ECONOMIC POLICIES
Colleges, universities
Government as promoter OF ECONOMIC INTERESTS
ECONOMY It refers to a system of production and
consumption of goods and services that are allocated
through the exchange among producers and
consumers.
Business firms, not opposed to government
regulations; they only object to regulatory policies that
harm their interests.
Some regulatory agencies have even sided with the
industries they are supposed to regulate in the public
interest.
REGULATION A term that refers to government
restrictions on the economic practices of private firms.
PROMOTING BUSINESS
Loans, tax breaks are ways government promote
business interests
Firms receive loans guarantees, direct loans, tax credits
for capital investment;
They receive tax deduction for capital depreciation;
Sometimes, burden of taxation shift from corporations
to individuals;
Example: TRAIN Law,
How?
DEREGULATION It refers to the repeal of government
regulations for the purpose of improving economic
efficiency.
1.
(Which are usually state funded)
2. Graduates, research
3. Professional & technical workforce, product
development
4. Businesses
PROMOTING LABOR:
Laissez-faire thinking may dominate government
approach to labor;
Economic downturns (such as The 1930s Great
Depression or recessions) may bring about change in
labor’s position;
Laws (The National Labor Relations Act of 1935) give
workers right to bargain collectively;
Prevented businesses from disrupting union activities or
discriminating against union employees.
Government support for labor now include:
 Minimum wage
 Maximum hour guarantees
 Unemployment benefits
 Safe and healthful working conditions
 Non-discriminatory hiring practices
Government support for labor is much less extensive
than its support for business
Fiscal Policy as an economic tool:
Before the 1930s prevailing economic theory held that
the economy was self-regulating, that it would correct
itself after a downturn;
LAISSEZ-FAIRE An economic philosophy that holds that
private firms and individuals should be left alone to
make their own production and distribution decisions.
Keynesian theory holds that the level of the
government’s response should be commensurate with
the severity of the downturn.
During an economic depression, the government should
engage in massive new spending programs to speed the
recovery.
During a recession government spending should also be
increased but by a lesser amount.

FISCAL POLICY refers to a tool by which the government

seeks to maintain a stable economy through its taxing DEPRESSION It refers to a very severe and sustained
and spending decisions. economic downturn.

 The Great Depression shattered the idea.

 The economy did not recover on its own but
continued to decline.
 The Great Depression was a severe worldwide
economic depression that took place mostly during
the 1930s, beginning in the United States.
 It was the longest, deepest, and most widespread
depression of the 20th century.
RECESSION It refers to a moderate but sustained
downturn of the economy.
Keynes’s theory is based on demand-side economics
DEMAND-SIDE. Under this fiscal policy, government can
use increased spending, placing money into people’s
hands.

 President Franklin Roosevelt's spending and jobs

Stimulates
programs, which stimulated the economy and Government
spends
consumer
spending
created jobs ushered in the modern era.

Today the government is expected to intervene

when the economy dips Hastens
economic
Stimulates
business
recovery production

Demand-Side Policy
Creates jobs

Fiscal Policy has its origins in the economic theories of

John Maynard Keynes

Noting that employers tend to cut their production and

workforce when the economy begins to weaken, Keynes
challenged the idea that government should also cut
back on its spending.

The downturn could be shortened only if the

government compensates in the slowdown in private
spending by increasing its spending level.
 The Chief Executive (President, or Prime Minister has
$787 billion American Economic Recovery and
the power to draft the national budget
Reinvestment Act of 2009, combatted the steep
economic slide precipitated by the near collapse of the
I don’t want to post his picture here.
financial markets

Included funding for construction projects and Deficit It refers to a condition when the government’s
enhanced unemployment benefits; expenditures exceed its revenues.

Funding that enabled state and local governments to National debt The total cumulative amount that the
retain employees. government owes creditors.

A bailout is a term for the provision of financial help to

Balanced budget is when, revenues would equal
a corporation or country which otherwise would be on
government expenditures.
the brink of failure or bankruptcy.

