Chapter 17 Domestic Policy 1 Outline the various economic theories proposed for managing the economy 2 Contrast fiscal policy and monetary policy and explain the key role of the Fed 3 Assess Government s ability to manage the economy in view of the Lucas critique 4 Discuss US distribution of income wealth and the role of supply side economics 5 Assess whether the US should pursue an industrial policy or remain a free market 6 Describe the basic concepts categories of how the Government regulates business 7 Describe the key government economic and social regulatory agencies their role 8 Assess the effectiveness and projected impact of current environmental policy 9 Describe the various concepts and categories of Social Welfare policy 10 Contrast social insurance w public assistance explain the role of means testing 11 Outline Social Welfare Policy and assess impact of the Social Security Act of 1935 12 Assess the current and future status of Social Security Welfare and Health 1 Policy Managing the Economy A Brief Historical Overview From Government Restraint to Government Intervention 1800 to early 1900s dominated by late 18th century economic theory Classical economics lassez faire An economic theory dominant at the start of the twentieth century that argued that the federal government s only role in the economy was to ensure a stable supply of money Theory applied to Hoover s balanced budget as solution to what major economic crisis 2 Managing the Economy A Brief Historical Overview 2 Start of the Great Depression 25 unemployment 1929 stock market crash Hoovervilles to protest lack of aggressive Federal action Public impatient with inability of Government to fix problem 1932 Presidential election landslide election of FDR First Hundred Days aggressive Federal action to fix New Deal programs Federal projects spending Objective spur economy to life get America back to work Examine FDR s economic policy to spur economy 3 FDR s Economic Policy Major economic events and actions of FDR s Presidency Became President in 1933 During Great Depression the U S suffered 25 unemployment Roosevelt s Administration instituted the New Deal At first employed public works programs Later used government spending to spur on the economy What kind of Government economic policy uses spending to spur 4 Fiscal Policy Using the federal government s control over taxes and spending to influence the condition of the national economy 5 Managing the Economy Fiscal Policy Fiscal Policy Government policy to Tax and Spend What economic theorist came up with this concept John Maynard Keynes 20th century economic theorist Wrote General Theory of Employment Interest Money Less jobs less low consumption low GDP 6 Keynesian Economics Active government role in the Nation s economy Create surplus deficit how Through manipulation of the Budget Objective Stimulate or retard a Boom or Bust economy How achieved Federal action tax less in economy or spend put more in economy Forever after associated with New Deal Democrats 7 Keynesian Economics An economic theory based on the work of British economist John Maynard Keynes that contends that the national government can manage the economy by running budget surpluses and budget deficits GDP A measure of a country s total economic output in any given year 8 Application of Keynesian Economics During Recession Government should spend to raise demand thus spur economy Okay to run a budget deficit Complication to above theory counter cycle programs Overheated economy Government should cut spending to control inflation How Raise taxes to take out of economy This will cut demand slow economy down Automatic government programs kick in to counter downturn Food Stamps Public Assistance Unemployment compensation Examine Recession cycle in greater detail 9 Cycle of Recession Supply and demand for goods and services fall Because businesses can t sell goods they fire workers and produce less Because people have less money they buy less Unemployment rises and the overall GDP falls 10 Managing the Economy Besides Fiscal Policy or Federal Tax Spending What s the other way to manage the economy Controlling the Money Supply What economic theory advocates control of money supply Monetary Theory Nation s money supply is primary to economy s health Therefore controlling the circulation of money in Nation s economy will control inflation or spur economic growth Who controls the Nation s money supply and how does it control it 11 The Federal Reserve An independent regulatory commission that Congress created in 1913 to oversee the nation s money supply How does Federal Reserve control the money supply Control of Nation s money supply by The Fed Set the discount rate i e short term interest rates Buy or sell U S Treasury Securities Savings Bonds Change required reserve ratio Ratio of money Bank must hold in reserve can t loan Examine structure of the Federal Reserve 12 The Federal Reserve Four Key Parts 1 The Board of Governors 2 The Federal Open Market Committee 3 Twelve Regional Federal Reserve Banks 4 The commercial banks that are members of Federal Reserve System 13 Federal Reserve System 14 Government Management of the Economy Assessment Can the Government effectively manage the economy Role impact of the Lucas critique Public s private corporations response to Gov actions to counter its ill effects on their interests The new Keynesians math models sticky wages Debate disagreements centered around following How economy works proper Gov policy to be applied Bottom Line No sure resolution on Gov role big or small role 15 Current Status of Economic Stewardship 12 economists with 13 conflicting opinions Applying Fiscal Monetary controls Aim economic stability Impact on economy of Government management actions Gradual dampening of Boom Bust swings Recent trends since 1950 Continuing disagreements over how to manage economy Distribution of Income Wealth Supply side economics the trickle down effect Industrial Policy as practiced in Japan 16 A Century of US Economic Growth 17 Debate on Management of Economy Continuing disagreements over how to manage economy Growing gap Distribution of Income Wealth 2005 U S income distribution as a percentage of income earned 18 US Wealth Income Distribution Wealth income real estate stocks bonds and material goods Top 1 2 3M Top 20 1 8K Control 40 of all wealth in United States Control 80 of all wealth in the United States 19 Debate of Management of Economy 2 Supply