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Ideology and economic policy: lesson overview

A high-level overview of the economic theories backing liberal, conservative, and libertarian views on the appropriate role of government intervention in the market. 
Today’s global economy is complex and interconnected. Factors far beyond the control of the average citizen contribute to whether the American economy is booming or lapsing into recession at any point; nevertheless, the state of the economy has major effects on the average citizen’s quality of life.
How well the economy is doing plays a decisive role when Americans go to the polls, and so politicians and political parties heavily promote their fiscal policies as the best pathway to prosperity for the country and its citizens.

Key terms

fiscal policyGovernment decisions about how to influence the economy by taxing and spending.
monetary policyGovernment decisions about how to influence the economy using control of the money supply and interest rates.
The Federal ReserveAlso called “The Fed.” An independent federal agency that determines US monetary policy with the goal of stabilizing the banking system and promoting economic growth.
Keynesian economicsAn economic philosophy that encourages government spending (through the creation of jobs or the distribution of unemployment benefits) in order to promote economic growth.
supply-side economicsAn economic philosophy that encourages tax cuts and deregulation in order to promote economic growth.

How much should the government intervene in the economy?

The idea that the US government and its officials are responsible for the economic health of the country is a relatively new one. Before the Civil War (1861-1865), the US government played little to no role in managing the nation’s economy. But the Second Industrial Revolution (1870-1914) and its social effects spurred some of the first government regulations on corporations, which were aimed at limiting monopolistic practices, improving working conditions, and ensuring the purity of food and drugs.
In the 1930s, government intervention into the economy intensified in response to the economic catastrophe of the Great Depression (1929-1939). This ushered in an era of sweeping government spending and regulation, based on the liberal principles of Keynesian economics.
Since the 1970s, however, conservatives have pushed back against government spending, arguing that the tax cuts and deregulation favored by supply-side economics will promote prosperity. Libertarian economic ideologies favor even less government intervention than conservative ideologies, believing that there should be no regulation of the marketplace beyond the protection of property rights and voluntary trade.

Review questions

What’s the difference between Keynesian economics and supply-side economics?
What’s the difference between fiscal policy and monetary policy?

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