StudySpace: We the People ed. 6

Why Is Government Involved in the Economy?

Since the 1930s, Americans have counted mostly on the federal government to ensure a prosperous economy. Political leaders have different views on what the most important problem is, which policy tools are preferable and who should benefit the most from government action. Americans tend to believe that individual liberty is the key to a thriving economy, but the steady rise in inequality has spurred interest in understanding the impact of government policy of economic inequality.

I. What are the basic principles behind government involvement in the economy?

• The belief in the separation of public and privates spheres to promote a capitalist economy is the bedrock of American economic policy.
• At the most basic level, government makes it possible for the markets to function efficiently by setting rules for economic exchange.
• Government is also now involved in many aspects of the economy to promote the public well-being.
• Accordingly, a conflict arises between the two different approaches to the role of government in the economy.

 

II. What basic economic roles does government serve?

• Since 1929, the national government has increased its role in managing the economy and minimizing the effects of economic downturns.
• The primary objective to managing the economy is to protect the welfare and property of individuals.
• The government is also involved in creating and maintaining a national market and regulating competition (e.g., antitrust laws).
• The government also provides public goods when no private firm can afford to provide the goods or services (canals, highways).

 

Should Government Be Involved in the Economy?

I. What are the main arguments in the debate over the proper role of the government in the economy?

• There are deep differences of opinion about whether, how much, and in what ways government should be involved in the economy.
• Ideas that envision only a minimal role for the government in the economy are often called laissez-faire capitalism approaches.
• Adam Smith’s Wealth of Nations is the foundation of free-market economics.
• Smith believed that government’s role should be restricted to maintaining national defense, establishing law and order, and providing basic public goods.
• John Maynard Keynes advocated a more prominent role for government in response to the Great Depression.
• Government could stimulate demand and overcome the economic factors contributing to the Great Depression.
• Keynesians believe that getting money into the hands of working people is the best way to stimulate the economy, and are interested in promoting equity.
• Monetarists believe that the role of government in managing the economy should be limited to regulating the supply of money. Monetarists are more concerned about ensuring economic stability than with promoting equality.

 

What Are the Goals of Economic Policy?

I. What are government leaders trying to achieve by passing specific economic policies?

• The three major goals that have guided government officials are promoting a strong and stable economy, encouraging business development, and regulating international trade.
• By the 1970s, two additional goals for national economic policy had emerged: protecting the environment and protecting consumers.

 

II. How is the national government fundamental in promoting a strong and stable national economy, business development, and international trade?

• Economic objectives of government policy-makers include promoting economic growth, full employment and low inflation.
• The Government uses grants, tax breaks and subsidies to aid businesses and farmers.
• The U.S. has long promoted free trade, backing NAFTA and the WTO, but the recent outflow of jobs has caused many to reconsider their support of free trade.

 

III. How is the national government fundamental in regulating industrial relations and protecting the environment and consumers?

• The National Labor Relations Board and the Department of Labor are charged with overseeing labor–management relations.
• The FDA has recently been criticized for lowering standards on health claims for dietary supplements.

 

What Are the Tools of Economic Policy?

I. How can we classify the broad set of tools used by the government to accomplish its economic policy goals? More specifically, what are these tools called?

• Monetary policies attempt to manipulate the growth of the economy by controlling the availability of money to banks.
• The Federal Reserve System was created by Congress in 1913 to integrate private banks into a single national system and to regulate the money supply through changing the discount rates and reserve requirements of banks and buying and selling government notes.
• Fiscal policies include the government’s taxing and spending powers.
• Progressive taxes, such as the income tax, have fallen in recent decades while regressive taxes have increased.
• Taxation provides a method for redistribution, controlling behavior, and raising revenue.
• Government spending can be used to stimulate sectors of the economy or to provide needed infrastructure.
• Recent heavy spending and tax cuts have led to massive budget deficits, which threaten future government services, such as Social Security and Medicare.
• Regulation and antitrust policy allows the government to directly affect the operation of business entities in the American economy.
• Despite well-known cases of regulation, such as the government’s attempt to reign in Microsoft, the trend since the 1970s has been towards deregulation.
• Government subsidies and contracts can promote or stabilize specific sectors of the economy.

 

The Politics of Economic Policy Making

I. How do political leaders disagree about what the priorities of economic policy should be?

• Both Democrats and Republicans want to promote a strong economy, but have different approaches to achieving it.
• While Republicans believe that the best way to promote growth is to let the free market work without government interference, Democrats tend to support government regulation to promote social or environmental objectives (such as the minimum wage law and anti-pollution laws).

 

II. What groups have the most influence on economic policy making? Does economic policy serve the public interest or special interests?

• A broad range of interest groups play a role in the formulation of economic policy, including consumer groups, environmentalists, businesses, and labor.
• Business organizations are the most consistently powerful groups in American politics and are the general beneficiaries of government economic policy.

 

III. How does the debate over economic policy reflect the broader debate over American political values?

• Americans are generally more concerned with ensuring economic liberty than with promoting economic equality.
• Accordingly, Americans are more tolerant of economic inequality and economic policy in the US has rarely attempted to promote economic equality.
• Inequality has risen dramatically in recent years, worsened by the recent tax cuts that mainly benefited the wealthy.
• Citizens must understand how economic policy proposals affect them as individuals, how it affects government services and how it reflects their values.

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