The Role of Government in the Economy

Americans usually see politics and economics as two quite different subjects. Robert Reich, the Clinton Administration’s first Secretary of Labor, has written that:

Americans tend to divide the dimensions of our national life into two realms. The fist is the realm of government and politics. The second is the realm of business and economics….The choice is falsely posed. In advanced industrial nations like the United States, drawing such distinctions between government and the market has ceased to be useful.

Americans also draw sharp distinctions between “our economy” and “the world economy”. Not so much anymore with the “electrical herd” which is the slang for people moving investments and money round he world now at the click of a mouse.

Historically the U.S. government policy toward business was summed up by the French term laissez-faire “leave it alone.” The concept came from the economic theories of influenced the growth of American capitalism. This however went out the window with Roosevelt’s “New Deal” program, which was Roosevelt’s response to the depression. Americans concluded that capitalism had failed and demanded government intervention. Roosevelt enacted a host of new laws that gave the government the power to intervene in the economy. It gave the right to workers to form unions, regulated the sale of stocks, set rules for wages and hours, provided cash benefits for the unemployed and retirement income for the elderly, established farm subsidies, insured bank deposits, and created a massive regional development authority in the Tennessee Valley. Since this the government offers two main two important tools to guide the economy: monetary policy and fiscal policy.

The government can influence the economy is through monetary policy, which is, the manipulation of the supply of money in private hands by which the government can control the economy. Monetarists believe that having too much cash and credit in circulation creates inflation. Essentially they advise to hold the growth in money supply to the rise in the groose domestic product, the total value of all the goods and services a nation produces. Politicians worry constantly about the money supply because it affects the rate of interest their constituents have to pay for home loans, new cars, starting new business, and so on. The main agency for making monetary policy is “the fed”; whose formal title is the Board of Governors of the Federal Reserve System. Created by congress in 1913 to regulate the lending practices of banks and thus the money supply.

The second policy the government created is the fiscal policy. Which is the policy that describes the impact of the federal budget-taxes, spending, and borrowing-on the economy? Fiscal policy is almost entirely determined by congress and the president, who are the budget makers. Likewise with this is the Keynesian economic theory which encourages the use of government spending to stimulate the economy during down periods. This was warped later during the Regan administration into supply-side economics which is an economic theory stating that too much income goes to taxes so too little is available for purchasing. The solution is to cut taxes and return the purchasing power to consumers.

You see these theories today in the Bush administration with the highest unemployment rating since the second Eisenhower administration. To counteract this decline the Appropriations Minority Staff, will have to add 96,000 jobs a month which it does so by building roads, bridges, dams, houses or whatever seems most appropriate.

In the United States, the political and economic sectors are closely intermingled. Although politicians have strong feelings about the economy and pay close attention to it, only scattered evidence indicates that they can successfully manipulate the economic situation at election time. The two parties do have different economic policies, particularly with respect to unemployment and inflating; democrats try to curb unemployment more than republicans, though they risk inflation in doing so, and republicans are generally more concerned with controlling inflation. Two major instruments are available to the government for managing the economy; monetary policy and fiscal policy. Democrats lean more toward Keynesian economics, which holds that government must stimulate greater demand, when necessary, with bigger government such as federal job programs. In contrast, many republicans advocate supply-side economics, which calls for smaller government and tax cuts to increase the incentive to produce more goods.

Though public policy, government also regulates various sectors of the economy. It regulates business and offers some protection to consumers and to labor. These are issues of the old economy and still very much issues today. In the twenty first century, there is also new economic issues- access to information technology, for example- which public policy is just beginning to confront.
As you can see we have still a free market economy but through the years the government has established many regulations and policies to keep our economy running smoothly.

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