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1 Domestic Policy (1). Outline the various economic theories proposed for managing the economy. (1). Outline the various economic theories proposed for.

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Presentation on theme: "1 Domestic Policy (1). Outline the various economic theories proposed for managing the economy. (1). Outline the various economic theories proposed for."— Presentation transcript:

1 1 Domestic Policy (1). Outline the various economic theories proposed for managing the economy. (1). Outline the various economic theories proposed for managing the economy. (2). Contrast fiscal policy and monetary policy, and explain the key role of “the Fed.” (2). Contrast fiscal policy and monetary policy, and explain the key role of “the Fed.” (3). Assess Government's ability to manage the economy in view of the Lucas critique. (3). Assess Government's ability to manage the economy in view of the Lucas critique. (4). Discuss US distribution of income & wealth and the role of supply-side economics. (4). Discuss US distribution of income & wealth and the role of supply-side economics. (5). Assess whether the US should pursue an industrial policy or remain a free market. (5). Assess whether the US should pursue an industrial policy or remain a free market. (6). Describe the basic concepts & categories of how the Government regulates business. (6). Describe the basic concepts & categories of how the Government regulates business. (7). Describe the key government economic and social regulatory agencies & their role.. (7). Describe the key government economic and social regulatory agencies & their role.. (8). Assess the effectiveness and projected impact of current environmental policy. (8). Assess the effectiveness and projected impact of current environmental policy. (9). Describe the various concepts and categories of Social Welfare policy. (9). Describe the various concepts and categories of Social Welfare policy. (10). Contrast social insurance w/public assistance & explain the role of means testing. (10). Contrast social insurance w/public assistance & explain the role of means testing. (11). Outline Social Welfare Policy and assess impact of the Social Security Act of (11). Outline Social Welfare Policy and assess impact of the Social Security Act of (12). Assess the current and future status of Social Security, Welfare, and Health Policy (12). Assess the current and future status of Social Security, Welfare, and Health Policy

2 2 Managing the Economy A Brief Historical Overview From Government Restraint to Government Intervention: From Government Restraint to Government Intervention: – 1800 to early 1900s dominated by late 18 th century economic theory: Classical economics=> lassez faire* Classical economics=> lassez faire* An economic theory, dominant at the start of the twentieth century, that argued that the federal government's only role in the economy was to ensure a stable supply of money. Theory applied to Hoover’s balanced budget as solution to what major economic crisis?

3 3 Managing the Economy A Brief Historical Overview (2) Start of the Great Depression=> 25% unemployment Start of the Great Depression=> 25% unemployment 1929 stock market crash=> 1929 stock market crash=> – “Hoovervilles” to protest lack of aggressive Federal action – Public impatient with inability of Government to fix problem 1932 Presidential election => landslide election of FDR 1932 Presidential election => landslide election of FDR – First Hundred Days => aggressive Federal action to fix $$$ – New Deal programs=> Federal projects & spending – Objective: spur economy to life=> get America back to work Examine FDR’s economic policy to spur economy Examine FDR’s economic policy to spur economy

4 4 Major economic events and actions of FDR’s Presidency: Became President in 1933 During Great Depression the U.S. suffered 25% unemployment Roosevelt’s Administration instituted the New Deal At first employed public works programs. Later used government spending to spur on the economy FDR’s Economic Policy What kind of Government economic policy uses spending to spur $$$?

5 5 Using the federal government's control over taxes and spending to influence the condition of the national economy. Fiscal Policy

6 6 Managing the Economy: Fiscal Policy Fiscal Policy => Fiscal Policy => – Government policy to Tax and Spend – What economic theorist came up with this concept? John Maynard Keynes John Maynard Keynes – 20 th century economic theorist – Wrote: General Theory of Employment, Interest, & Money – Less jobs=> less $$$=> low consumption=> low GDP

7 7 Keynesian Economics Active government role in the Nation’s economy: Active government role in the Nation’s economy: – Create surplus & deficit – how? – Through manipulation of the Budget Objective: Objective: – Stimulate or retard a “Boom or Bust” economy How achieved?=> How achieved?=> – Federal action: tax (less $$ in economy) or… – spend (put more $$ in economy) – Forever after associated with “New Deal Democrats”