Surplus refers to a condition when the governments

stimulus refers to attempts to use monetary or fiscal
revenues exceed its expenditures.
policy (or stabilization policy in general) to stimulate the
economy. 
High spending & High spending= Fiscal Crises
Is sometimes colloquially referred to as "priming the
pump" or "pump priming"
Supply-side Policy
Kick-starting the economy
This fiscal policy boosts the economy by putting money
into producer’s hands.
Injection

Preferred by Republicans;
Should be applied sensibly:
See an economic downturn through the lens of business
firms
 Overspending
 Budget deficit
Typically resisted large spending increases because
 National debt government has to borrow the money, which creates
upward pressure on interest rates, including the rates
Budgetary Powers- the ability of an executive to
business firms have to pay for their loans.
formulate the budget, present it to the legislature and
execute or control the budget.
Rather than relying on government spending programs
National Budget- the sum of money allocated for the to boost consumer spending, Reagan turned to tax cuts
government’s expenditures for a given year. as a means of stimulating business activity.

Deficit spending It is when the government spends Reaganomics included large tax breaks for firms and
more than it collects in taxes and other revenues. upper income individuals.
 As with demand-side stimulation, supply-side has its
costs

Fostering
economic
Bush argued that his tax cut would boost economic
Increased
consumer
growth
activity to such an extent that revenue would actually
Creating jobs,
spending
increasing increase
incomes
Increases
investments
The prediction proved faulty. The loss in revenue from
Tax
breaks the tax cut exceeded the gain in revenue from
heightened economic activity.

When Bush took office, the national debt stood at $5.7

Was also the basis of George W. Bush’s economic trillion.
initiatives;
By the time he left office, the deficit had reached
Included reductions in the personal income tax and in record-high $432 trillion and national debt rose to $10
capital gains tax trillion.

CAPITAL-GAINS TAX This refers to revenue collected Controlling Inflation

from what people gain from the sale of stocks
Claiming that taxes on the wealthy were stunting
economic growth, Bush persuaded Congress to reduce
capital-gains tax rate from 28% to 25%
INFLATION refers to the general increase in the average
level of prices of goods and services.
STAGFLATION It is a term used to refer to a period of
slow economic growth coupled by the rising of prices.

