At first glance, economics may seem like a scary concept with unusual graphs, confusing terms, and finance bros shouting at you from every direction. Rest assured, as I am here to guide you through the essential economic plans as they apply to the United States and the stances of each political party; by the end, you will see that economics is nowhere near as terrifying as it appears. Being knowledgeable about economics is not only essential to every career field, as each one encounters money, but also will give you a greater understanding of how the world operates. Get in, future econ girlie! Weā€™re going shopping!
Economics is broken into two areas: macro and micro. Macroeconomics concerns large-scale trends like inflation, unemployment, and gross domestic product (the value of all final goods produced within a country). Microeconomics focuses on decisions made by individual businesses and consumers within the economy. Essentially, macro is a country whereas micro is a business, so I will be limiting this article to macroeconomics as we talk about the U.S. political parties and nation as a whole.
Monetary & Fiscal Policy
Monetary and fiscal policy are different strategies used to regulate and influence the economy. They are not exclusive to either political party, however, Democrats and Republicans may favor one over the other or utilize each in different ways.
Monetary Policy
Monetary policy revolves around a central bank controlling the overall money supply that is available to the banks, consumers, and businesses with the specific goal of targeting inflation. To regulate the economy, the central bankā€“for America, thatā€™s the Federal Reserve (or the Fed)ā€“can take two different approaches: contractionary and expansionary.
Contractionary policy occurs when the central bank raises interest rates, increases bank reserve requirements, and sells government securities in order to decrease inflation. Raising interest rates decreases the demand for consumers to take out loans as borrowing, and essentially spending, is more expensive; therefore, inflation will drop as businesses have to lower prices to make products appetizing to consumers. To act as a cushion so that the prices do not drop too drastically, the Fed will also increase the amount of reserves (cash) that a bank can hold, allowing the bank to lend more money. This expansion of the money supply stimulates the economy to act against the raised interest rates. Finally, the Fed will sell more government securities, or assets such as U.S. Treasury notes, to lower the market price of such assets and increase their yields. This tactic decreases the money supply caused by raising bank reserve requirements, because the Fed is intaking the cash it previously put out. All these tools act against each other as polar magnets to stabilize the economy and bring inflation to an ideal 2%, which is regarded as a healthy level.
Expansionary policy is utilized when there is recession (six months of negative gross domestic product) as it grows economic activity by expanding the money supply or decreasing interest rates, essentially performing the exact opposite of contractionary policy. By decreasing interest rates, people are more inclined to spend and consequently heat up the economy. It seems like we were drilled as young children to save, save, save, so encouraging people to spend may sound foreign; a healthy economy rests on the constant circulation of money. For example, the Eras Tour generated economic upswing for a variety of cities (thank you, Taylor!) because when you buy a hotel room, although you are losing money, that money is now redistributed throughout the entire economy as wages, rent, and taxes, meaning it can return to you through various channels. If you are sitting in a boat pouring water into the ocean, it will not increase the sea very much. If everyone pours water, then the tide will rise and a rising tide lifts all boats.
Fiscal Policy
Fiscal policy has the same goal of monetary policy to regulate the economy. However, instead of the central bank acting as a guiding hand, the elected government officials influence the economy through government spending and tax policies.
Fiscal contractionary policy still has the aim to decrease inflation so Congress will pass legislation to tax more, reduce public spending on various institutions, and cut public sector wages or jobs. Aggregate demand decreases as people are less inclined to spend due to paying more with taxes, or they have less money due to unemployment or wage cuts. Consequently, inflation lowers as businesses have to take prices down.
Following the same suit as monetary policy, expansionary policy through a fiscal lens involves lowering tax rates or increasing spending. If spending is decreasing and a recession seems on the horizon, then the government can lower tax rates as an incentive for people to spend more. Additionally, increasing public spending such as building highways, opens the door for more employment and growth overall.
Republican Policy
The Republican Party has traditionally upheld its emphasis on legislation that is business-friendly and limits government regulation of the economy. Because of this, they tend to favor monetary policy since it places power in the bank, and although the Federal Reserve is a government administration, it is not an elected official such as Congress.
Democratic Policy
The Democratic party is considered more willing to influence the economy through government power. In order to regulate businesses and uphold public opinion, they will utilize fiscal policyā€“and the ability to tax and spendā€“more often than not.
Incoming Trump Administration Policy
The incoming Trump administration pushed increasing tariffs and implementing tax cuts as two of their driving economic policies. Some economists argue that increasing tariffs will in turn cause inflation to rise as companies must pay more to import and export goods. However, Stephen Moore, a longtime economic advisor to Trump disputes that the tariffs may cause inflation to rise but they will simultaneously be cutting taxes to keep prices in check. Whichever way the cookie crumbles, the Fed will still be the primary advising board to regulate economic policies in the United States.
Congratulations, you have just completed your crash course on Macroeconomics and U.S. political party influence! There is a plethora of more information to explore within economics and I encourage you to stay up to date with all things money, because at the end of the day it can only help you to be informed about how your finances affect the world. Now go forth and girl math!