Alexeyev V. S.

Oles’ Honchar Dnipropetrovsk National University (Ukraine)

Economic Policy-making in the USA

Few policy issues evoke stronger disagreements than policies about the economy. Policymakers worry a lot about the state of the economy because voters often judge officeholders by how well the economy is going.Why do policymakers try to control the economy? How do economic conditions affect elections?

Both James Madison and Karl Marx argued that economic conflict was at the root of politics. Politics and economics are powerful, intertwined forces shaping public policies and public lives. Economic problems create social problems, Too much unemployment and inflation can increase unemployment among politicians. The Bureau of Labor Statistics measures the unemployment rate as the proportion of the labor force actively seeking work but unable to find a job. Studies have shown that unemployment is probably associated with social problems, at least in a subtle way. The key measure of inflation is the Consumer Price Index (CPI). Inflation hurts some but actually benefits others. Persons on fixed incomes are especially hurt by inflation. However, people whose salary increases are tied to the CPI or have fixed mortgages may find that inflation increases their buying power.Ample evidence indicates that voters pay attention to economic trends, their own and the nation's, in making up their minds on election day. Concern for unemployment seems to be associated with support for the Democratic party. Concern over inflation has had less impact on voter choices. Since voters are sensitive to economic conditions, the parties must pay attention to them when selecting policies. The Democratic party has usually behaved as its coalition expects it to, pursuing policies designed to lower unemployment. Members of the Republican coalition are more concerned with steady prices for goods and services. While trying to hold down inflation, Republican administrations have been willing to risk more unemployment.

What are the major policy instruments used by government to control the economy and how are they used?

The laissez-faire principle is that government should not meddle in the economy. At least since the New Deal, policymakers have made every effort to control the economy. The American political economy offers two main tools for doing so: monetary policy and fiscal policy.

Monetary policy is the manipulation of the supply of money in private hands. Monetarism holds that the supply of money is the key to a nation's economic health. Monetarists believe that having too much cash and credit in circulation produces inflation and that growth in money supply should be held to growth in the real gross national product. The main agency for making monetary policy is the Board of Governors of the Federal Reserve System (the Fed), created by Congress in 1913 to regulate the lending practices of banks and, thus, the money supply. Its seven members are appointed to fourteen-year terms, intended to insulate them from political pressures. The Fed has three basic instruments for affecting the money supply: setting discount rates for the money that banks borrow from the Federal Reserve banks; setting reserve requirements that determine the amount of money that banks must keep in reserve at all times; and buying and selling government securities in the market, thereby either expanding or contracting the money supply. Raising the costs of borrowing money increases the risk of unemployment and recession while making more money available to borrow increases the risk of inflation. Since the Fed can profoundly influence the state of the economy, it attracts the attention of politicians and can affect their fate. The Fed is generally responsive to the White House, although even president may be frustrated by the politically insulated decisions of the Fed.

Fiscal policy describes the impact of the federal budget-taxes, spending, and borrowing-on the economy. Fiscal policy choices are made by Congress and the president. According to Keynesian economic theory, advanced by English economist John Maynard Keynes, government spending (even if it means deficits) can help the economy weather economic fluctuations. Keynes argued that the government could end the Depression by stimulating the economy through spending. The government's job is to increase the demand when necessary and the supply would take care of itself. Both Democrats and Republicans long adhered to Keynesian thinking. They parted, however, over a theory popularized by Ronald Reagan called “supply-side economics”. It holds that by taxing too heavily, spending too freely, and regulating too much, government curtails economic growth. Incentives to invest, work harder, and save could be increased by cutting back on the scope of government. The Laffer curve suggests, in particular, that taxes cause people to work less and thereby reduce government's revenue from taxes. Reagan cut taxes to stimulate supply and tried, but failed, to reduce the size of government.

What are the main obstacles that government faces in trying to control the economy?

Some authors argue that politicians manipulate the economy for short-run advantage in winning elections. It is not so easy, however, to manipulate the economy so precisely. No one has shown that decisions to artificially influence the economy at election time have been made on a regular basis. All the instruments for controlling the economy are difficult to use. We do not understand the economy enough to always choose correct adjustments to ensure prosperity. It may be a year or more before many policies have their full impact on the economy. The capitalist system presents an additional restraint on controlling the economy. Since the private sector is much larger that the public sector, it dominates the economy. Activities in other nations can also have profound effects on the domestic economy. Fiscal policy is hindered by the nature of the budget because most expenditures are uncontrollable. It is also difficult to coordinate economic policy-making because the process is so decentralized.

How do government policies, benefits, and regulations affect the sectors of the economy?

Liberals tend to favor active government involvement in the economy while conservatives believe in minimal regulation. Most interest groups seek benefits, protection from unemployment, or safeguards against harmful business practices. Agriculture, business, consumers, and labor are four of the major actors in, and objects of, governments economic policy.