Ideology and Economic Policy

Ideology and Economic Policy

Economic Policy

  • Economic policy is crucial because voter decisions are influenced by economic conditions.
  • Politicians aim to control:
    • Inflation: The rate at which the cost of goods increases; the goal is low inflation to encourage spending.
      • Generally favored by Republicans/Conservatives
    • Employment: The number of people working; the goal is low unemployment, which increases consumer spending and reduces government welfare costs.
      • Generally favored by Democrats/Liberals
  • Tools to control economic activity:
    • Fiscal Policy
    • Monetary Policy

Business Cycle

  • The business cycle includes periods of economic expansion and contraction, marked by peaks and troughs.
  • Key terms:
    • Peak: The highest point of economic expansion.
    • Trough: The lowest point of economic contraction, potentially leading to a depression.

Fiscal Policy

  • Definition: Government's use of taxing and spending to influence the economy.
  • Effects:
    • Direct impact on supply and demand.
    • Shapes the size of the government.
  • Key Policymakers:
    • Congress (responsible for taxing and spending - \"Power of the Purse\")
    • The President (initiates and approves the budget).

Keynesian Economic Theory

  • Developed by John Maynard Keynes during the Great Depression.
  • Core Idea: Government intervention is necessary during economic downturns.
  • Focus:
    • Consumers: Policies aimed at increasing consumer spending.
      • Tax Reduction: Provides consumers with more disposable income, boosting demand.
      • Government Spending: Funds job-creation programs. (e.g. FDR's New Deal)
    • Multiplier Effect: Government spending generates further economic growth in various sectors.
  • Results:
    • Deficit Spending: Government spending exceeds tax revenues, increasing national debt.
  • Example: American Recovery and Reinvestment Act of 2009
    • Tax cuts of 275 billion.
    • Spending of 540 billion on transportation, water treatment, research, and small business grants.
    • Block grants for education.
    • Resulted in increased deficits and national debt.

Supply-Side Economic Theory

  • Popular in the early to mid-1980s.
  • Also known as \"Trickle-Down Economics.\"
  • Core Idea: Tax cuts and reduced government spending stimulate the economy.
  • Focus:
    • Businesses (Supply): Reducing taxes on businesses encourages expansion, job creation, and higher wages.
    • Government tax revenues increase due to more people working and earning more money.
  • Example: Economic Recovery Tax Act of 1981
    • Reduced tax rates by 25\% over three years.
    • Top income tax rate reduced from 70\% to 50\% (later to 30\% in 1986).
    • Spending remained consistent.
    • Led to deficits as increased revenue took longer than expected.

Monetary Policy

  • Definition: Controlling the money supply and credit within the private sector.
  • Principle: Monetarism - Excessive cash and credit leads to inflation.
  • Key Policymaker:
    • Federal Reserve System (The Fed, established in 1913):
      • Regulates lending practices of banks and sets monetary policy.
      • Designed to be independent of presidential and congressional control.
      • Governed by a 7-member Board of Governors appointed by the President and confirmed by the Senate, serving 14-year terms to ensure political independence.

Tools of the "Fed"

  • Discount Rate: Interest rate banks pay on short-term loans from the Federal Reserve Bank.
    • Raising the rate decreases the money supply.
  • Open-Market Operations: The Fed buys and sells government bonds to influence the money available for banks to lend.
    • Selling bonds decreases the money supply.
  • Reserve Requirement: The fraction of deposits banks must hold in reserve.
    • Raising the requirement decreases the money supply.

Taxation

  • Government taxation significantly impacts economic activity.
  • The 16th Amendment allows the federal government to tax individual income.

Progressive Income Tax

  • Higher earners are taxed at a higher rate.
    • Supported by Liberals: Reduces the tax burden on the poor and funds government programs.
    • Opposed by Conservatives: Reduces money available for corporations and businesses to stimulate the economy.

Flat Tax

  • All individuals pay the same tax rate, regardless of income.
    • Opposed by Liberals: Burdens the poor disproportionately.
    • Supported by Conservatives.

Regressive Taxes

  • Disproportionately affect lower-income earners.
  • Example: Sales Tax - Higher impact on lower-income individuals as it constitutes a larger percentage of their income.

Regulation

  • Definition: Government restrictions and rules on businesses.
    • Examples: Workplace safety, waste disposal, minimum wage, emission limits.
  • Liberals: typically support regulations to protect workers, consumers, and the environment.
  • Conservatives/Libertarians: typically oppose regulation because it impedes economic activity.