Chapter 17 Outline
I. GOVERNMENT, POLITICS, AND THE ECONOMY
A. In the United States, the political and economic sectors are closely intermingled in amixed economy, where the government, while not commanding the economy, is stilldeeply involved in economic decisions.
1. The United States operates under capitalism an economic system in whichindividuals and corporations own the principal means of production, throughwhich they seek to reap profits.
2. Yet the American system is not one of pure capitalism; it actually has a mixedeconomy a system in which the government, while not commanding theeconomy, is still deeply involved in economic decisions.
3. Americans also draw sharp distinctions between “our economy” and “the worldeconomy.” Our new economy is also an international and global economy.Government and the economy in the United States have always been closelylinked.
4. Multinational corporations—businesses with vast holdings in many countriessuch as Disney, Coca-Cola, and Microsoft—dominate the world’s economy.
B. A look at Wal-Mart illustrates two key points.
1. The government’s long arm of regulation affects Wal-Mart, as it does thehundreds and thousands of other U.S. companies.
2. Wal-Mart epitomizes the imbedding of the U.S. economy in the global economy,a trend that will continue to have an enormous impact on the domestic economyand the politics of economic policy.
C. Studies by political scientists have reaffirmed Harry S. Truman’s observations aboutvoters and their pocketbooks.
1. Policymakers worry constantly about the state of the economy, and voters oftenjudge officeholders by how well the economy performs.
2. Traditionally in American politics, Democrats stress the importance ofemployment while Republicans are worried about inflation. This reflects theirconstituencies.
D. Measuring how many and what types of workers are unemployed is one of the majorjobs of the Bureau of Labor Statistics (BLS) in the Department of Labor.
1. No one questions using a survey to determine the unemployment rate, butsome economists do challenge the BLS’s definition of this rate (the proportionof the labor force actively seeking work but unable to find a job).
E. The problem of inflation is the other half of policymakers’ regular economicconcern.
1. The Consumer Price Index (CPI) is the key measure of inflation.
2. Few things are more worrisome to consumers and politicians alike than thecombined effects of inflation and unemployment marching upward together,referred to by Jimmy Carter as the “misery index.”
II. POLICIES FOR CONTROLLING THE ECONOMY
A. The impact of government on the economic system is substantial, but it is alsosharply limited by a basic commitment to a free enterprise system.
1. When the stock market crash of 1929 sent unemployment soaring, PresidentHerbert Hoover clung to the laissez-faire principle that government should notmeddle with the economy.
2. In the next presidential election, Hoover was handily defeated by Franklin D.Roosevelt, whose New Deal experimented with dozens of new federal policiesto put the economy back on track.
3. Government has been actively involved in steering the economy since the GreatDepression and the New Deal.
4. The American political economy uses two important tools to guide theeconomy—monetary policy and fiscal policy.
B. Monetary policy and the Fed.
1. Monetary policy involves the manipulation of the supply of money and credit inprivate hands.
a. An economic theory called monetarism holds that the supply of money isthe key to the nation’s economic health.
b. Monetarists believe that having too much cash and credit in circulationgenerates inflation.
2. The main agency for making monetary policy is the Board of Governors of theFederal Reserve System (otherwise known as “the Fed”).
a. Created by Congress in 1913 to regulate the lending practices of banks andthus the money supply, the Federal Reserve System is intended to beformally beyond the control of either the president or Congress.
b. Its seven-member Board of Governors is appointed by the president (andconfirmed by the Senate) for 14-year terms—a length of the time designed toinsulate them from political pressures; the general finding is that the Fedactually is responsive to the White House, but at times the chief executivecan be left frustrated by the politically insulated decisions of the Fed.
3. The Fed sets discount rates for the money that banks borrow from the FederalReserve banks; by raising or lowering the rate that banks pay, these increased(or decreased) costs will be passed on to people who take out loans, and thusaffect the amount of money in circulation.
a. The Fed can also exercise control over the money supply by buying andselling government securities in the market (open market operations),thereby either expanding or contracting the money supply.
