriations bills-required spending

Fiscal Policy Con’t

1. Mandatory Spending: expenditures necessary in the U.S. budget that are needed by programs in the government

2. Discretionary Spending: negotiated between the President and Congress

Fiscal Policy Con’t

• extremely political as politicians try to balance the competing goals of providing goods and services to consumers and keeping taxes low

• uses change in government spending or taxation to produce desired changes in discretionary income, employment rates, or productivity

Monetary Policy

• Monetary policy:• Tight- inflationary pressures-

keeping money in short supply• Loose- during recession- getting

more into economy• Allows the government to manage

the economy by controlling the money supply through the regulation of interest rates

Monetary Policy Con’t

• changing the supply of money in circulation in order to alter credit markets, employment, and the rate of inflation

• isolated from political influence• economic policy in which government

regulates the economy by manipulation interest rates to control the money supply

Monetary Policy: The Federal Reserve

• independent commission that controls the money supply through a system of twelve federal banks

• Runs board of governors-seven members appointed by the pres and confirmed by the Senate who serve 4 year term

• Controls the amount of money that banks and other institutions have available to loan and controls the supply of money by controlling the interest rates at which banks borrow money, by limiting the amount the banks have to hold in reserve, and by buying government securities

The Federal Reserve Con’t • lots of money to loan,

interest rates drop-- people borrow more, economic activity increases

• no money to loan, charge more for money (higher interest rates), economic activity slows down

• PROBLEMS: labor shortages, agricultural shortfalls or surpluses, or international crises

• President of the Fed: Ben Bernanke

Important Organizations/People

• Chairman of the Council of Economic Advisor-Austan Goolsbee• Charged with offering the President objective economic

advice on the formulation of both domestic and international economic policy.

• Director of the Office of Management and Budget-Jacob J. Lew• The OMB's predominant mission is to assist the President in

overseeing the preparation of the federal budget and to supervise its administration in Executive Branch agencies.

• Secretary of Treasury-Timothy Geithnew• “Maintain a strong economy and create economic and job

opportunities by promoting the conditions that enable economic growth and stability at home and abroad, strengthen national security by combating threats and protecting the integrity of the financial system, and manage the U.S. Government’s finances and resources effectively.”

Economic Policy Acts

• Tax Relief Reconciliation Act of 2001-over 10 year period (Majoritarian Politics)•cut tax rates on all income groups•increase the tax credit for children•make it easier to deduct expenses•eliminate the “marriage penalty”•make it easier to save for education•phase-out the tax on estates of deceased

Economic Policy Acts Con’t

• Congressional Budget Act of 1974• Created the Congressional Budget Office(a nonpartisan

agency that provides economic data to Congress)• budget resolution-Set limits on revenues and spending

that governs Congress through procedural objections• concurrent resolution-adopted by both houses but lacks

the force of law and does not need presidential approval

Additional Laws Regarding Economic

Policy• Sherman Anti Trust Act• First federalist anti-trust law that allowed the government

to take action against trusts and monopolies that restrained trade

• Lack of clarity of the definition of a “trust” created struggle in the courts for many years

• Clayton Anti Trust Act • An act to supplement the existing anti-trust laws—fought

unlawful monopolies and trusts

• Hawley-Smoot Tariff act of 1930 (Client Politics)• Raised tariffs to historically high levels– it was put into

place to protect farmers against agricultural imports– represents the high water mark of U.S. protectionism in the U.S.

GDP Grows For Five Consecutive Quarters

Trade Treaties• protectionism: the view that laws should limit the sale of foreign

imports in order to protect producers at home• A large trade deficit can negatively affect the US economy because

it means that Americans are buying more foreign-made goods than people from other countries are buying American-made products(exports<imports)

• The deficit hurts American businesses, which could mean fewer jobs and higher unemployment. As a result, unions are more likely to support protects to trade policies, which would narrow the trade deficit.

• Union-removal of NAFTA• Concerns over employment moving abroad and no replacement

jobs available in the US-high unemployment rates

Trade Treaties Con’t• The government can implement protectionist policies in several

ways:• place quotas or caps on the number of foreign imports that the US

can receive and it can levy tariff (government taxes on foreign goods)

• create non tariff barriers, which are more convert measures to protect the domestic economy

• Free trade policies eliminate measure such as quotes, tariffs, or non tariff barriers, and encourage open borders between trading partners

• Trade deficit: the difference between the value of the goods a country imports and what it exports

Trade Treaties Con’t• CAFTA: free trade agreement between United States

and the Central American countries of Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua• Support: economists always agree to a free trade

agreement but do not agree on the size and role of government

• Opposition: argue that it will increase poverty by prematurely opening markets to US agricultural goods which are subsidized, making local farmers unable to compete with imports, and the nations in question do not have the ability to bear the costs of switching resources with their available capital, nor deal with the consequences of even short-term unemployment

Trade Treaties Con’t

• NAFTA: trade agreement that removed most of the barriers to trade and investment that existed among the U.S., Mexico, and Canada• January 1, 1994-between United States, Canada, and

Mexico

Bibliography• Barbour, C. & Wright, G. (2006). Keeping the Republic. In Economic Policy (Vol. 3, p. 769-

801). Washington, D.C.: CQ Press. • Learner, B. D. (n.d.). In Sherman Antitrust Act. Retrieved Feb. 19, 2011, from http://www.u-

s-history.com/pages/h760.html• Eichengreen, B. (n.d.). In Smoot-Hawley Tariff. Retrieved Feb. 18, 2011, from

http://future.state.gov/when/timeline/1921_timeline/smoot_tariff.html• Friedman, M. (Writer), & Samuelson, P. (Director). (2002). Fiscal Policy [Television series

episode]. Economics U$A. Leaner.org.• Unknown, (2000). In Clayton Anti-Trust Act. Retrieved Feb. 20, 2011, from

http://www.historycentral.com/documents/Clayton.html• Ameadeo, K. (n.d.). In FY 2011 Discretionary Federal Budget. Retrieved Feb. 19, 2011, from

http://useconomy.about.com/od/usfederalbudget/p/Discretionary.htm• Ameadeo, K. (n.d.). In Mandatory Spending. Retrieved Feb. 19, 2011, from

http://useconomy.about.com/od/glossary/g/mandatory_spend.htm