-- History of Governmental Involvement

in the Economy

Alexander Hamilton, the first Treasury

Secretary, favored a government role in the
economy.
He wanted a national bank.
He also supported government aid to
commerce so the new American economy
would grow.
 Democrats Jefferson and Jackson
Jackson opposed a national bank.
When Jackson was elected President, about
1830, he eliminated it.
But federal intervention on the economy is
nothing new.
There was early support for development of
canals, railroads and land grants.
 During the late 19th century, you had laissez-
faire capitalism in the U.S.
Businesses were allowed to grow.
You soon had concentrations in whole
industries like the railroads and oil production.
These concentrations of industries were
known as trusts.
 There soon came a movement, the
Progressives, that called for regulation of the
trusts.
Famous progressives were Theodore
Roosevelt, Woodrow Wilson, and California
Governor Hiram Johnson.
There also was a call during the late 19th
century for the regulation of food and drugs.
Upton Sinclair wrote The Jungle.
 In the 20th century, Government started
getting much more directly involved in the
economy.
1913 Sixteenth Amendment established an
income tax.
The Federal Reserve System was also set up in
1913. It is our national bank.
 Todays style of government intervention in
the economy didnt really start until FDR.
He had his New Deal in the 1930s.
But FDR wanted to run a balanced budget.
This probably led to a slip back into
depression in 1937.
World War II got the U.S. out of the
Depression and set us up as a global economic
powerhouse.
 There are two levers of policy the government
can pull to manipulate the economy.
These are 1) Monetary policy by the Fed.
This is manipulation of the money supply.
The other is 2) Fiscal Policy.
This is manipulating taxing and spending
policy.
 The Federal Reserve Bank controls the money
supply in the U.S.
The more money in circulation, the lower the
interest rate.
The lower interest rates are, the more money
individuals and banks can borrow and spend.
The more spending, the more economic
activity.
 At the top of the Federal Reserve Bank, is the
Federal Reserve Board.
These are 7 members appointed by the
President and confirmed by the Senate for 14
year, staggered terms.
They can only be removed for cause.
They are supposed to overlap presidential
administrations and be independent of the
federal government.
 The Chairperson of the Board is also selected
by the President and confirmed by the Senate.
They serve for a four year term.
There is no limit on the number of terms they
can serve.
The current chair, recently appointed, from UC
Berkeley, is Janet Yellen.
 Federal Reserve Banks make up the Federal
Reserve System.
There are 12 federal reserve districts, and thus
12 federal reserve banks.
Their headquarters are in major financial
cities, like San Francisco, Dallas, New York and
Philadelphia.
A Federal Reserve Bank is a bankers bank.
Nationally chartered banks (most) must
belong. State chartered financial institutions
can belong if they want to, and most do.
 The Fed controls the money supply. It has
four tools to do this.
These are 1) the Discount Rate, 2) the Reserve
requirement it puts on member banks, 3)
Open market operations and 4) setting the
federal funds rate.
 The Discount Rate. This is the rate at which
Federal Reserve Banks loan money to member
banks.
The Reserve Requirement is how much cash a
member bank has to have on hand at any one
time.
Open Market Operations The Federal
Reserve Open Market Committee buys and
sells the different kinds of federal bonds
available, mostly Treasury Notes or Bonds.
 The Federal Funds rate is the interest rate that
member banks can charge each other to
borrow funds.
Fiscal Policy Taxing and Spending
Theory developed by John Maynard Keynes.
Theory is in good times the government
should run a budget surplus. In bad times, it
runs a deficit.
 A deficit is supposed to get the economy
going.
This is to be combined with a loose monetary
policy (expansionist).
In this way, you flatten out the business cycle.
 Keynesian Demand Curve
C + I + G + X = GDP
C = All consumption
= All investment
G = All government spending
X = Net exports
GDP = Gross Domestic Product
 The government can manipulate C, ,G and X.
You manipulate C by what you do with interest
rates and government spending.
You manipulate by playing with the interest
rate and the levers of the Fed.
You manipulate G by deficit spending or
running a surplus.
 Keynesian policy was in favor from 1933 to
1979. Then again from 2008 to the present
under President Obama.
Keynesian philosophy calls for manipulation of
the money supply and taxing and spending to
control the economy.
Recent examples, QE1, QE2, QE3, TARP, Auto
Bailout and President Obamas $800 billion
stimulus bill.
Probably kept us out of depression.
 Other Schools of Thought
Laissez Faire Economics Adam Smith and the
Wealth of Nations
Monetarism Milton Friedman from the
University of Chicagos Chicago School of
Economics.
Calls for just increasing the money supply at a
steady rate to accommodate economic growth
(5% per year).
Also Supply Side Economics In vogue from
19802007.
 Supply side economics calls for cutting taxes
to stimulate the economy.
Theory is this will increase the base and the
lower tax rate will produce more government
revenue.
Supply side economists also favor less
government regulation of business.
 Supply side economics supported by George
Gilder who wrote Wealth and Poverty in
1981.
Also supported by Arthur Laffer. He was from
the Claremont Graduate School in Los
Angeles.
He now teaches at Vanderbilt University in
Tennessee.
Laffer curve and optimum tax rate.
 You can have progressive or regressive tax
rates.
Income tax is progressive.
Sales tax is regressive.
These effect the Marginal Propensity to
Consume (MPC) and the Marginal Propensity
to Save (MPS).
 Budget Deficits
National Debt
A budget deficit is the difference between
revenue and expenditures by government in a
given year.
The National Debt is the sum of all previous
deficits.
National Debt is currently north of $17.5
trillion dollars.