William_T._Bianco,_David_T._Canon]_American_Polit

The key players in economic policy making 539

Trade-offs between Economic Goals

One challenge facing economic policy makers is that it is difficult to “have it all.”

Though the United States enjoyed low unemployment, low inflation, economic

growth, falling budget deficits (and a surplus by the end of the decade), and a healthy

current account throughout most of the 1990s, this was relatively unusual. Typically,

at least part of the economy is not performing well and some goals are not being met.

For example, if inflation starts to increase, the Federal Reserve will attempt to bring

it down by increasing interest rates. When interest rates go up, the economy slows

because businesses are less willing to expand when the cost of borrowing increases. As

a result, unemployment increases. Therefore, there is a trade-off, at least in the short

run, between stable prices and full employment and economic growth.

Steps to address the trade deficit also conflict with other goals. Politicians are often

under pressure to protect American jobs and prevent them from going overseas. But if policy

makers impose barriers to free trade to protect domestic products and jobs, this action

violates the goal of promoting an efficient free market. That is, political goals and economic

goals may come into conflict. Another example would be budget deficits: politicians have

a strong political incentive to keep budget deficits high (because, even though people don’t

like paying taxes, they support keeping spending the same or increasing it for most policies),

but this may not be the best economic policy in some situations. Policy makers must tread

carefully when addressing economic problems to ensure that they are not making some

other problem worse. The next section explores who these policy makers are.

“Why

Should

I Care?”

Understanding the goals of economic policy is essential for making sense of much of

what happens in Washington and in political campaigns. If a presidential candidate

promises to cut your taxes and increase spending on education and national defense,

without increasing budget deficits, your truth-o-meter should be buzzing. If the

president talks about slapping punitive tariffs on China, you should be concerned about

the impact of a trade war on the economy. Having a realistic set of goals is an important

first step for sound economic policy.

The Key Players in Economic Policy Making

Now that we know the goals of economic policy, we need to answer these questions: Who

are the key policy makers? What role do they play in shaping American economic policy?

Congress

The Constitution places Congress at the center of economic policy making by

giving legislators the “power of the purse”—that is, power over the nation’s fiscal

policy of taxing and spending. In a way, everything Congress does has an impact on

the economy, whether it is providing money for an interstate highway or a student

loan, regulating the level of air pollutants, or funding the Social Security system.

DESCRIBE THE ROLES

PLAYED BY EACH OF THE

BRANCHES OF GOVERNMENT

IN SHAPING ECONOMIC

POLICY

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