Fiscal and Monetary policy





Demand-side economics calls for government to increase its spending during an economic downturn. By doing so, government puts money into consumers’ hands, which increases demand (consumer spending), resulting in job growth and increased production.

In contrast, supply-side economics centers on tax cuts for business and upper-income taxpayers. The logic is that, if business and the wealthy have more money at their disposal, they will invest some of it in production—the supply side of the economic equation. Increased production will require business to hire more workers. Their pay will then feed into the economy, stimulating further production and hiring.

Whether on the demand-side or supply-side, these policies require action by Congress and the president’s signature to become law.

Democratic lawmakers have typically preferred demand-side policies because the increase in government spending can be targeted at those at the lower end of the economic ladder—for example, providing unemployment benefits and government-funded jobs (e.g., construction projects) for the jobless. Lower-income individuals and the economically vulnerable tend to vote Democratic.

Republicans lawmakers typically prefer supply-side policy. It fits their small-government philosophy because tax cuts are implemented through the tax code and don’t require new federal programs. Moreover, tax cuts for business firms and upper incomes go to those who typically side with the Republican Party.


AmGov Text Protectionism is the idea that domestic firms should be protected from their foreign competitors. The classic protectionist measure is a tariff (tax) on a particular import, which raises the market price of the foreign-made product, thereby giving domestic producers of the same product a competitive advantage. In contrast, free trade holds that barriers to international trade should be kept to a minimum. Proponents of free trade claim that the long term economic interests of all countries are advanced when tariffs and other trade barriers are kept to a minimum. Economic studies indicate that, although free trade is generally a net benefit to the U.S. economy, the costs and benefits are not equally distributed. Consumers benefit from free trade—products made in low-wage countries can be purchased for less than comparable products produced in the United States. Business also benefits—free trade opens up new markets to U.S. firms. The costs are borne largely by labor—U.S. jobs can be lost to foreign competitors. The political lineup follows predictably from these tendencies. Labor unions have opposed many free trade policies on grounds that they hurt American workers—that free trade results in job loss to low-wage trading partners. Because they are aligned with labor, Democratic lawmakers tend also to be wary of free trade. Democratic lawmakers are also influenced by the stance of environmental groups, which tend to oppose free trade agreements because such agreements typically result in a shift of manufacturing to low-wage countries that also have weaker environmental regulations. On the other hand, multinational firms and Republican lawmakers (because of their pro-business orientation) have tended to support free trade. An exception for Republican lawmakers is when a major producer within their state or district will be hurt by free trade; in that case, they tend toward protectionism. In general, presidents have been supporters of free trade because of their national policy perspective—free trade usually results in a net gain for the national economy. Donald Trump is an exception. One of his first actions as president was to withdraw the United States from free trade agreements that had not yet been instituted. It’s possible that Trump’s opposition could also prompt increased resistance among Republican lawmakers to free trade. If that should occur, the likelihood that the United States would enter into major multi-nation free trade agreements in the foreseeable future would diminish sharply.

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