8 8 An economic theory, based on the work of British economist John Maynard Keynes, that contends that the national government can manage the economy by running budget surpluses and budget deficits. A measure of a country's total economic output in any given year. GDP Keynesian Economics

9 9 Application of Keynesian Economics During Recession:* During Recession:* Government should spend to raise demand & thus spur economy Government should spend to raise demand & thus spur economy Okay to run a budget deficit Okay to run a budget deficit Overheated economy: Overheated economy: Government should cut spending to control inflation (How?) Government should cut spending to control inflation (How?) Raise taxes to take $$ out of economy Raise taxes to take $$ out of economy This will cut demand & slow economy down This will cut demand & slow economy down Complication to above theory:  counter-cycle programs Automatic government programs “kick in” to counter downturn  Food Stamps  Public Assistance  Unemployment compensation Examine Recession cycle in greater detail*

10 10 Supply and demand for goods and services fall Because businesses can’t sell goods, they fire workers and produce less Because people have less money, they buy less Unemployment rises and the overall GDP falls Cycle of Recession

11 11 Managing the Economy Besides Fiscal Policy (or Federal Tax & Spending) Besides Fiscal Policy (or Federal Tax & Spending) – What’s the other way to manage the economy? Controlling the Money Supply Controlling the Money Supply What economic theory advocates control of money supply? What economic theory advocates control of money supply? Monetary Theory: Monetary Theory: – Nation’s money supply is primary to economy’s health – Therefore controlling the circulation of money in Nation’s economy will control inflation or spur economic growth Who controls the Nation’s money supply and how does it control it? Who controls the Nation’s money supply and how does it control it?

12 12 The Federal Reserve An independent regulatory commission that Congress created in 1913 to oversee the nation's money supply. An independent regulatory commission that Congress created in 1913 to oversee the nation's money supply. How does Federal Reserve control the money supply? How does Federal Reserve control the money supply? Control of Nation’s money supply by “The Fed” Control of Nation’s money supply by “The Fed” – Set the discount rate => (i.e. short term interest rates) – Buy or sell U.S. Treasury Securities=> (Savings Bonds) – Change required reserve ratio Ratio of money Bank must hold in reserve & can’t loan Ratio of money Bank must hold in reserve & can’t loan Examine structure of the Federal Reserve=> Examine structure of the Federal Reserve=>

13 13 The Federal Reserve Four Key Parts: Four Key Parts:  1. The Board of Governors  2. The Federal Open Market Committee  3. Twelve Regional Federal Reserve Banks  4. The commercial banks that are members of Federal Reserve System*

14 14 Federal Reserve System

15 15 Government Management of the Economy Assessment: Assessment: – Can the Government effectively manage the economy? Role & impact of the Lucas critique Role & impact of the Lucas critique – Public’s & private corporations’ response to Gov. actions to counter its ill effects on their $$ interests The “new Keynesians” (math models & sticky wages) The “new Keynesians” (math models & sticky wages) Debate & disagreements centered around following: Debate & disagreements centered around following: – How economy works & proper Gov. policy to be applied Bottom Line: Bottom Line: – No sure resolution on Gov. role (big or small role)

16 16 Current Status of Economic Stewardship 12 economists with 13 conflicting opinions 12 economists with 13 conflicting opinions Applying Fiscal & Monetary controls=> Applying Fiscal & Monetary controls=> – Aim: economic stability Impact on economy of Government management actions: Impact on economy of Government management actions: – Gradual dampening of Boom & Bust swings* – Recent trends since 1950* Continuing disagreements over how to manage economy: Continuing disagreements over how to manage economy: – Distribution of Income & Wealth – Supply-side economics & the “trickle down” effect – Industrial Policy (as practiced in Japan)

17 17 A Century of US Economic Growth

18 18 Debate on Management of Economy Continuing disagreements over how to manage economy: Continuing disagreements over how to manage economy: – Growing gap: Distribution of Income & Wealth: U.S. income distribution as a percentage of income earned 2005