C. Fiscal policy: Keynesian versus supply-side economics.
1. Fiscal policy describes the impact of the federal budget—taxing, spending, andborrowing—on the economy.
2. Fiscal policy is shaped mostly by the Congress and the president.
3. Whether bigger government or smaller government best ensures a strongeconomy has become the central issue in economic policymaking.
4. On the side of big government, Democrats lean more toward Keynesianeconomic theory, which holds that government must stimulate greater demand,when necessary, with bigger government (such as federal job programs).
5. Many Republicans advocate supply-side economics, which calls for smallergovernment (such as tax cuts) to increase the incentive to produce more goods.
a. Rather than public works programs to stimulate demand, Americansreceived tax cuts under President Reagan and President George W. Bush tostimulate supply.
III. WHY IT IS HARD TO CONTROL THE ECONOMY
A. Some scholars argue that politicians manipulate the economy for short-runadvantage to win elections; however, no one has shown that decisions to influencethe economy at election time have been made on a regular basis.
B. “Managing” the economy is more difficult than many politicians (and citizens)believe.
1. Politicians—and even economists—do not understand the workings of theeconomy sufficiently well to always choose the correct adjustments to ensureprosperity.
2. Most policies must be decided upon a year or more before their full impact willbe felt on the economy.
3. The American capitalist system presents a restraint on controlling the economy:because the private sector is much larger than the public sector, it dominates theeconomy.
4. The increasingly interdependent world activities of other nations can interferewith the American government’s economic plans.
5. Fiscal policy is hindered by the budgetary process: most of the budgetexpenditures for any given year are “uncontrollable.”
6. Economic policy in the United States is decentralized: the president andCongress may not agree on taxes or spending, and neither may agree with theFed.
IV. ARENAS OF ECONOMIC POLICYMAKING
A. Economic interests far outnumber any other kind of interest groups.
1. Liberal or conservative, most interest groups seek benefits, protection fromunemployment, tax breaks, or safeguards against some other economic evil.
2. Business, consumers, and labor are three of the major actors in, and objects of,government economic policy.
B. Americans have always been suspicious of concentrated power, whether in the handsof government or business. In both the old economy and the new, government policyhas tried to control excess power in the corporate world.
1. Corruption and concentration of economic power are two major concerns ofgovernment regulation.
a. The corruption scandals of the twenty-first century followed a binge ofcorporate concentration in the last century.
b. Corporate giants have also internationalized in the postwar period.Some multinational corporations, businesses with vast holdings inmany countries, have annual budgets exceeding that of many foreign
governments.
c. Since the early 1980s, a new form of entrepreneurship has flourished,merger mania.
2. The purpose of antitrust policy is to ensure competition and preventmonopoly (control of a market by one company).
a. Government regulation of business is at least as old at the ShermanAntitrust Act of 1890.
3. Although business owners and managers complain about regulation, thegovernment also sometimes comes to the aid of struggling businesses.
4. The main regulatory agency responsible for regulation of business practicesis the Securities and Exchange Commission (SEC).
C. Consumer policy.
1. The first major consumer protection policy in the United States was the Foodand Drug Act of 1906, which prohibited the interstate transportation ofdangerous or impure food and drugs.
2. Today the Food and Drug Administration (FDA) has broad regulatory powersover the manufacturing, contents, marketing, and labeling of food and drugs.
a. It is the FDA’s responsibility to ascertain the safety and effectiveness of newdrugs before approving them for marketing in America.
3. “Consumerism” was awakened in the 1960s by consumer activists such as RalphNader, who argued that it was the government’s responsibility to be a watchdogon behalf of the consumer.
a. The Consumer Product Safety Commission (CPSC) has broad powers toban hazardous products from the market.
4. The Federal Trade Commission (FTC)—which has traditionally beenresponsible for regulating trade practices—also jumped into the business ofconsumer protection in the 1960s and 1970s; Congress also made the FTC theadministrator of the new Consumer Credit Protection Act (which enforces“truth in lending”).
