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Part 1. Domestic Policy Issues: The Economy. Role: State of economy plays a significant role in determing strength of United States and mood of its people Affects EVERYONE How much we earn, what we can afford to buy Important issue May influence our vote. The Economy. 1990s

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part 1

Part 1

Domestic Policy Issues:

The Economy

the economy

State of economy plays a significant role in determing strength of United States and mood of its people


How much we earn, what we can afford to buy

Important issue

May influence our vote

The Economy
the economy3

Expands rapidly


Recession sets in


9/11 causes anxiety about domestic security

Job market tight

Energy prices soar

Health care pinches wallets

Policymakers disagree on what steps to take to get back on track

The Economy
the economy5
Governments Role

Economy encompasses production, distribution, and consumption of goods/services

Struggle to determine best way to regulate economy

Have a hard time anticipating ups and downs, so look to recent trends

Rely on statistics to make important policy decisions

3 major tools:

Fiscal policy, monetary policy, and trade policy

The Economy
the economy6
Fiscal Policy:

Use of federal government’s taxing and spending powers


To promote steady economic growth, full employment, and stable prices

Spend taxpayer dollars on specific programs and subsidies

EX: programs that provide additional jobs; subsidies for industries like agriculture

The Economy
the economy7
Monetary Policy:

Fed tries to promote steady growth without inflation or unemployment


Controlling amount of money in circulation

Called monetary policy, controlled by Federal Reserve (central bank of US)

Created in 1913


Safe, flexible and stable financial system

Fed issues US currency and regulates short term interest rates to banks

Board of Governors, selected by President, confirmed by Senate, runs the Fed (14 year terms)

The Economy
the economy9
Trade Policy:


Exchange of goods and services among nations

Generally increase a country’s overall standard of living

Policy includes promoting exports, restricting imports when necessary, and pursuing agreements that boost trade benefits

The Economy
the economy10

Continuing rise in prices for goods and services

Higher the rate of inflation, faster the prices go up

If unaccompanied by rise in wages, standard of living goes down

In other words, people can afford to buy less

Who is hurt the most?

People on fixed incomes

What could it lead to?

People to buy on credit; save less

Domino Effect:

Banks have less money, economy suffers b/c banks cannot lend for investments

Inflation calculator

The Economy
the economy11
Inflation: (cont’d)

Gov’t Control

# of ways, but most common is monetary policy

Reduce, or tighten, the money supply by raising interest rates

When they go up, consumer spending decreases; prices level off, or go down

Reducing interest rates, it increases the money supply, and consumer spending increases


Sustained decrease in prices across the economy

Good initially, but widespread trend of steadily falling prices can cause consumers/businesses to hoard cash, which could lead to lower wages

The Economy

Zimbabwe Inflation

the economy12

% of men/women who want to work but cannot find jobs

Is it ever zero?

No, b/c there are always people in between jobs

Many consider it at full employment when rate is at 4% or less

Traditionally affects minorities, women, and out of school teens harder than others

Affects federal, state, and local gov’t treasuries

People don’t pay taxes when they are out of work, so gov’t acquires less revenue and pays out more in unemployment comp

Times of high unemployment:

Gov’ will work to create jobs, ususally by lowering taxes & interest rates to encourage businesses to expand operations, thus hiring more workers

The Economy
the economy15

Period of economic decline marked by rising unemployment and reduced production, spending, and consumer demand

How to stimulate?

Fed can make more money available to banks for lending by lowering interest rates

Through fiscal programs

Funding to create jobs or reducing taxes


We have gone through cycles of recession and recovery (capitalism)

Most dramatic:

Begins 1929 w/ stock market collapse; leads to Great Depression of the 1930s

The Economy
the economy16

Refers to the amount of goods and services produced per person per hour

Rising rate usually leads to higher wages and profits, and lower prices

Generally considered good for economy

can change nature of workforce and lead to unemployment

The Economy
the economy17
International Interdependence:

Increasing levels of trade among nations has made them more interdependent than ever before

US is world’s largest importer

Result: jobs created overseas; keeps foreign workers employed

Strength of US economy depends on how well American products sell in foreign markets

US economy can be adversely affected by rising costs of certain imports, like oil

G-8 Countries (Group of Eight)

World’s leading industrial nations (Canada, France, Germany, Italy, Japan, Russia, UK, and US

Try to develop cooperative solutions

The Economy
the economy18
The Stock Market:

People invest in stock market by buying shares of ownership, called stocks, in companies

If businesses make profits, their stocks generally go up in value

Recent Years:

More and more are buying stocks through mutual investment funds and employer retirement plans, enabling more Americans to profit from market’s highs, but also making them more vulnerable to lows

The Economy

Exxon Stocks

the economy current issues
Offshore Outsourcing:

In recent years, a # of US companies have hired companies or workers in other countries to do work that was once done within US borders

Job losses affect highly skilled workers

Some want federal gov’t to raise trade barriers to limit outsourcing; others think that gov’t should provide incentives for companies to keep jobs in the US

The Economy:Current Issues
the economy current issues20
The Budget Deficit and Social Security:


Soc Sec consumes 21% of federal budget; Medicare about 13%

Economists worry that entitlements taken from these will grow dramatically as huge baby boom generation begins to retire from work force

The Economy:Current Issues
the debate the economy congress should make tax cuts permanent
For This:

Tax cuts are sound fiscal policy that will keep economy moving in right direction for years to come

Lower tax rates, esp. for corporations, spur investments that will lead to economic growth and new jobs

As economy grows, gov’t budget surpluses will return

If they expire, Americans will face a huge and economically debilitating tax increase in 2011

Against This:

Tax cuts have created budget deficits and debts that will eventually handicap the economy

Tax cuts have reduced revenues, given handouts to the wealthy, and left America’s children with the bill

Reduce coffer, thus jeopardizing the gov’t future ability to fund essential programs like Social Security and Medicare

The Debate: The EconomyCongress should make tax cuts permanent
the debate the economy federal gov t should do more to protect domestic jobs
For This:

Nations like China and India have been “stealing” jobs away from American workers

Fed gov’t must use trade barriers and incentives to keep domestic jobs at home

If American workers must compete with foreign workers in manufacturing and service sectors, they will face lower wages and reduced standards of living, thus harming the economy

Against This:

Companies will always seek to operate in ways that reduce costs and increase profits

Might result in some job losses, but the fed gov’t should not interfere with this natural move toward economic efficiency.

When companies bring profits home, they inject money into US economy, boosting job creation in other areas

Net affect is to strengthen economy

The Debate: The EconomyFederal Gov’t should do more to protect domestic jobs
the debate the economy social security benefits should be cut to help reduce the budget deficit
For This:

One of the best ways to reduce budget deficit and keep it from dragging down the economy is to make needed changes in the largest entitlement programs

Retirement among baby boom generation will bankrupt the already shaky Social Security system and add to deficit

Any reduction plans should require wealthier Americans to reduce their benefits while allowing the poorest to continue to collect their expected amount of money

Against This:

Cutting Social Security benefits is a diversionary tactic designed to avoid necessary tax increases

Other programs should be cut before Social Security; then changes to that and other entitlement programs could be enacted in small increments

Otherwise, nation risks cutting benefits to those retirees and disables people who rely exclusively on Social Security income.

These American should not be asked to solve the nation’s budget problems

The Debate: The EconomySocial Security benefits should be cut to help reduce the budget deficit