Chapter Study Outline

The Goals of Economic Policy

  1. Public policy is a law, rule, statute, or an edict that expresses the government’s goals and provides for rewards and punishments to promote their attainment.
  2. At the most basic level, government makes it possible for the economy to function efficiently by setting the rules for economic exchange and punishing those who violate the rules.
  3. Government promotes stable markets by protecting the welfare and property of individuals, maintaining law and order, providing protection of private property, and regulating competition.
  4. Government makes the market economy possible by providing public goods, facilities the state provides because no single participant can afford to provide those facilities.
  5. A strong and prosperous economy is the basic goal of all economic policy. But the key elements of a strong economy—economic growth, full employment, and low inflation— often appear to conflict with each other.
  6. Government promotes business development indirectly through categorical grants and supports specific business sectors with direct subsidies, loans, and tax breaks.
  7. From the 1930s to the 1980s, the government regulated industrial relations by overseeing union elections and collective bargaining between labor groups and management. But more recently, with the exception of the minimum wage, the government has significantly reduced its involvement in industrial relations.
  8. The federal government plays an active role in protecting consumers from unsafe products.

The Tools of Economic Policy

  1. Monetary policies manipulate the growth of the entire economy by controlling the availability of money to banks through the Federal Reserve System.
  2. Fiscal policies include the government’s taxing and spending powers.
  3. During the nineteenth century, the federal government received most of its revenue from a single tax, the tariff. Since then, the federal government has added new sources of tax revenue, the most important being the income tax and social insurance taxes. One of the most important features of the American income tax is that it is a progressive tax, meaning that it hits upper-income brackets more heavily.
  4. The federal government’s power to spend is one of the most important tools of economic policy because spending decisions affect every aspect of the economy. These decisions, which are typically contentious, are made as part of the annual budget process involving the president and Congress.
  5. The federal government can establish conditions that regulate the operation of big businesses to ensure fair competition and can force large monopolies to break up into smaller companies. In addition to economic regulation, the federal government can also impose conditions on businesses to protect workers, the environment, and consumers.
  6. The trend since the late 1970s has been against regulation. Although the deregulation movement has resulted in a reduction in the amount of regulatory laws, few regulatory programs have actually been terminated.
  7. Subsidies and contracting are the carrots of economic policy. Their purpose is to encourage people to do something they might not otherwise do or to get people to do more of what they are already doing.

The Environment and the Economy

  1. During the 1970s, environmental policy emerged as a major component of federal action, with the passage of new laws reaching into many aspects of the economy. During this time Congress enacted the National Environmental Policy Act (which created the Environmental Protection Agency), the Clean Air Act, the Clean Water Act, and the Safe Drinking Water Act.
  2. Concerns about climate change pose complex new challenges for economic policy. Policy makers are considering a variety of solutions including policies designed to reduce greenhouse gases, development of alternative technologies, and policies that promote adaptation to a changed climate.

The Politics of Economic Policy Making

  1. Politicians disagree about what the priorities of economic policy should be. Both Democrats and Republicans want to promote economic growth, but Republicans stress the importance of maintaining economic freedom whereas Democrats are more willing to support economic regulation to attain social or environmental objectives.
  2. There are four different theories about whether, how much, and in what ways government should be involved in the economy.
  3. Proponents of laissez-faire argue that the economy will flourish if the government leaves it alone.
  4. Proponents of Keynesianism argue for an ongoing role for government in the economy by redistributing money and stimulating consumer demand.
  5. Proponents of monetarism argue that the role of government in the economy should be limited to regulating the supply of money.
  6. Proponents of supply-side economics argue that reducing the government’s role in the economy, particularly through tax cuts, will promote investment and spur economic growth.
  7. Since the Great Depression of the 1930s, the public has held the government responsible for maintaining a healthy economy.
  8. After the 2008 global economic crisis, the federal government, first under George W. Bush and then under Barack Obama, initiated large-scale government interventions, which included emergency measures to bail out failing companies, short-term stimulus to get the economy moving again, and proposals for regulations that would prevent similar financial meltdowns in the future. Support for these measures has wavered as fears of rising deficits, long-term debt, and, more abstractly, “big government” have grown.
  9. Consumer groups, environmentalists, businesses, and labor all attempt to shape economic policy, though business groups are the most consistently influential today.

Thinking Critically about Economic Policy

  1. Historically, Americans have been more concerned about ensuring economic liberty than with promoting economic equality, although debates about the appropriate balance between the two are an ongoing feature of economic policy in the United States.
  2. Many Americans report that they are concerned about rising inequality, but studies show that they do not have a good understanding of the relation between economic policy and inequality.