ECONOMIC POLICY

(Or…“How Many Harvard Economists Does It

Take to Craft an Economy Policy?”

FISCAL VS. MONETARY POLICY

FISCAL POLICY• Tax and spend to affect

economy • Deficit vs. Surplus

MONETARY POLICY• Use interest rates to

control economy• Lower rates encourage

borrowing and spending

KEYNESIANISM (CANE-ZEE-AN-ISM)

John Maynard Keynes1883-1946

•The market will not automatically operate at full-employment, low inflation•Emphasis on savings vs. spendings•The key is to create the right demand•If demand is too low, government should pump $ into economy (public works, etc)•If demand is too great, government should taken $ out of circulation by raising taxes and/ or spending less.•Government activism•Liberal•FISCAL POLICY

MONETARISMMilton Friedman (1912-2006)

•Inflation occurs when there is too much money, and too few goods•Value of dollar decreases•Gov’t should have a steady, predictable increase in the money supply equal to growth•Generally, gov’t should leave matters alone (Free Market)•Conservative

•MONETARY POLICY

Price & Wage Controls

John Kenneth Galbraith (1908-2006)

•Government should regulate the max prices charged and wages paid in larger industries to control inflation

•Socialism

INDUSTRIAL POLICY

Robert Reich(1946- )

• Government should invest to keep key industries healthy or plan for replacements

• Socialism

SUPPLY-SIDE THEORY

Arthur Laffer(1940- )

Paul Craig Roberts(1939- )

• Less government interference • Cut taxes a lot to encourage people to work, save, and invest• Increased investment will lead to more jobs• Conservative• FISCAL POLICY

REAGANOMICS

• Reduced government spending on social programs• Increased military spending• Sharp income tax cuts• Increased social security taxes

•Result: HUGE budget deficit that lowered unemployment and helped the rich

WHO HELPS CRAFT ECONOMIC POLICY?• CEA (Council of Economic Advisors)• OMB (Office of Management and Budget)• Secretary of Treasury• The Federal Reserve Board (the Fed)

-7 members appointed by Pres, confirmed by Senate for 14 year terms

-Regulates the supply and price (interest rates) of money -Congress must approve all expenditures

-Can control Fed by threatening to reduce its power BUDGET

-Pres submits to Congress in Feb-Analyzed by the CBO (Congressional Budget

office)-Budget Resolutions come out of committee

THE BUDGET• President submits

budget to Congress in February

• Budget is analyzed by the CBO (Congressional Budget Office)

• Budget resolutions come out of committees