D. Labor and government.
1. Until the Clayton Antitrust Act of 1914 exempted unions from antitrust laws,the federal government spent more time busting unions than trusts.
2. The major turning point in government policy toward labor took place duringthe New Deal.
a. In 1935, Congress passed the National Labor Relations Act (often calledthe Wagner Act), which guaranteed workers the right of collectivebargaining—the right to have labor union representatives negotiate withmanagement to determine working conditions—and set rules to protectunions and organizers.
b. The Taft-Hartley Act of 1947 continued to guarantee unions the right ofcollective bargaining, but also prohibited various unfair practices by unions.
(1) The law permitted states to adopt what union opponents call right-to-worklaws—laws that forbid labor contracts from requiring workers tojoin unions in order to hold their jobs.
3. Unions have had two notable successes.
a. Partly as the result of successful union lobbying, the government providesunemployment compensation.
b. Since the era of the New Deal, government has guaranteed a minimum wagefor hourly employees.
V. UNDERSTANDING ECONOMIC POLICYMAKING
A. In America, solutions to many of the problems of a free enterprise economy wereachieved through the democratic process.
B. It would be an exaggeration to say that democracy regularly facilitates an economicpolicy that looks after general rather than specific interests.
1. One of the consequences of democracy for economic policymaking is thatgroups that may be adversely affected by an economic policy have manyavenues through which they can work to block it.
2. The decentralized American political system often works against efficiency ingovernment.
C. Economic policymaking and the scope of government.
1. Liberals and conservatives disagree about the scope of government involvementin the economy.
2. Liberals focus on the imperfections of the market and what government can doabout them; conservatives focus on the imperfections of government.
3. The two parties have different economic policies, particularly with respect tounemployment and inflation; Democrats try to curb unemployment more thanRepublicans, though they risk inflation in so doing, and Republicans aregenerally more concerned with controlling inflation.
KEY TERMS AND CONCEPTS
Antitrust policy: government regulation of business to ensure competition and preventmonopoly (control of a market by one company).
Capitalism: an economic system in which individuals and corporations own the principalmeans of production, through which they seek to reap profits.
Collective bargaining: the right of workers to have labor union representatives negotiate withmanagement to determine working conditions.
Consumer Price Index (CPI): a government statistic that measures the change in the cost ofbuying a fixed basket of goods and services.
Federal Reserve System: created by Congress in 1913 to regulate the lending practices ofbanks and thus the money supply.
Fiscal policy: the government’s decisions to tax, spend, and borrow, as reflected in the federalbudget.
Food and Drug Administration (FDA): government agency with broad regulatory powersover the manufacturing, contents, marketing and labeling of food and drugs.
Inflation: a government statistic that measures increases in the price of goods.
Keynesian economic theory: the theory emphasizing that government spending and deficitscan help the economy weather its normal ups and downs. Proponents of this theory advocateusing the power of government to stimulate the economy when it is lagging.
Laissez-faire: a belief that government should not intervene in the economy.
Mixed economy: a system in which the government, while not commanding the economy, isstill deeply involved in economic decisions.
Monetarism: economic theory that suggests that the supply of money is key to the nation’seconomic health.
Monetary policy: government decisions regarding the money supply, including the discountrates for bank borrowing, reserve requirements for banks, and trading of government securities.
Multinational Corporation: businesses with vast holdings in many countries.
National Labor Relations Act: passed by Congress in 1935, guarantees workers the right ofcollective bargaining; also known as the Wagner Act.
Protectionism: the economic policy of shielding an economy from exports.
Right-to-work laws: laws forbidding labor contracts from requiring workers to join unions tohold their jobs.
Securities and Exchange Commission: the federal agency created during the New Deal thatregulates stock fraud.
Supply-side economics: economic philosophy that holds that the key task for governmenteconomic policy is to stimulate the supply of goods, not their demand.
Unemployment rate: a government statistic that measures how many workers are activelyseeking work but unable to find jobs.