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Economic Policy

Explore the role of economic policies, theories, and measures in the American economy, from Adam Smith's Laissez-Faire to Reagan's Supply Side Economics. Learn about GDP, CPI, poverty rate, and more.

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Economic Policy

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  1. Economic Policy Now 15

  2. American Dream • A healthy Economy is needed to help insure the goals of the Preamble. • Another reason is so that Americans can try to obtain the American Dream. • This is one of the main causes for illegal immigration. • See the chart on pg 536 • Tax base: the overall wealth that the government can tax in order to raise revenue.

  3. American Economy • The system of transactions by which goods and services are distributed in the marketplace. • Good Economy: unemployment is low, price of goods is steady and productivity is increasing. • Pure capitalist economy: private individuals and companies own the modes of producing goods and services, and the gov. does not enact laws amid at influencing the marketplace transactions that disturbed these services.

  4. American Economy • But since the government does regulate some things we have a regulated capitalist economy (mixed economy). This is to influence the health of the economy.

  5. Economic Theories • Adam Smith the father of economics came up with the idea of Laissez- faire. • He believed to have a healthy economy unregulated competition was needed. • However once the Constitution was signed the government got involved with the economy. • Alexander Hamilton in Federalist No. 11 believe in regulation to create competition between other countries to benefit the US, plus in Federalist No. 12 he believed tariffs would help the gov. raise revenue and control consumer behavior.

  6. Economic Theories • As farming was replaced by industry more gov. regulations came. • Cheap labor was coming to the US through immigration. • Chinese's Exclusion Act 1882. • Also Income inequality grew, which was the gap between the upper class and the working class. • Working conditions changed in the late 19th century and early 20th century • The Jungle by Upton Sinclair

  7. Keynesian Economics • Before the GDP government officials believed in a balance budget, yet during war time deficit spending was allowed. • Keynesian Economics was a theory by John Maynard Keynes that supported government spending and lower taxes in a recession and the opposite during a boom. • Thus a fiscal policy can control and ensure a healthy economy. • But Keynesian can not protect against stagflation, which is high unemployment in a recession and high prices on goods. Which occurred in the 1970’s

  8. Supply Side Economics • To deal with stagflation President Reagan implemented supply side Economics, which advocated tax cuts and decrease government regulation. The argument was that the gov. took to much money thus people were not willing to work over, also that cooperation's could not invest into their companies. • Thus Reagan proposed deregulation. • Bush followed the same program until he broke his promise and raised taxes to deal with the national debt which led to his downfall to Clinton.

  9. Monetarism • Milton Friedman is the founder of the Monetarism theory, which is the government controls the rate of inflation by the amount of money in circulation. • Inflation is the decrease in the value of money as evidence to the increase in prices.

  10. Traditional Measures of Economic Health • Gross Domestic Product (GDP) is the total value of all goods and services produced by labor within a country’s borders. • A way to measure a consumers purchasing power is through Consumer Price Index (CPI) it gauges price change overtime on goods and services • Inflation is 1 to 3% for a healthy economy • Low unemployment rate is 5% or less

  11. Other Measures of Economic Health • Human Development Index (HDI) this was created by the UN to determine how well a country’s economy is providing for a long and healthy life, education opportunities, and a decent standard of living such as house hold income. This is total pretax earnings of residents over the age of 15 living in a home. • To get the median of that house hold income we have to measure Real income, which is earned income adjusted for inflation.

  12. Other Measures of Economic Health • Poverty rate is another measurement. This is a proportion of the population living below the poverty line as established by the national government. • This is calculated by poverty thresholds which are updated annually to measure who is bellow the poverty line.

  13. Fiscal Policy The budget process the government sets in place is over a twelve months which starts in Oct 1 and ends in Sept 30 the following year.

  14. Tax Policy • Tax laws raise money and appropriation laws authorize the spending of the money. • In 1913 the Sixteenth Amendment authorized the use of a national income tax. This imposed a tax on earned income and unearned income. Largest tax • Second largest Social insurance • These deductions from a pay check for federal programs are called payroll taxes • The third largest is corporate income taxes

  15. Tax Policy cont.. • The gov. also collect excises taxes which are levied against a specific items such as gas or liquor, estate and gift taxes and custom duties. • Taxes don’t effect everyone in the same way. • The national income tax is a progressive tax. It takes more money from the wealthy and smaller amount from the less well off. • Some people believe that a proportional tax( flat tax) which takes the same percentage from each person. • Regressive tax takes a larger percentage of the income from lower income earners than higher earners. State sales tax. • Another reason taxes affect us differently is because of tax expenditures( tax breaks or loopholes). Tax break to those who pay interest on their mortgage.