19 19 Wealth: income, real estate, stocks, bonds, and material goods. Top 1% ($2.3M+) Control 40% of all wealth in United States Top 20% ($1.8K+) Control 80% of all wealth in the United States US Wealth & Income Distribution

20 20 An economic theory that argues that if the government cuts taxes, reduces spending, and eliminates regulations, resources will be freed up to fuel the economy to produce even more goods and services. Debate of Management of Economy (2) Supply Side Economics* & the “Trickle Down” Effect Another proposal to manage economy? Industrial Policy* (as practiced in Japan)

21 21 Government Aid The government selects an industry that it thinks can be a world leader and spur on the economy Tax Incentives R & D Funds Regulation Exemption Industrial Policy* Any downside to this approach?

22 22 Industrial Policy Challenge How accurate can government bureaucrats predict which particular industry or corporation will be the next up and coming winner? How accurate can government bureaucrats predict which particular industry or corporation will be the next up and coming winner? – Past government track record & efficiency in spending money don’t inspire confidence What if investors in the market or future consumers disagree with the government’s selection & don’t buy it or go another direction instead? What if investors in the market or future consumers disagree with the government’s selection & don’t buy it or go another direction instead?

23 23 Regulating Business Regulatory policy Regulatory policy – Origins: Interstate Commerce Act of 1887 (Box 17-1) Purpose: Control unfair & monopolistic practices of who? Purpose: Control unfair & monopolistic practices of who? – “Short” versus “Long Haul” prices to market? Public attitude towards regulatory policy=> Public attitude towards regulatory policy=> – Mixed & many times conflicting – why? Theory versus reality Theory versus reality – Theory: Government should stay out of business versus? – Reality: Consumer protection & small businesses Two major categories Regulatory policy? Two major categories Regulatory policy? – Economic regulation – Social regulation

24 24 Rules affecting business practices Seeks to ensure competition and prevent illegal monopolies Economic Regulations* Social Regulations* Rules that protect citizens from dangerous or unfair practices associated with how businesses produce products or with the products themselves. Regulations

25 25 Objectives of Economic Regulation Government influences competitive practices of industry Government influences competitive practices of industry – Promote competition (prevent monopolies- Microsoft) Stifle competition & innovations in software Stifle competition & innovations in software – Control firms’ entry into industry or control industry’s prices When a Monopoly is necessary- examples? When a Monopoly is necessary- examples? Role of Interstate Commerce Commission of 1889 (RR) Role of Interstate Commerce Commission of 1889 (RR) Disagreement in principle & practice Disagreement in principle & practice – Impact of recent trends in deregulation Savings & Loans (1980s) Savings & Loans (1980s) Airlines Airlines How has economic regulation evolved over US history? How has economic regulation evolved over US history? – Evolved in three major phases*

26 26 Congress responds to farmers’ and small businesses’ complaints about major monopolies & trusts Congress responds to farmers’ and small businesses’ complaints about major monopolies & trusts – 1887 establishes Interstates Commerce Commission (ICC) Commission with no real enforcement capability Commission with no real enforcement capability – 1890 Sherman Antitrust Act (against monopolies) General statement of intent (still lacked teeth to enforce) General statement of intent (still lacked teeth to enforce) – 1914 Clayton Antitrust Act Fix above weakness- established enforcement mechanism Fix above weakness- established enforcement mechanism – 1914 Federal Trade Commission Act (Same as above) (Same as above) Important Events in Economic Regulation Phase I

27 27 Events in Economic Regulation Phase II More regulation following events leading to Depression More regulation following events leading to Depression – 1934 Federal Communications Commission (FCC) – 1934 Securities and Exchange Commission (SCC) – 1938 Civil Aviation Board (CAB) 1960s=> Federal Government established four key areas of economic regulatory policy: 1960s=> Federal Government established four key areas of economic regulatory policy: – Antitrust- Prevent monopolies & encourage competition (Microsoft suit) – Financial Institutions- Savings & Loans/SEC/Enron debacle – Transportation- Air/Ground/Rail – Communication- FCC (Radio & TV)

