Major US Economic Policies

Why This Matters

Understanding major U.S. economic policies isn't just about memorizing dates and programs—it's about grasping how the federal government has repeatedly redefined its relationship with American citizens and the economy. You're being tested on your ability to recognize the philosophical tensions at play: government intervention vs. free markets, progressive redistribution vs. supply-side economics, social safety nets vs. individual responsibility. These debates didn't end in the 1930s or 1980s; they shape every election cycle and policy discussion today.

Each policy in this guide represents a specific answer to fundamental questions: Who should benefit from economic growth? How much should government regulate markets? What responsibilities does society have toward its most vulnerable members? Don't just memorize what the New Deal did—know that it represents expansive federal intervention during crisis. Don't just recall Reagan's tax cuts—understand they embody supply-side theory and a philosophical shift away from government solutions. That conceptual understanding is what separates a 3 from a 5.

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Crisis Response and Federal Expansion

When economic catastrophe strikes, the federal government faces pressure to act decisively. These policies established precedents for government intervention that permanently reshaped American expectations about federal responsibility.

The New Deal

• FDR's response to the Great Depression (1933-1939)—fundamentally expanded federal power through dozens of programs addressing unemployment, banking failures, and poverty
• Created lasting institutions including the Social Security Administration, Securities and Exchange Commission (SEC), and the Federal Deposit Insurance Corporation (FDIC)
• Established the precedent that the federal government bears responsibility for economic stability and citizen welfare—a philosophical shift that defines modern American governance

Federal Reserve Monetary Policy

• The Fed controls money supply and interest rates—using tools like open market operations (buying/selling government securities) and adjusting the discount rate banks pay to borrow
• Crisis intervention role expanded dramatically after 2008, when the Fed used quantitative easing to inject liquidity into frozen credit markets
• Dual mandate requires balancing maximum employment with stable prices (targeting roughly 2% inflation)—decisions ripple through mortgage rates, job markets, and global currency values

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Social Safety Net Programs

These policies reflect the belief that government should protect citizens from economic hardship they cannot control—old age, disability, illness, and poverty. They represent the most direct form of wealth redistribution in American policy.

Social Security

• Established in 1935 as the New Deal's cornerstone—provides retirement income, disability benefits, and survivor benefits funded through payroll taxes (FICA)
• Pay-as-you-go system means current workers fund current retirees—creating intergenerational obligations and long-term funding challenges as the population ages
• Dramatically reduced elderly poverty from over 35% in 1960 to under 10% today, demonstrating measurable policy impact on inequality

Medicare and Medicaid

• Created in 1965 under the Great Society—Medicare covers Americans 65+ (and some disabled individuals), while Medicaid covers low-income populations through federal-state partnerships
• Medicare is federally administered; Medicaid varies by state, creating significant geographic disparities in coverage and eligibility
• Together they represent the largest government healthcare expenditure and reflect ongoing tension between universal coverage goals and cost containment

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Anti-Poverty and Social Reform

Beyond basic safety nets, some policies aimed to fundamentally restructure opportunity and address systemic inequality. These represent the most ambitious attempts to use federal power for social transformation.

The Great Society

• LBJ's 1964-1965 legislative agenda—declared "war on poverty" and produced Medicare, Medicaid, the Civil Rights Act, Voting Rights Act, and federal education funding (Elementary and Secondary Education Act)
• Head Start and food assistance programs targeted childhood poverty and nutrition, reflecting belief that early intervention breaks cycles of disadvantage
• Expanded federal role in areas traditionally controlled by states—education, healthcare, housing—while facing criticism about costs, effectiveness, and federal overreach

Progressive Taxation

• Tax rates increase as income rises—designed so higher earners pay a larger percentage of income, not just larger amounts
• Funds redistributive programs including education, healthcare, and infrastructure—making it the primary mechanism for reducing income inequality through government policy
• Ongoing debate centers on incentive effects—critics argue high marginal rates discourage work and investment, while supporters emphasize funding for public goods and fairness

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Market-Oriented and Supply-Side Approaches

Not all economic policy expands government. These policies reflect the belief that free markets, reduced regulation, and lower taxes produce better outcomes than government intervention.

Reaganomics

• Supply-side economics implemented 1981-1989—cut top marginal tax rates from 70% to 28%, reduced regulations, and slowed growth of social spending
• "Trickle-down" theory held that tax cuts for businesses and wealthy individuals would stimulate investment, job creation, and broadly shared prosperity
• Mixed legacy includes economic growth and reduced inflation alongside tripled national debt and increased income inequality—making it a case study in policy trade-offs

Free Trade Agreements (NAFTA/USMCA)

• NAFTA (1994) eliminated most tariffs between the U.S., Canada, and Mexico—replaced by USMCA in 2020 with updated labor and environmental provisions
• Reflects free-market philosophy that reducing trade barriers increases efficiency, lowers consumer prices, and promotes economic growth through comparative advantage
• Critics point to manufacturing job losses and wage stagnation, while supporters emphasize lower prices and export opportunities—a key example of globalization's uneven effects

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Market Regulation and Worker Protection

Even market-oriented societies require rules. These policies aim to ensure fair competition and basic labor standards without replacing markets with government control.

Antitrust Legislation

• Sherman Act (1890) and Clayton Act (1914) prohibit monopolies, price-fixing, and anti-competitive mergers—enforced by the FTC and DOJ
• Reflects Progressive Era belief that concentrated economic power threatens both consumers (through higher prices) and democracy (through political influence)
• Modern debates focus on tech giants—whether traditional antitrust frameworks adequately address platform monopolies, data control, and network effects

Minimum Wage Laws

• Federal minimum wage established in 1938 (Fair Labor Standards Act)—currently $\$7.25$/hour federally, though many states and cities set higher rates
• Intended to ensure basic living standard and reduce poverty among working Americans, while critics argue it reduces employment opportunities for low-skilled workers
• Illustrates federalism in action—states can exceed but not fall below federal standards, creating a patchwork of wage floors reflecting local costs of living

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Quick Reference Table

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Self-Check Questions

1. Compare and contrast the New Deal and the Great Society. What economic and social problems did each address, and how did they expand federal power differently?

2. Which two policies best illustrate the philosophical tension between government intervention and free-market approaches? Explain the core assumptions underlying each.

3. If an FRQ asks about federalism in social policy, which programs demonstrate shared federal-state responsibility, and how does that structure create geographic variation in benefits?

4. How do progressive taxation and Social Security work together as mechanisms for reducing inequality? What distinguishes a funding mechanism from a program?

5. A question asks you to evaluate whether Reaganomics or the New Deal better promoted long-term economic stability. What evidence would you cite for each side, and what trade-offs would you acknowledge?