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Economic Policymaking in Capitalism: Balancing Supply, Demand, and Government Intervention

This chapter explores the dynamics of economic policymaking within a capitalist framework, where private individuals own the means of production. It examines the role of supply and demand in price determination, the implications of government intervention versus a free market, and how economic conditions influence voting behavior. It also outlines the priorities of the Democratic and Republican parties regarding unemployment and inflation. Additionally, it delves into fiscal and monetary policies, contrasting Keynesian economics with supply-side economics, and highlights the challenges in effectively managing the economy.

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Economic Policymaking in Capitalism: Balancing Supply, Demand, and Government Intervention

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  1. Chapter 17 Economic Policymaking

  2. Capitalism • Private individuals own the principal means of production • Prices and wages determined by Supply and Demand • “Free Market” = no government intervention of economy

  3. “It’s the economy, Stupid.” • Economic conditions drive voting behavior • Democrats = priority is to decrease unemployment • Republicans = priority is to decrease inflation

  4. Unemployment • Those people seeking work but unable to find it • Compiled by Bureau of Labor Statistics (BLS) via monthly surveys of 60,000 households • New jobs must be ~125,000/month just to keep pace with new workers • “Discouraged workers” = given up job hunt or taken part-time jobs

  5. Underemployment Rate • Unemployment Rate + Discouraged workers rate

  6. Inflation • Increase in prices for goods and services • BLS complies Consumer Price Index (CPI) by measuring the change in a fixed basket of goods and services (80,000)

  7. History • 1789-1929: Laissez-faire • 1929-present: regulatory and activist • 2 Tools to influence economy: • Monetary Policy and Fiscal Policy

  8. Monetary Policy • Control over money supply held in private hands • Federal Reserve Board • Prime % rate • Sells Bonds • Sets deposit reserve levels • These can influence expansion/contraction of the money supply

  9. Fiscal Policy • Federal Budget to influence economy • Taxing, Spending, Borrowing • Keynesian Economic Theory vs. Supply-Side Economics

  10. Keynesian Theory • Government spending stimulates the economy by creating demand for goods and services • “Pump-Priming” (New Deal/FDR) • Favored by Democrats • Considers deficit spending allowable, even necessary at times.

  11. Supply-Side Economics • Key task of policy is to stimulate supply, not demand • First adopted under Reagan, favored by Republicans • Lowering tax rates, de-regulating businesses, and decreasing government spending

  12. Regardless of strategy … • The concept of a free market economy / passive government re: economy is now virtually gone … • Government’s responsibility to use fiscal policy to control/influence the economy

  13. Then why is it so hard to control the economy? • Policies are slow to enact • “Uncontrollable expenditures” limit fiscal options • Free Enterprise system / philosophy limits government actions • Government spending / influence relatively small compared to billions of economic decisions made by consumers and business

  14. Arenas of Economic Policymaking

  15. Business Policy • Protectionism • Anti-Trust Policy • Preserve competition

  16. Consumer Policy • FDA • CPSC • FTC • To prevent harm to consumers

  17. Labor Policy • NLRB • To protect workers

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