The savings:
Weaker currency could trigger inflationary spiral
Top 1% = $54,493 a year
Middle 20% = $611a year Some economists believe that the high level of
Bottom 20% = $67 a year government borrowing has flooded the world market
with dollars, which will depreciate its value resulting to
In contrast, Democrats pursued tax policies favoring increased inflation.
working-class people and lower-middle class;
Others believe that the risk of inflation is low; they
They typically advocate a graduated, or progressive foresee sluggish economic recovery which will dampen
personal income tax in which the tax rate increases consumer spending and keep inflation at bay. Neither
significantly as income rises, thus shifting tax burdens to prediction is a rosy one.
wealthier individuals.
Doomsayers like Niall Ferguson predicts that a nation’s
fiscal crisis could cause its decline. “That’s how empires
decline.”
MONETARY POLICY is a tool of economic management
used by the government based on the manipulation of
money in circulation.
Economists who emphasize monetary policy are called
monetarists.
Milton Friedman, held that supply and demand are best
controlled by manipulating the money supply.
Too much money in circulation contributes to inflation
because too many dollars are chasing a few goods
which drives up prices.
Too little money in circulation results in a slowing
economy and rising unemployment because consumers
lack the ready cash and easy credit required to maintain
spending levels.
Monetarists believe in increasing the money supply
when the economy needs a boost and decreasing the
supply when it needs to be slowed down.
Money supply is controlled by the Central Bank (US
Fed).
The Central Bank decides how much money to add or
subtract from the economy seeking a balance that will
permit steady growth without causing an unacceptable
level of inflation.
The basic structure of the Bangko Sentral includes:
 The Monetary Board, which exercises the
powers and functions of the BSP, such as the
conduct of monetary policy and supervision of
the financial system;
 The Monetary Stability Sector, which takes
charge of the formulation and implementation
of the BSP's monetary policy, including serving
the banking needs of all banks through
accepting deposits, servicing withdrawals and
extending credit through the rediscounting
facility;
 The Supervision and Examination Sector, which
enforces and monitors compliance to banking laws
to promote a sound and healthy banking system;
and
 The Resource Management Sector, which serves
the human, financial and physical resource needs of
the BSP.
The powers and function of Bangko Sentral are
exercised by its Monetary Board, whose seven
members are appointed by the President of the
Philippines. As provided for by RA 7653 or the New
Central Bank Act, one of the government sector
members of the Monetary Board must also be a
member of Cabinet. Members of the Monetary
Board are prohibited from holding certain positions
in other government agencies and private
institutions that may give rise to conflicts of
interest. The members have fixed and overlapping
terms, except for the Cabinet Secretary
representing the incumbent administration.
The current members of the Monetary Board are:
 Benjamin Diokno, BSP Governor and Chairman of the
Monetary Board
 Carlos Dominguez III, Secretary of the Department of
Finance
 Antonio S. Abacan, Jr.
 Juan D. De Zuñiga, Jr.
 V. Bruce J. Tolentino
 Felipe M. Medalla
 Peter B. Favila
Methods:
1. Lowering the cash reserve that banks are required to
deposit with the CB. It is the proportion of a member
bank’s total deposit that the bank must keep on hand,
meaning the bank can’t loan it out.
By increasing the reserve rate, the CB requires member
banks to keep more of their money out of circulation
thereby reducing money supply.
Lowering the reserve rate allows the banks to use more
money for loans to consumers and firms.
2. The lowering or raising of interest rates.
When the CB raises interest rates for banks, they will as
well raise the rate they charge their costumers for new
loans, which discourages borrowing, thereby reducing
the amount of money in circulation.
Conversely, when the CB lowers the interest rate on its
loans to member banks, they are able to lower the rate
they charge for their loans which leads to additional
borrowing by firms and consumers resulting in increase
in money supply.
Economists debate the effectiveness of fiscal and
monetary policy;
Monetary policy has an advantage; it can be
implemented more quickly.
The CB can adjust interest rate and reserve rates on
short notice, thus providing the economy with a
psychological boost to go along with the actual effect of
a change in the money supply.
Changes in fiscal policy usually takes months to
implement; Congress moves slower than the CB.
A year after passage of the stimulus package, half of
the money had not been spent.
EFFICIENCY An economic principle that holds that firms
should fulfil as many of society’s needs as possible
while using as few of its resources as possible. The
greater the output (production) for a given input (for
example, an hour of labor) the more efficient the
process.
EXTERNALITIES Burdens that society incurs when firms
fail to pay the full cost of production. An example of
externality is the pollution thatr results when
corporations dump industrial wastes into lakes and
rivers.
The Globalization of world economics
International trading systems, not new
Oldest international trading route, Silk Road (China to
Europe), silk was highly priced
Used from 130 BCE (Han Dynasty) to 1453 (when
Ottoman Empire closed it)
Though international, Silk Road was not global; it
crossed no oceans and could not reach the Americas
Globalization began, according to Dennis O. Flynn,
Arturo Giraldez,
“all important populated continents began to exchange
products continuously—both with each other directly
and indirectly via other continents– and in values
sufficient to generate crucial impacts on all trading
partners;
1571, establishment of Galleon Trade, Manila-
Acapulco;
First time the Americas were connected to Asian
trading routes
For Filipinos, it is crucial to note that economic
globalization began on the country’s shores.
Mercantilism is an economic policy that is designed to
maximize the exports and minimize the imports for an
economy.
It promotes imperialism, tariffs and subsidies on traded
goods to achieve that goal.;
Galleon Trade was part of age of mercantilism;
16th to 18th centuries, countries (mainly Europe)
competed to sell more goods;
They imposed high tariffs , forbade colonies to trade
with other nations, restricted trade routes, subsidized
exports to protect their products;
Goal was to create a common system that would allow
for more efficient trade and prevent isolationism of the
mercantilist era.
Countries thus established common basis for currency
prices and fixed exchange rate system (gold-based).
Gold standard was still a restrictive system; compelled
countries to back currencies with fixed gold reserves;
World War I forced countries to abandon gold standard
when reserves were depleted;
They adopted floating currencies not redeemable in
gold;
Returning to a pure standard became difficult as Great
Depression started (late 1920s -1930s)
Depression was worst and longest crisis experienced by
Western world;
Some economists blame gold standard, it limited the
amount of money in circulation, thus reduced demand
and consumption;
Money supply severely curtailed by gold standard as