28 28 Events in Economic Regulation Phase III Economic Regulation=> 1970s through present: Economic Regulation=> 1970s through present: – Deregulation=> benefits & unintended consequences – Mixed bag- sometimes good & sometimes bad: Deregulation is good for consumer when: Deregulation is good for consumer when: – Competition rises & prices fall Telecoms, Computers, Airlines Telecoms, Computers, Airlines Deregulation can be very bad for the public when: Deregulation can be very bad for the public when: – Corporate greed leads to poor service & risky business decisions Airline services to passengers Airline services to passengers Savings & Loan default (tax payers pick up tab) Savings & Loan default (tax payers pick up tab) Stock Market price manipulation & fraudulent accounting (Enron) Stock Market price manipulation & fraudulent accounting (Enron)

29 29 Social Regulation Social Regulation focus on conditions under which=> Social Regulation focus on conditions under which=> – Goods & services are produced When contrasted with economic regulation: When contrasted with economic regulation: – Social regulations cut across industries (vice focus on a specific industry) (vice focus on a specific industry) – Regulations grounded in specific technical legislation Very specific & detailed Very specific & detailed vice vague & general guidelines of economic regulations vice vague & general guidelines of economic regulations Aim: protect public interest Aim: protect public interest Principal Federal Agencies established to administer: Principal Federal Agencies established to administer: – Social regulation from 1930 through 1975 (See Table 17-1)*

30 30 AgencyYear Food and Drug Administration 1930 National Labor Relations Board 1935 Equal Employment Opportunity Commission 1964 Environmental Protection Agency 1970 Occupational Safety and Health Admin National Highway and Traffic Safety 1970 Consumer Product Safety Agency 1972 Nuclear Regulatory Commission 1975 Social Regulation Agencies

31 31 Protecting Worker Safety and Health Occupational Safety and Health Act of 1970 Occupational Safety and Health Act of 1970 – Created OSHA => regulate industry=> worker safety Problems & criticism Problems & criticism – Too detailed & complicated regulations – Employers complaints (time & $$$ to comply) Labor Union & consumer advocates => support Labor Union & consumer advocates => support – Posted regulations (see example p.623) Debate OSHA’s over proper role continues Debate OSHA’s over proper role continues – Debate centered around costs versus benefits

32 32 OSHA Regulations

33 33 Protecting the Environment Evolution of Environmental Policy (Silent Spring) Evolution of Environmental Policy (Silent Spring) – 1960s => environmental activists movement – Union Oil of California oil spill off Santa Barbara=> VIP & public outcry (who owns homes off West Coast?) VIP & public outcry (who owns homes off West Coast?) National Environmental Policy Act (1969): National Environmental Policy Act (1969): – Requirement for Environmental impact statement – Required for all government agencies – Later exploited by environmental activists (Endangered Species Act) (Endangered Species Act) Nixon consolidates various agencies into EPA (1970) Nixon consolidates various agencies into EPA (1970) – Vast array of laws & regulations ensued (Table 17-2 )* (It was the early 70s after all) (It was the early 70s after all)

34 34 EPA Responsibilities So what areas exactly does the EPA regulate?

35 35 The Environmental Protection Agency regulates: Air Quality Water Quality Disposal of Hazardous Waste Chemicals Noise Levels Protecting the Environment Any problem* with Government regulations to protect the environment?

36 36 Congress President Environmental Policy impact Public RepublicansDemocrats Political Conflict & Who is effected Why? regulations

37 37 Environmental Policy Conflict & Its Impact Political conflicts of Environmental Protection Political conflicts of Environmental Protection – Environmental policies creates: Winners & losers – Due to those affected by benefits vs. costs – Somebody has to pay for it Other related factors: Other related factors: – Diffused benefits (to Public) with specific costs to a few (Industry) – Benefits often hard to measure – Measuring extent of environmental problem very difficult – Costs rise significantly for each incremental improvements at the margin

38 38 Future Directions Future Directions for Environmental Policy Future Directions for Environmental Policy – Conflicting guidance=> to the EPA – Democrats (want more regulation) vs. – GOP (who want less regulation) Options for how government protects environment Options for how government protects environment – Three different methods: – 1. Command & control* – 2. Market incentives – 3. Pollution prevention

39 39 Command and Control Market Incentives & Pollution Prevention Agencies draft regulations Agencies dictate enforcement mechanisms Establish allowable pollution levels Issue permits to pollute Recipients can trade and sell permits Differing Options to Protect Environment A Comparison: Debate & great conflict over environmental policy to continue

40 40 Government programs that provide goods and services to citizens to improve the quality of their lives. Social Welfare Policy What is Social Welfare Policy?

