Economic Policy

Peters, Chapter 8 CQ Researcher: Pension Crisis, Minimum Wage

Types of Economic Systems
• Capitalist ("free-enterprise")
• private ownership of major means of production, distribution and exchange • prices & wages determined by market

Types of Economic Systems
• Socialist
• public (gov't) ownership of major means of production, distribution and exchange • prices and wages determined by gov't

Types of Economic Systems
• "Mixed" Economies ("welfare state capitalism")
• combines elements of both systems • major means of production mostly in private hands • allocation of goods and services, prices, are frequently planned

Where does the United States stand in comparison to the rest of the world?

Economic Systems and Ideology
• Capitalism Assumptions:
• People are motivated by material selfinterest • Consumers have perfect information to make rational economic choices • Demand is elastic (adjusts to changing prices) • Production and price are elastic (producers can respond easily to shifts in demand) • There is perfect competition

Economic Systems and Ideology
• Values maximized:
• individual liberty through protection of property rights (private property) • economic efficiency through "survival of the fittest" • innovation / quality through competition

Economic Systems and Ideology
• Those on "the Right" tend to place great faith in these assumptions and tend to place a high priority on the values maximized by capitalism.

Economic Systems and Ideology
• Socialism Assumptions:
• Capitalist assumptions are mostly wrong in the real world. • Capitalism inevitably results in an accumulation of wealth by a small minority of society • To the extent that economic power = political power, a "ruling class" will come to dominate • The only solution is for government to exercise complete control over the operation of the economy

Economic Systems and Ideology
• Values maximized:
• Political and economic equality

• The economic system in most countries reflects the dominant ideology and political culture of that country.

U.S. Political Culture
• Trust in Business vs. trust in government

• Trust in major American institutions: % saying they have “hardly any confidence”:
Major Companies: 13.9 Supreme Court: 14.8 Banks and Financial Institutions: 16.5 Organized religion: 19.9 Congress 26.3 Exec. Branch of Fed. Gov’t: 29.2 Organized Labor: 33.9

U.S. Political Culture
• Belief in private property (reinforced by Constitution) • Belief that nat'l gov't should play a role in stabilizing the economy • Belief in equality of opportunity (tolerance for economic inequality)

Average Voter Ideology 10 20 30 40 50 60 70 80 90 0
R NO LU X SW E FI N NZ G B

U.S. Voter “Liberalism” in Comparative Perspective

Country
US IC E

IT A DE N BE L NE T CA N G ER FR A AU T IR E SW I AU L IS R TU R

U.S. Political Culture
• Impact on Economic Policy:
• Gov't regulation of privately owned business (rather than public ownership) • Limited redistributive effort (reflected in tax structure and social programs) • Government intervention to stabilize the economy (macroeconomic policy to promote growth and stabilize prices)

Goals of Economic Policy
• Economic policy has four fundamental goals:
• • • • growth; full employment; stable prices; and balance of trade

• There may be trade-offs among these goals, as is indicated by the traditional trade-off between unemployment and inflation. • To these goals may be added an additional intermediate policy goal—positive structural change.

Public Opinion and the Economy

Public Opinion and the Economy

Public Opinion and the Economy

Labor Union Membership in the U.S.

Why?

Instruments of Economic Policy
• Policy instruments to influence the economy include:
• • • • • • • fiscal policy; monetary policy; regulations and control; public support for business; public ownership; incentives; and moral suasion

• The United States tends to emphasize indirect instruments of fiscal and monetary policy.

Fiscal Policy
• Keynesian economics (demand-side theory): the fed gov't has the obligation to create demand by purchasing goods and services through increased spending • Keynesian theory: run a budget deficit to stimulate the economy, run a surplus to reduce inflation in an “overheated” economy.

Fiscal Policy
• Deficits and surpluses are not politically neutral. • Keynesian theory has not translated well into practice: there has been a tendency to run deficits (“one-eyed Keynesianism”) and to forget to run surpluses: • From 1950–1997, there were 47 budget deficits in 48 years • There were budget surpluses from 1998–2001

Fiscal Policy
• Supply-Side Economics ("trickle-down") • gov't taxes, regulation and spending is a burden on the economy • emphasis should be on stimulation of production; demand will follow naturally as a result of the production process itself • Reagan's twofold strategy: (1) cut taxes to stimulate investment (2) reduce gov't spending to make up for loss of revenue • increased profits  investment  production  jobs and prosperity for all • "A rising tide lifts all ships"

Fiscal Policy
• Did "Reaganomics" work?
• economic recovery? • At what cost?
• budget deficits • national debt • income inequality

Monetary Policy
• Federal Reserve Board (1913) regulates the economy through control over the money supply
• 7-member Board + Advisory Council • recession = encourage people to spend $ • inflationary periods = encourage NOT to spend $

Monetary Policy Tools
• The Federal Reserve’s principal tools for influencing the economy are:
• open-market operations:
• Open-market operations involve the FRB entering the money markets to buy or sell securities issued by the federal government.

• altering the discount rate and the federal funds rate;

• change the reserve requirement:

• these are the rates of interest at which member banks can borrow money from the FRB or from each other • Rate increases make money more costly to borrow and will slow down the economy and inflation. • this is a change in the amounts of money that member banks are required to keep in reserve to cover their outstanding loans • This is a more drastic tool, used to effect quick change.

Chairman of the “Fed”
• Bernard Bernanke

Theories of Economic Policymaking
• “The Political Control of the Economy” by Edward Tufte (1978)

Public Opinion and the Economy

Public Opinion and the Economy

1974

Economic Issues and Voting
• What do we know?

Economic Issues and Voting
• What do we know?
• Retrospective voting • Prospective voting • Pocketbook voting • Sociotropic voting

The Political Business Cycle

The Political Business Cycle
• Is there a political business cycle?
• Monetary policy instruments – yes/no • Inflation – yes/no • Fiscal policy - yes

The Political Business Cycle

Source: Drazen (2000)

The Impact of Economic Policy
• Case Studies
• The Minimum Wage • The Pension Crisis (reading only) • NAFTA

The Minimum Wage

The Minimum Wage

The Minimum Wage
• Cost and Benefits? • The politics of the minimum wage
• Why do increases in the minimum wage occur so infrequently?

The North American Free Trade Agreement (NAFTA)
• Promotes “free trade” among member countries (U.S., Mexico, Canada) • Went into effect Jan. 1, 1994
• Signed by Bush I in 1992 • Passed by U.S. Congress in 1993 (Clinton) • Gradual implementation

The North American Free Trade Agreement (NAFTA)
• Supplemented by two additional agreements
• North American Agreement on Environmental Cooperation (NAAEC) • North American Agreement on Labor Cooperation (NAALC)

• Part of larger trend toward “globilization”

The North American Free Trade Agreement (NAFTA)
• Has NAFTA been good for the U.S.?

The North American Free Trade Agreement (NAFTA)
• Has NAFTA been good for the U.S.? • EPI Report • Burfisher, et al. (2001)

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