printing money and increasingly money supply is
limited by gold supply;
Barry Eichengreen, US recovery began when it
abandoned gold standard thus freed up money to
spend on reviving the economy;
At the height of WW II, other major industrialized
countries followed suit;
The world never returned to the gold standard of early
20th century (though indirect versions were used until
the 1970s);
Today, world economies operate on fiat currencies,
currencies not backed by precious metals, values are
determined by their cost relative to other currencies;
System allows governments to freely and actively
manage their economies by increasing or decreasing
the money in circulation as they see fit.
The Bretton Woods System
After the WWs, leaders sought to create a global
economic system that would ensure a longer lasting
global peace;
Through a network of global financial institutions that
would promote economic interdependence and
prosperity;
Breton Woods system was inaugurated in 1944 during
the UN Monetary and Financial Conference to prevent
catastrophes of early decades from re-occuring and
affecting international ties.
Bretton Woods system, influenced by John Maynard
Keynes; economic crises occur not when country does
not have enough money, but when money is not being
spent, thereby, not moving;
When economies slow down, governments have to
reinvigorate markets with infusions of capital;
This active role of governments in managing spending
served as anchor of global Keynesianism system;
Bretton Woods delegates agreed to create two
financial institutions, International Bank for
Reconstruction and Development (IBRD, World Bank),
responsible for funding post-war reconstruction
projects;
International Monetary Fund (IMF), global lender of
last resort to prevent countries from spiraling into
credit crises.
If economic growth slowed down because of lack of
capital for economic stimulation, the IMF would step
in.
Both are key players in economic globalization.
After Bretton Woods, various countries also committed
themselves to further economic integration through
the General Agreement on Tariffs and Trade (GATT) ,
1947.
Main purpose was to reduce tariffs and other
hindrances to free trade.
Neoliberalism and its Discontents
Peak of Keynesianism came in mid-1940s to early
1970s;
During this, governments poured money into
economies, allowing people to purchase more goods,
thus increasing demand;
As demand increased, so did prices of goods;
Western countries, Japan, accepted rise in prices as it
was accompanied by economic growth, reduced
unemployment;
As prices increased, companies earned more, thus have
money to hire more workers;
Keynesian economists believed all these was necessary
trade-off for economic development;
In early 1970s, prices rose due to Organization of Arab
Petroleum Exporting Countries imposition of oil
embargo due to US (& others) decision to resupply
Israel with arms (Yom Kippur War).
Arab countries used embargo to stabilize their
economies and growth;
Oil embargo affected Western economies that were
reliant on oil;
Stock market crashed in 1973-1974 after US stopped
linking dollar to gold, thus ending Bretton Woods
system;
Result, stagflation—decline in economic growth and
employment (stagnation) takes place alongside a sharp
increase in prices (inflation);
New form of economic thinking challenged
Keynesianism;
Friedrich Hayek, Milton Friedman argued pouring
money into economies caused inflation by increasing
demands, without necessarily increasing supply;
Government intervention in economies distort the
proper functioning of the market;
Economists used economic turmoil to challenge
Keynesian theories;
(new form of economic thinking) Neoliberalism
emerged;
From 1980s onward neoliberalism became the codified
strategy of US Treasury Department, the WB, the IMF ;
eventually the World Trade Organization (WTO, 1995)
to continue tariff reduction under GATT.
Their policies came to be called, Washington
Consensus.
Washington Consensus dominated global economic
policies from 1980s through 2000s;
Advocated minimal government spending to reduce
government debt;
Called for privatization of government-controlled
services like water, power, communications, and
transport—believing free market can produce best
results;
Pressured governments, developing world, to reduce
tariffs and open up their economies, arguing it is the
quickest way to progress;
Advocated conceded that certain industries would be
affected and die, this “shock therapy” necessary for
long-term economic growth;
The appeal of neoliberalism was its simplicity.
Reagan and Thatcher justified government spending by
comparing national economies to households;
Thatcher likened herself to a mother who reined in
overspending to reduce national debt.
Household analogy does not hold true to national
economies;
Government can print money, and tax provide them a
steady flow of income that allows them to pay and
refinance debts.
Washington Consensus had defects, despite successes
by politicians like Thatcher and Reagan.
Example: Russia. After collapse of communism, IMF
called for privatization of industries;
Privatization was aimed to free industries from corrupt
bureaucrats and pass them to dynamic and
independent private investors;
Only people who grew wealth under old system had
money to purchase industries;
It entrenched an oligarchy that still dominates the
Russian economy until today.
The Global Financial Crisis and the Challenge to
Neoliberalism
Russia’s case proved how “shock therapy” of
neoliberalism did not lead to ideal outcomes predicted.
The recent repudiation was the global financial crisis of
2008-2009.
Neoliberalism came under severe strain during the
crisis; it was biggest crisis since the Great Depression;
Came as a result of easing of bank and investment
restrictions in the 1980s.
Deregulation continued until the 2000s, paving the way
for crisis;
Attempt to free market led to failure to regulate bad
investments;
Taking advantage of cheap housing loans, people began
building homes beyond their financial capacities;
To mitigate risk of loans, banks that were lending
homeowners’ money pooled these mortgage payments
and sold them as “mortgage-back securities.” (MBS).
One MBS is a combination of multiple mortgages
assumed to pay a steady rate;
So much money circulating increased demand for MBSs
among investors;
Banks became less discriminating in issuing loans; loans
were granted to people who had dubious credit
records; These high risk mortgages are known as sub-
prime mortgages;
Financial experts assumed that a majority of borrowers
would not default;
Banks thought since there are many mortgages in one
MBS, a few failures would not ruin the entirety of the
investment;
Banks assumed housing prices would rise, therefore,
even if homeowners defaulted, they can reacquire the
homes and sell them at higher prices, leading to profit.
In 2007, home prices stopped increasing as supply
caught up with demand;
It became clear that families cannot pay up their loans;
this led to banks getting rid of bad investments.
Led to major investment banks (Lehman Brothers) to
collapse depleting major investments;
Crisis spread beyond the US since many investors were
foreign governments, corporations, individuals;
Interconnections allowed for global multiplier effect
that sent ripples around the world;
Iceland’s banks which depended heavily on foreign
capital, when crisis hit, they failed to refinance their
loans;
Credit crunch led to Iceland’s banks to default
increasing the country’s debt seven-fold;

