CHAPTER 17 OVERVIEW
INTRODUCTION
Politics and economics are powerful, intertwined forces shaping public policies and public
lives. The view that politics and economics are closely linked is neither new nor unique.
Although the United States is often described as operating under a capitalist economic
system, it is more accurately described as a mixed economy, a system in which the
government, while not commanding the economy, is still deeply involved in economic
decisions. Today we live in a global economy with all its problems and opportunities.
Multinational corporations—businesses with vast holdings in many countries such as
Disney, Coca-Cola, and Microsoft—dominate the world’s economy. Because voters are
sensitive to economic conditions, the parties must pay close attention to those conditions
when selecting their policies. Voters often judge officeholders by how well the economy
performs. This chapter explores the economy and the public policies dealing with it.
GOVERNMENT, POLITICS, AND THE ECONOMY
Wal-Mart, the world’s largest company, is about as big as the economy of Saudi Arabia and
more than half the size of Australia. Government regulation affects the way Wal-Mart does
business, and the employment and investment practices of Wal-Mart has a substantial effect
on the U.S. economy. About 1.4 million people work for Wal-Mart. Workers there and
nearly everywhere are entitled to the minimum wage. Its workers also have a right to join a
labor union, a worker’s organization for bargaining with an employer. First guaranteed by
law in 1935, labor unions engage in collective bargaining about wages and working
conditions with their employers under rules controlled by the National Labor Relations Board.
The problem of unemployment is one component of policymakers’ regular economic
concern. Measuring how many and what types of workers are unemployed is one of the
major jobs of the Bureau of Labor Statistics (BLS) in the Department of Labor.
Some economists challenge the BLS’s definition of the unemployment rate (the proportion of
the labor force actively seeking work but unable to find a job). The unemployment rate would
be higher if it included “discouraged workers”—people who have become so frustrated that
they have stopped actively seeking employment. On the other hand, if the unemployment rate
included only those who were unemployed long enough to cause them severe hardship, it
would be much lower since most people are out of work for only a short time.
The problem of inflation is the other component of policymakers’ regular economic concern.
The Consumer Price Index (CPI) is the key measure of inflation. Some groups are
especially hard hit by inflation (such as those who live on fixed incomes), while those whose
salary increases are tied to the CPI (but who have fixed payments such as mortgages) may
find that inflation actually increases their buying power.
People who are unemployed, worried about the prospect of being unemployed, or struggling
with runaway inflation have an outlet to express some of their dissatisfaction—the polling
booth. Ample evidence indicates that economic trends affect how voters make up their minds
on election day, taking into consideration not just their own financial situation but the
economic condition of the nation as well.
POLICIES FOR CONTROLLING THE ECONOMY
The impact of government on the economic system is substantial, but it is also sharply limited
by a basic commitment to a free enterprise system. The time when government could ignore
economic problems, confidently asserting that the private marketplace could handle them, has
long passed. When the stock market crash of 1929 sent unemployment soaring, President
Herbert Hoover clung to laissez-faire—the principle that government should not meddle with
the economy. In the next presidential election, Hoover was handed a crushing defeat by
Franklin D. Roosevelt. Government has been actively involved in steering the economy since
the Great Depression and the New Deal.
Monetary policy and fiscal policy are two tools by which government tries to guide the
economy. Monetary policy involves the manipulation of the supply of money and credit in
private hands. An economic theory called monetarism holds that the supply of money is key
to the nation’s economic health. The main agency for making monetary policy is the Board
of Governors of the Federal Reserve System (“the Fed”). The Fed has three basic
instruments for controlling 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 exercising control over the
money supply by buying and selling government securities in the market (open market
operations).
Fiscal policy describes the impact of the federal budget—taxing, spending, and borrowing—
on the economy. Fiscal policy is shaped mostly by the Congress and the president.
Democrats tend to favor Keynesian economic theory, which holds that government must
stimulate greater demand, when necessary, with bigger government (such as federal job
programs). This theory emphasizes that government spending could help the economy
weather its normal fluctuations, even if it means running in the red.
Since the Reagan administration, many republicans advocate supply-side economics, which
calls for smaller government to increase the incentive to produce more goods. Ronald
Reagan’s economic advisors proposed this theory (which is radically different from
traditional Keynesian economics), based on the premise that the key task for government
economic policy is to stimulate the supply of goods, not their demand. Supply-side
economists argued that incentives to invest, work harder, and save could be increased by
cutting back on the scope of government. During his first administration, Reagan fought for
and won massive tax cuts, mostly for the well-to-do. Instead of a fiscal policy that promoted
bigger government, Americans got a policy that tried (but ultimately failed) to reduce the size
of government.
WHY IT IS HARD TO CONTROL THE ECONOMY
Some scholars argue that politicians manipulate the economy for short-run advantage to win
elections; however, no one has shown that decisions to influence the economy at election time
have been made on a regular basis. The inability of politicians to so precisely control
economic conditions as to facilitate their reelection rests on a number of factors, including the
decentralized nature of economic policymaking in the United States.