  16. Spending Policy • Federal spending effects the national economy as well as the American dream. • Mandatory spending is payment of debt and government programs for which the legislation that created the program also obligate the gov. to spend money on programs just as long as they exists. • Once a program is made the budget authority provides by law for agencies to obligate gov. spending • Mandatory = uncontrollable spending

  17. Spending Policy cont.. • Discretionary spending = controlled spending • This is payment on programs for which Congress and the President must approve budget authority each year in appropriation legislation. • Discretionary spending has two categories: Nonsecurity spending and security spending

  18. Creating fiscal policy through the national budget • The process starts in the executive branch. • The budget process starts about a year and a half before its due in the OMB. • The OMB sends the President the executive department budget priorities. • After changes the President sends the priorities back to the OMB for review. • After review and forecast of the economy they are sent back to the President for approval. • The draft is a budget document that explains the presidents fiscal plan. This is known as the executive budget.

  19. Creating fiscal policy through the national budget • After that the executive budget is sent to congress (CBO) for review. • The Senate and House come up with a concurrent budget resolution, which creates a expenditure ceiling and revenue floor. • All has to be agreed on before April 15th. • After approval the House and Senate draft appropriation bills to provide for the programs. • Budget reconciliation: the annual process of rewriting authorization legislation to comply with the expenditure ceiling and revenue floor of the current budget for the upcoming year.

  20. Creating fiscal policy through the national budget • Congress has till the end of June to approve all 12 appropriations bills that fund the national government. • This timeline gives the President two months to approve bills so the new budget can start in Oct. • If Congress and the President fail to approve one of the bills then continuing resolution occurs. Which is an agreement of the House and the Senate that authorizes agencies not covered by the appropriation laws to cont. spending money within their previous years budget. • At the same time the GAO is evaluating the previous years budget

  21. Deficit Spending, Debt, and Economic Health • Budget Surplus: Money left over when all expenditures are paid. • Budget Deficit: more money is spent then collected. • To pay of the national debt the gov. must raise taxes, cut expenditures, or both.

  22. Monetary Policy and Federal Reserve • Monetary Policy: the body of government policies, controlled by the federal reserve system amide at influencing the supply of money in the market place to maintain price stability. • The Federal Reserve consists of Board of governors, an open market committee, 12 federal reserve banks,3000 member banks. • Control is done in three ways: reserve requirement, discount rate, sell bonds

  23. Regulatory Policy • Adam Smith wanted a free, unregulated market but it could led to market failure. A condition in which competition for profits in the market place causes harm to society. • To make sure this does not occur the gov. has set up business regulation and social regulation.

  24. Business Regulation • Interstate commerce commission was created in 1887 to regulate business of the railroad and protect farmers. • Next the Federal Trade Commission was made to regulate overseas trade. • During the Depression the Securities and Exchange Commission was made to regulate the financial market. • Another regulation during the depression was the National Labor Relations Act of 1935( Wagner Act) which regulated interactions between management and labor unions. • Labor Management Relations act ( Taft-Hartley Act) outlawed labor practices congress deemed unfair and restricted the right to unionize to nonsupervisory employees only.

  25. Social Regulation • Pure Food and Drug act led to the creation of the FDA. • Meat Inspection Act • The Jungle • Fair Labor Standards Act of 1938 led to standardized work week, minimum wage, keeping track of workers hours, overtime pay, and limits on children's work hours. • EPA was made in 1970 and Consumer Product Safety Act in 1973 which turned into the CPSC.

  26. Trade Policy • Our economy relies on the global economy and each nation we trade with has a trade policy. • A protectionist trade policy aims at protecting domestic producers. This is done through tariffs. • Nontariff trade barriers aim at creating a competitive advantage in trade. • To help this kind of trade out subsidies are used and these are tax break so other businesses can be more competitive. • Free Trade Policy is the elimination of tariff and non tariff trade barriers so that international trade is expanded.

  27. International Trade Agreements • In 1947 the US and 23 nations signed the General Agreement on Tariffs and Trade (GATT). • 1. Not to discriminate against each other in trade • 2. Work toward eliminating tariffs • 3. Negotiate to resolve trade problems. • Out of this the WTO grew in 1995 which is made up of 130 countries. • NAFTA was made in the early 1990s which many argue created a trade deficit.

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