I. Two type of economic policies
A. Fiscal: taxes and spending considerations = budget matters. Fiscal policy is conducted by Congress and the President. Primarily takes the form of budgetary spending, tax cuts, etc.
B. Monetary: regulation of money supply by the Federal Reserve Board (“the Fed”). Primarily takes the form of adjusting the interest rates to increase or decrease inflation. Can make the borrowing of money hard or easier.
II. History of economic policy
A. Constitution gave Congress the power to “regulate” interstate and foreign policy. This is historically one of the easier ways in which the federal government has delved into state matters; historically a lot of cases have been received by the court in this manner.
B. Industrial revolution’s excesses led to Congress making greater use of economic regulatory powers, e.g., breaking up trusts, regulating meat and drugs, and regulating the rail roads.
C. Great Depression of the 1930’s led to even greater regulation of economy by Congress. Unemployment rate of 25%, bank failures, farm crisis, and deflation demanded aggressive action.
D. Keynesian economics
1. During the depression the New Deal was influenced by British economist John Maynard Keynes.
2. Keynes suggested that government could manipulate the economic health of the economy through its level of spending. In hard times, the government should increase spending (even if it means running large deficits) to stimulate economic health. In inflationary “boom” times, government should decrease spending to “cool down” the economy.
3. Keynes influenced passage of the Employment Act of 1946 which made the government responsible for maintaining high employment rates.
4. Difficulty posed by Keynesian economics: once government spending rises, it is politically difficult to cut it (consider the fights in recent years over entitlement reform). This helps to explain why we have had such high budget deficits.
E. Supply-side economics
1. Definition – cuts in taxes will produce business investment that will compensate for the loss of money due to the lower tax rates. Tax rates will be lower, but business will boom, unemployment will go down, incomes will go up, and more money will come into the treasury.
2. Most associated with the Reagan Administration (1981-1989).
3. Unfortunately, the Reagan tax cuts were not accompanied by spending cuts, and the national debt tripled from $1 trillion to $3 trillion.
4. Tax cuts under Bush 43 have prompted concern that they have contributed to a rising national debt (~10.7 trillion in 2008).
F. Monetarism
1. Whereas Keynesians suggest that the level of government spending (i.e. fiscal policy) is most important for determining the economic health of the nation, monetarists believe that the money supply (monetary policy) is the most important factor.
2.Thus “the Fed” can tighten up money supply (through adjusting interest rates) to reduce inflation or it can loosen up money supply to stimulate the economy.
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