Government makes economic policy very slowly. Most policies must be decided upon a year
or more before they will have their full impact on the economy. The budgetary process is
dominated by “uncontrollable expenditures.” Given that the law already mandates so much
spending, it is difficult to make substantial cuts. Keynesianism is thus largely irrelevant in
the twenty-first century. Because the private sector is much larger than the public sector, it
dominates the economy.
ARENAS OF ECONOMIC POLICYMAKING
Government spends one-third of America’s gross national product and regulates much of the
other two-thirds—a situation that stimulates a great deal of debate. Liberals tend to favor
active government involvement in the economy in order to smooth out the unavoidable
inequality of a capitalist system. Conservatives maintain that the most productive economy is
one in which the government exercises a hands-off policy of minimal regulation. Liberal or
conservative, most interest groups seek benefits, protection from unemployment, or
safeguards against harmful business practices.
Competition in today’s economy is often about which corporations control access to, and the
profits from, the new economy. In the old and the new economy, Americans have always
been suspicious of concentrated power, whether it is in the hands of government or business.
In both the old economy and the new, government policy has tried to control excess power.
Since the early 1980s, a new form of entrepreneurship has flourished: merger mania.
Corporate giants have also internationalized in the postwar period. Some multinational
corporations, businesses with vast holdings in many countries such as Microsoft, GE, CocaCola, and AOL-Time Warner have annual budgets exceeding that of many foreign
governments. The purpose of antitrust policy is to ensure competition and prevent
monopoly. Antitrust legislation permits the Justice Department to sue in federal court to
break up companies that control too large a share of the market. It also generally prevents
restraints on trade or limitations on competition, such as price fixing. Enforcement of
antitrust legislation has varied considerably.
The most famous and controversial recent antitrust case was filed against Microsoft, makers
of computer operating systems running nearly 90 percent of all American computers. The
Clinton administration originally filed an antitrust suit against Microsoft, but the Bush
administration had other priorities and settled the suit.
Although business owners and managers complain about regulation, the government also
sometimes comes to the aid of struggling businesses. When a crucial industry falls on hard
times, it usually looks to the government for help in terms of subsidies, tax breaks, or loan
guarantees (as the Chrysler Corporation did when it was close to bankruptcy).
The federal government is also involved in setting policies for consumer protection. The first
major consumer protection policy in the United States was the Food and Drug Act of 1906,
which prohibited the interstate transportation of dangerous or impure food and drugs. Today
the Food and Drug Administration (FDA) has broad regulatory powers over the
manufacturing, contents, marketing, and labeling of food and drugs. The Federal Trade
Commission (FTC), traditionally responsible for regulating trade practices, also jumped into
the business of consumer protection in the 1960s and 1970s, becoming a defender of
consumer interests in truth in advertising. Congress has also made the FTC the administrator
of the new Consumer Credit Protection Act.
Throughout most of the nineteenth century and well into the twentieth, the federal
government allied with business elites to squelch labor unions. Until the Clayton Antitrust
Act of 1914 exempted unions from antitrust laws, the federal government spent more time
busting unions than trusts. In 1935, Congress passed the National Labor Relations Act (the
Wagner Act), which guaranteed workers the right of collective bargaining—the right to have
labor union representatives negotiate with management to determine working conditions—
and set rules to protect unions and organizers. The Taft Hartley Act of 1947 continued to
guarantee unions the right of collective bargaining, but also prohibited various unfair
practices by unions. Section 14B of the Taft Hartley Act law permitted states to adopt what
union opponents call right-to-work laws. Such laws forbid labor contracts from requiring
workers to join unions to hold their jobs.
UNDERSTANDING ECONOMIC POLICYMAKING
Some of the unjust aspects of a capitalist economy—which have caused revolutions in other
countries—have been curbed in the United States; solutions to many of the problems of a free
enterprise economy were achieved through the democratic process. As the voting power of
the ordinary worker grew, so did the potential for government regulation of the worst aspects
of the capitalist system.
On the other hand, it would be an exaggeration to say that democracy regularly facilitates an
economic policy that looks after general rather than specific interests. One of the
consequences of democracy for economic policymaking is that groups that may be adversely
affected by an economic policy have many avenues through which they can work to block it.
The decentralized American political system often works against efficiency in government.
Liberals and conservatives disagree about the scope of government involvement in the
economy. Liberals focus on the imperfections of the market and what government can do
about them; conservatives focus on the imperfections of government.
Voters expect a lot from politicians, probably more than they can deliver on the economy.
The two parties have different economic policies, particularly with respect to unemployment
and inflation; Democrats try to curb unemployment more than Republicans, though they risk
inflation in so doing, and Republicans are generally more concerned with controlling
inflation.