Chapter Summary

Economic policy addresses the problem of economic security not for some particular group or segment of society but for society itself. For much of our history, policymakers believed that government should not play much of a role in regulating the economy, instead letting the market take care of itself. Since the Great Depression, government has played a more active role in regulating the economy.

The capitalist market operates according to the laws of supply and demand. These laws influence a country's gross domestic product, or GDP. Because supply and demand may increase or decrease, the economy is not stagnant. It can enter periods of booms, when GDP rises, or busts, when GDP drops.

Economic policy has two principal subsets: fiscal and monetary. Fiscal policy, created by Congress and the president, uses changes in government spending or taxation to produce desired changes in discretionary income, employment rates, or productivity. The Federal Reserve directs monetary policy by changing the supply of money in circulation in order to alter credit markets, employment, and the rate of inflation.

The politics of monetary and fiscal policies are quite different. Because the Fed sets monetary policy, it is somewhat insulated from political pressures. Fiscal policy is extremely political as politicians try to balance the competing goals of providing goods and services to constituents and keeping taxes low.

Since the 1930s, government has been more involved in economic regulation, specifically regarding business, unions, and trade. Government has tried to limit the power and possible corruption of business by passing antitrust policies and placing regulations on companies. It has protected workers by allowing them to unionize and to engage in collective bargaining, and it has limited the strength of unions with legislation like Taft-Hartley. Finally, the government has long debated whether it should take a protectionist stance toward trade by implementing policies such as tariffs, or whether it should promote more open, free trade policies.

Economic policymaking is generally made by elites, with limited input from the public. Still, interest groups and public opinion can influence economic policymaking.