Countries like Spain and Greece are heavily indebted;
Greece was forced by Germany and the IMF to adopt
austerity measures which affected the poor most as it
led to social security and welfare cuts;
Austerity led to slowed growth and high
unemployment;
$787 billion stimulus package (Keynesian-style) led US
to recover fast;
Economic crisis in Europe sparked political upheaval
causing far-right parties to gain in the polls (France,
Hungary, Sweden);
These movements blend popular resentment with
hatred and racism.
Economic Globalization Today
The global financial crisis will take decades to resolve;
the solutions proposed by nationalist and leftist groups
of closing national economies to world trade will no
longer work.
The world has become too integrated;
Advanced economies like US, Japan and the EU
benefited the most from free trade in the past
accounting for 65% of global trade, Third world, 29%;
When countries opened up their economies the shares
of the percentage changed.
By 2011, developing countries (e.g. Philippines, India,
China, Argentina, Brazil) accounted for 51% of global
exports while the share of advanced nations had gone
down to 45%;
The WTO-led reduction of trade barriers known as
trade liberalization, profoundly altered the dynamics
of the global economy.
Global growth rates have spiked as result of increased
exports.
Global capita GDP rose over five-fold in the second half
of the 20th century (IMF).
It was this growth that created the large Asian
economies like Japan, Taiwan, Korea, HK and
Singapore.
Yet, economic globalization remains an uneven
process, with some countries, corporations, and
individuals benefiting a lot more than others.
Series of trade talks under WTO have led to reductions
in tariffs and other trade barriers, but processes have
often been unfair;
Developed countries are often protectionists, they
refused to lift policies that safeguard their primary
products, which could be otherwise overwhelmed by
products from developing world.
Ex. Japan refused imports (rice is “sacred”). Its
economic muscle allows it to resist pressures to open
its agricultural sector.
US protects its sugar industry, forcing consumers and
sugar-dependent businesses to pay higher prices
instead of cheaper sugar from Central America.
Faced with protectionist measures from powerful
countries and blocs, poorer countries can do very little
to make economic globalization more just.
Beneficiaries have been mainly TNC’s, not
governments.
TNC’s concerned more with profits than social
programs of governments hosting them.
Host countries loosen tax laws which prevents wages
from rising, social welfare programs are sacrificed.
“Race to the bottom” refers to countries lowering their
labor standards, including protection of workers’
interests to lure foreign investors seeking higher profits
at lowest cost.
Governments weaken environmental laws to attract
investors, creating bad consequences on ecological
balance and depletion of finite resources (oil, coal,
minerals).