41 41 Promoting Social Welfare Federal government runs broad range of programs Federal government runs broad range of programs – Several specifically designed to promote social welfare Basic Concepts and Categories of Social Welfare Policy Basic Concepts and Categories of Social Welfare Policy – Fed programs=> goods & services to improve Public’s quality of life goods & services to improve Public’s quality of life What are the two major categories of Social Welfare? What are the two major categories of Social Welfare? – Social Insurance programs & qualifications You pay in to the program=> you qualify (example?) You pay in to the program=> you qualify (example?) – Public Assistance => means tested programs

42 42 Social welfare strategies What are the three social welfare strategies? What are the three social welfare strategies? – 1. Alleviative (food stamps & “Meals on Wheels”) (food stamps & “Meals on Wheels”) – 2. Preventative (Unemployment Compensation & Social Security) (Unemployment Compensation & Social Security) – 3. Curative (“Head Start” & job training) (“Head Start” & job training) If given an example, can you ID the proper strategy?!

43 43 Social Welfare Programs Income maintenance programs Income maintenance programs Nutrition programs Nutrition programs Health programs Health programs Housing programs Housing programs Education programs Education programs Social services programs Social services programs What are the different types of Social Welfare Programs? See Table 17-3 for specific associated programs by type

44 44 The Evolution of Social Welfare Policy Welfare as private sector & local responsibility Welfare as private sector & local responsibility – True for first half of our Nation’s history Federal government initial involvement: “deserving poor” Federal government initial involvement: “deserving poor” – 1880s thru 1910s => Focused on disabled & elderly Veterans Focused on disabled & elderly Veterans State government also expanded selective benefits State government also expanded selective benefits – Addressed needs of other poor citizens – Both Federal & State governments target “deserving poor” only Then what major event caused both to reconsider who should take lead in addressing needs of its citizens? * Then what major event caused both to reconsider who should take lead in addressing needs of its citizens? * – What major legislation was enacted as a result?*

45 45 Act established Federal programs providing goods & services to improve the lives of American citizens in two major areas: 1. Provided Social Insurance programs for elderly and disabled 2. Established Public Assistance programs to help blind, elderly, and dependent children Impact of Great Depression & the New Deal Impact of Great Depression & the New Deal Social Security Act of 1935*

46 46 Nationalizing Social Welfare – A Summary Social Security Act of 1935 Social Security Act of 1935 – Significantly expanded Federal government’s welfare role Social insurance programs (elderly & unemployed) Social insurance programs (elderly & unemployed) – Created as old age & survivors program – 1956: Congress adds Disability Insurance Social Security has grown significantly over the years Social Security has grown significantly over the years – Both in number of “entitled” and costs of administration – Beneficiaries grew from 222K in 1940 to 46.4 Million by 2003 – Increased costs: $32M (1940) to $454 Billion in pay out in 2003 Cost increase due to inflation & COLA over 60 year span Cost increase due to inflation & COLA over 60 year span FICA deductions have also increased (Chapter 16) FICA deductions have also increased (Chapter 16)

47 47 Public Assistance Programs Administration left to states => Administration left to states => – Care for elderly, poor, blind 1972: Congress standardized benefits & eligibility 1972: Congress standardized benefits & eligibility – Supplemental Security Income (SSI) – Cost grew: from $495 Million in 1940 to 32.2 Billion in s: ADC => AFDC (controversial from start) 1960s: ADC => AFDC (controversial from start) – (1996: AFDC replaced by TANF ) 1964: LBJ’s War on Poverty 1964: LBJ’s War on Poverty – Number of additional program created – Economic Opportunity Act of 1964 – Job Corps & Head Start (associated with what strategy?) – Food Stamp program (significantly grew over decades)

