Constitutional Power and
Bureaucratic Power
List out four ways that Congress is the branch
with the “real” control over the bureaucracy.
Explain what the article means when it
distinguishes between Presidential authority
and Presidential power over the bureaucracy.
How do the powers given to the bureaucracy
violate the separation of powers doctrine?
How does the article justify the bureaucracy’s
violation noted in the previous question?
Governmental Economic Policy
Capitalism
Individuals make the decisions
Individuals own the factors of production
Buyers and sellers come together to exchange
things
People buy and sell what they want
Recall how other systems of
government regulate their economies
Tribal
Feudal
Fascists
Socialism
Communism
Totalitarian v. Non-Totalitarian
Dictatorships?
How did our economy run?
How did we used to look at it?
Classical Economists: free markets can
regulate themselves
a.k.a. “laissez faire” economics
Problem with Classic Economics:
It never addressed how long it would
take for the market to return to
equilibrium
What about today?
We have two types of policies that we normally
use to regulate the economy:
Monetary Policy
controlling the money supply
Fiscal Policy
taxing and spending to influence demand
Other tools:
The market itself
Regulation by government agencies
i.e., Securities & Exchange Commission regulates the buying and
selling of securities through reporting and disclosure
requirements
Social programs
i.e., worker’s compensation; unemployment
Why the government intervenes?
Unemployment
Not enough jobs
Measured by the “unemployment rate”
Democrats are typically most concerned with
unemployment due to their alliance with labor and the
lower classes.
They will normally sacrifice higher inflation to keep
unemployment down
Inflation
When prices rise
Measured by the Consumer Price Index
Republicans are typically most concerned with the costs
associated with goods and services (g/s).
They try to prevent inflation, even at the risk of higher
unemployment
Fiscal Policy - Keynes
John Maynard Keynes:
Wrote “The General Theory of Employment,
Interest, and Money” in 1936
Wanted to tell the government how to get
out of or avoid economic crises (become
active)
Keynes wanted the government to
supplement the economy’s demand for
goods and services when consumer
demand dropped significantly
Fiscal Policy
Regulates revenues and expenditures
through the federal budget
Determined by Congress and the President
Expansionary Policies:
fiscal policies that encourage economic growth
higher spending and tax cuts (more $$$ into the
economy)
Contractionary Policies:
fiscal policies that reduce economic growth
decreased spending and higher taxes (less $$$ into the
economy)
Fiscal Policy – Supply-Side Economics
By decreasing government involvement in
the economy, people will be forced to work
harder and save more
The government should cut taxes to
increase the money supply available to
spend money
The wealthy will invest more money, stimulate job
growth and increase wages as growth occurs
Problem: lower taxes means less government
revenue, which causes the government to go
into debt
Fiscal Policy – Demand-Side Economics
The idea that government spending and tax
cuts can help an economy by raising
demand
Keynes believed that government actions
can make up for changes in individual and
business demand (our 3 sectors of the
economy)
Fiscal Policy
After seeing what it is, who sets policy?
Monetary Policy
Monitoring and controlling the amount of
money in circulation
“Monetarism” states that by controlling the
money supply, we can control the economy
Too much money available as cash or credit =
inflation
The “Federal Reserve System” was created to
manage monetary policy
History of U.S. Banking
Early 20th Century:
The Panic of 1907
banks stopped being able to lend money
because they did not have adequate
reserves
investments in future projects stopped
people lost their jobs as a result
History of U.S. Banking
Early 20th Century:
Federal Reserve Act of 1913 created the
nation’s first true central bank
Central Bank: a bank that can lend to
other banks in times of need
History of U.S. Banking
Importance of the Federal Reserve Act
Created 12 regional banks throughout the
US
Banks chartered by the US were required
to become members of the Fed
Member Banks: banks that belong to the Fed
and would store their cash reserves at their
regional bank
History of U.S. Banking
Importance of the Federal Reserve Act
(cont.)
Federal Reserve Board supervises the
Banks
Regional banks allow members to borrow
money to meet short-term demands
tries to prevent failures due to mass
withdrawals
National currency created, so Fed could
increase or decrease supply to meet needs
History of U.S. Banking
Importance of the Federal Reserve Act
(cont.)
The national currency created
was called a Federal Reserve note
Federal Reserve notes are what
we use today, which we call
“dollars”
Structure of the “Fed”
Board of Governors
Washington, D.C.
Boston New York
12 District
Philadelphia Cleveland Richmond Atlanta
Kansas San
Reserve Banks
Chicago St. Louis Minneapolis Dallas
City Francisco
Member Banks
38% of the 8039 Commercial Banks
Structure of the “Fed”
Board of Governors:
The seven-member board that
oversees the Federal Reserve
System
14-yr terms, staggered every 2 yrs
President appoints members, including
specific appointment of a Chairman,
and Senate confirms
Fed operates fairly independently of
Pres. & Senate
Structure of the “Fed”
Board of Governors: (cont.)
Set up so that…
no one regional member bank can have
too much influence
no one President alone can appoint a full
BoG
members of the BoG are shielded from
daily political pressures
Structure of the “Fed”
Federal Open Market Committee:
7 BoG members and 5 of the 12 district bank
presidents (12 total members)
the BoG can control because it has 7 of 12
members
makes decisions about the growth of the
U.S. money supply
Structure of the “Fed”
FOMC: (cont.)
Influences money supply by:
Changing interest rates
Buying and selling government securities
Controlling the amount of money that
banks have available (reserve ratio)
Obstacles
Difficult to predict economic ups & downs
far enough in advance to implement a
policy that affects it
No control over international events
World Trade Organization (WTO) tries to
regulate international trade
We are dealing with a private sector over
which the government has little control
Some want “protectionism” to lessen the effect
from imports and external events
Monetary Policy
After seeing what it is, who sets policy?
Where do we try to implement policy?
Business
Multi-national corporations control large amounts of assets
and play a large role in the world economy
Antitrust laws – limit monopolistic behavior; tries to break
them up to increase competition
Save failing industries with subsidies, loans and capital
investments
Lobbying
Consumer
Usually want more regulation to protect consumers (safety,
advertising, disclosure)
FTC – trade & advertising
FDA – health safety in food and drugs
CPSC – product recalls
Where do we try to implement policy?
Labor
There are competing interests between business
and labor – used to be business dominated; labor
gained protections in the 20th century
Collective bargaining by unions
Unemployment compensation
Minimum Wage
Safety standards (OSHA)
“Regular” work-week
Child labor laws
The Market
vs.
Government Intervention
The Market Government Intervention
The public is not always aware of all
Consumers dictate what changes of the costs of businesses’ activities
should be made to business activities and decisions
Individuals do not always have the
Less cost to government and resources to discover businesses bad
therefore to the people business practices
More efficient response by business There is a great disparity in the
bargaining position of businesses
to the demands of the market and individual laborers
We are a nation of freedom, which There is not always a voice from
those or that which is harmed by
should include economic freedom business practices (i.e., dead, the
Less cost to business to comply with environment, etc.)
regulations by one or more level of The market is not always responsive
Some regulations ensure “fair”
government, which translates into competition in the market
cheaper goods/services to consumers Some business activities must be
regulated due to their size,
importance to national security, or
other market factors
International Trade
Based on what you know so far about
Congress, the Presidency, their
Constitutional powers and how their
powers have developed over time…
Who is in charge of the U.S.’s international
trade policies?