4.9 - Ideology and Economic Policy

Economic Ideologies and Policy Preferences

• Favor more economic regulation, arguing corporations hold too much power.

• Favor higher taxes on higher earners.

• Prioritize economic equality over economic freedom.

• Want more tax revenue to fund entitlement programs and broader federal spending, like healthcare and college subsidies.

• Example: support raising the federal minimum wage, which has been $7.25 an hour since 2009.

• Favor less economic regulation, letting people trade freely.

• Support tax cuts.

• Favor cutting entitlement spending, especially income-based assistance.

• Note: Trump-style nationalist conservatives are more mixed on free trade and regulation.

• Example: generally oppose large federal minimum wage increases, arguing they cost jobs and that wages are better left to the market and the states.

• Intensely focused on freedom.

• Want minimal to no market regulation beyond protecting property rights and voluntary trade, believing markets outperform politicians.

• Push for minimal taxation and dramatically smaller government.

• Believe helping the needy should be a job for private charity, not government.

• Example: oppose minimum wage laws altogether, since wages should be a voluntary agreement between an employer and a worker.

• Adam Smith's The Wealth of Nations (1776): argued that competition and the pursuit of self-interest, guided by an "invisible hand," allocate resources better than government control, and that government should stick mainly to defense, justice, and public works (see 4.1). Libertarians are closest to Smith, and conservatives lean his way. Supply-side economics builds on his focus on production and free markets.

• Federalist No. 10 (1787): Madison wrote that "the most common and durable source of factions has been the various and unequal distribution of property," and that "those who hold and those who are without property have ever formed distinct interests in society." Today's fights over taxes, regulation, and spending are those economic interests competing through politics, just as he expected.

Fiscal Policy and Recession Responses

• Multiplier effect: each dollar the government spends becomes income for someone else, who spends part of it, and so on, so the total boost to the economy can be bigger than the original spending.

• Example: the American Recovery and Reinvestment Act (2009) put about $800 billion in spending and tax cuts into the economy during the Great Recession. The CARES Act (2020), about $2.2 trillion with stimulus checks and expanded unemployment benefits, followed the same logic during COVID-19 and passed with support from both parties.

• In theory, Keynesians also say government should do the opposite (cut spending or raise taxes) when the economy is overheating and inflation is high, though that's much less popular with politicians.

• Example: Reagan's 1981 tax cuts lowered the top income tax rate from 70% to 50%, and the Tax Cuts and Jobs Act (2017) cut the corporate tax rate from 35% to 21%.

• Who makes fiscal policy: the president proposes a budget each year and signs or vetoes tax and spending bills, and Congress writes and passes them (the power of the purse). Since elected officials control it, fiscal policy usually follows the ideology of whichever party holds power.

Monetary Policy and the Federal Reserve

• Handled by the Federal Reserve, an independent regulatory commission meant to be insulated from politics, unlike fiscal policy.
• Why it's independent: the Fed's Board of Governors has seven members appointed by the president and confirmed by the Senate for 14-year terms, and the chair serves a 4-year term. Long terms let them make unpopular choices, like raising interest rates before an election, without worrying about reelection.
• How it moves rates: the Fed sets a target for the federal funds rate, the rate banks charge each other for overnight loans. Other rates, like those on mortgages, car loans, and business loans, tend to move with it, which changes how much people and businesses borrow and spend.

• Dual Mandate: the Fed's two goals are maximum employment and price stability, meaning keeping both unemployment and inflation low.
• High inflation calls for raising interest rates (as seen dramatically in 2022-2023).
• High unemployment calls for lowering rates to stimulate growth.

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