48 48 Public Assistance Programs- problems Many War on Poverty programs eventually phased out – why? Many War on Poverty programs eventually phased out – why? Activists poor challenged established power Activists poor challenged established power – Traditional establishments controlled distribution of Public Assistance (and resented this challenge to Power) – Political bias for alleviative/preventative & against curative programs

49 49 Health Care Two major categories of Health Care? Two major categories of Health Care? Medicare* Medicaid** (versus) What’s the difference between the two? *A social insurance program that provides basic hospital insurance and supplementary insurance for doctors' bills and other health care expenses for people over the age of 65 or older (Entitlement) **A public assistance program that provides publicly subsidized health care to low-income Americans. (Means Tested)

50 50 Current Status of Social Welfare Policy Criteria used to measure Social Welfare Policy status: Criteria used to measure Social Welfare Policy status: – 1. Social welfare Policies of other Industrial Democracies – 2. Social Welfare vs. other types of U.S. government spending – 3. Spending on different types of Social Welfare programs – 4. Objective measurements of success of Social Welfare Programs

51 51 1. Policies of other Industrial Democracies A Comparison Full Health care provided by other Industrial Democracies Full Health care provided by other Industrial Democracies US spends less on social welfare than Japan & Europe US spends less on social welfare than Japan & Europe – US spends 30% of Budget vs. 40% of European budgets – Europeans receive greater amount of government services – Health care paid in full by government American tradition of relying on private sector American tradition of relying on private sector – Strong bias against big government & social medicine

52 52 2. Social Welfare vs. other types of spending

53 53 Year Social Insur- ance Public Aid Health/ Medical Veteran’s Programs EducationHousingOther %14.3%18.8%10.8%0.6%1.3%0.1% %10.5%41.8%2.5%1.1%3.0%0.2% 3. Spending on different types of Social Welfare Distribution of Social Welfare Expenditures Across Programs

54 54 4. Measuring success of Social Welfare Conservative position: complete failure Conservative position: complete failure – Traps poor in poverty cycle=> permanent underclass Liberal position: work in progress Liberal position: work in progress – Needs moderate reform but still effective Objective measures => reveals mixed success Objective measures => reveals mixed success – Poverty has fallen since 1970 (from 13%) – 2000: fell to 11.3% poverty rate=> then back up to 12.5 in 2003 – Nevertheless: major gap exists between two groups: Old (10.2%) vs. children (17.6% in 2003) & growing Old (10.2%) vs. children (17.6% in 2003) & growing – Infant mortality rate has fallen to 7 per 1000 births Social effects on society also reveal some negatives: Social effects on society also reveal some negatives: – Significant increase in divorce, single parent families, & crime

55 55 The Future of Social Welfare Policy Social Security – two debated questions Social Security – two debated questions – 1. On whom should government spend $$$ (old or young?) – 2. Is Social Security headed for insolvency? * (and what should we do about it if it is?) (and what should we do about it if it is?) Welfare Policy – the uneasy balance in conflict: Welfare Policy – the uneasy balance in conflict: – The safety net versus the free ride – 1996 Welfare Reform law: Abolished AFDC => TANF - striking a proper balance? Abolished AFDC => TANF - striking a proper balance? Concerns: Impact of the economic recession on unemployed? Concerns: Impact of the economic recession on unemployed? Poor & unemployed trying to make ends meet at the margin Poor & unemployed trying to make ends meet at the margin Health Policy* => Two major concerns: cost & access Health Policy* => Two major concerns: cost & access – How to stem costs & who should have access

56 56 Social Security Options to address problem? Increase taxes, reduce benefits, restrict eligibility

57 57 Major concerns with Health Care system Access and Cost Access and Cost Who pays the costs of the uninsured? Impact of Baby Bommers

58 58 Domestic Policy- Key Terms Counter-cyclical programs: Government programs that automatically increase spending when the economy slows down and unemployment rises, and decrease spending when the economy speeds up. Counter-cyclical programs: Government programs that automatically increase spending when the economy slows down and unemployment rises, and decrease spending when the economy speeds up. Economic regulation: Laws and governmental rules that affect the competitive practices of private business. Economic regulation: Laws and governmental rules that affect the competitive practices of private business. