Peters - American Public Policy - Chapter 8 Notes

?Week 10 - Peters - Chapter 8 - "Economic Policy" ?economy wasn't originally seen as being able to be controlled ?1950s, 1960s, 1970s: Western nations experienced rapid and consistent growth ?however, after the oil shocks of 1970s and the stagflation of the 1980s, people lost faith in the government's ability to control the economy ?Clinton made some headway but couldn't resolve continuing trade deficits and increased levels of economic inequality ?government must form a coherent set of policies designed to manage the economy ?overall policy is the result of many separate decisions ?also depends heavily on the actions of individual citizens over whom the governments have little/no direct control ?The Goals of Economic Policy ?generally, 4 fundamental goals ?Economic Growth ?growth has acted as a political solvent to ease the US transition from warfare state to welfare state ?public programs grew along with private affluence ?lots of growth in the 1990s led to people liking the flexible model of the US ?economic future seems uncertain ?Full Employment ?social benefits of the welfare state don't match those that could be provided by a full job ?unemployment also impacts government ?if not working, no Social Security or income tax ?cost money in unemployment programs ?job creation has been shifted away from manufacturing and toward a service base ?Stable Prices ?inflation impacts all consumers ?particular hurts those living on fixed incomes, or those not organized enough to gain pay increases in relation to price increases ?helps those that owe debt, government included ?not unqualified boon ?government has to buy things too ?A Positive Balance of Payments ?US less involved in international trade than other industrialized countries ?still must manage its balance of payments from trade ?net negative balance of payments are generally detrimental to a country's economy ?shows that a country's products aren't competitive ?also decreases a country's value of currency regarding other nation's currency ?may indicate a country's dependence on the products of other nations ?Structural Change ?changing the industrial and regional composition of production ?some regions of a country may be less developed than others (i.e. the US South) ?production composition can make some regions really vulnerable to economic changes ?in the US, state and local governments much more involved with promoting economic development and structural change ?especially Southern states using tax incentives ?The Instruments of Economic Policy ?giving the increased globalization, traditional tools of national economic management may not be sufficient ?Fiscal Policy ?theory of fiscal policy: if the government wants to stimulate the economy, it should run a deficit and vice versa ?hard in practice between deficits and credits aren't politically neutral ?estimating the amount of revenue to be received is also not that simple ?"full-employment budget" ?the budget should be balanced during periods of full employment (5% unemployment) ?Making Fiscal Policy ?most fiscal policy decisions are made through budgetary process ?primarily a presidential concern ?only at budget level can global decisions about economic management be made ?president receives advice/pressure (generally to spend more) ?especially from cabinet secretaries linked to special interests ?president doesn't make decisions along, Congress is increasingly involved ?Supply-side economics ?argued that instead of inadequate demand in American economy, there wasn't enough supply ?generally, increased supply of labor and capital leads to growth ?major tool for implementing supply-side economics is the Economic Recovery Tax Act of 1981 ?decreased average income tax by 23% over 4 years ?assumed if people had increased incentives to work and invest, they would ?led to massive increases in the federal deficit ?Monetary Policy ?stresses the importance of the money supply in controlling economic fluctuations ?increased money in circulation is presumed to stimulate the economy ?extra money decreases interest rates, making borrowing easier ?Federal Reserve Board and its member banks are responsible for monetary policy ?intentionally independent from executive authority of the president and also largely independent from congressional control ?exercise judgement as bankers, not politicians ?3 principal tools ?1) open-market operations ?Federal Reserve can enter the money markets to buy/sell securities issued by the federal government ?2) change the discount rate and/or the federal funds rate ?rates of interest at which member banks can borrow money from the Federal Reserve Bank or from each other ?changed relatively infrequently and then only by a small amount ?3) reserve requirement ?will decrease an amount of money in circulation and should slow down economic activity ?Regulations and Control ?generally, regulation has not been used for general economic management but to achieve economic and social goals ?antitrust regulation has been one of the most important forms of government control of the economy ?may have outlived its utility ?to compete in a global economy, American firms may have to be bigger ?also may need to protect intellectual property, is kind of like a natural monopoly ?US has limited experience with wage and price controls ?minimum wage has been a source of political contention ?Public Support for Business ?great deal of support comes from state and local governments ?majority are provided for R & D and the subsidation of credit ?state governments use direct services and credits to attract industry ?Public Ownership ?public ownership of certain kinds of industries may be important for economic management ?at state and local levels, many public enterprises are organized to carry out economic and social political functions ?ex: gas, electric ?can provide revenue, may be more efficient (public transport) ?loan guarantees have been used to attempt to assure continuing employment and economic growth ?Incentives ?can attempt to influence economic change by providing incentives for desired behaviors ?most are made available through the tax system and are directed at encouraging investment and economic change ?major incentives for structural change is oil depletion allowance ?can write off resources used to search for new supplies of nonrenewable resources ?Moral Suasion ?governments can try to influence citizens/industries through persuasion ?works best in times of national emergency Maria Putzer Document3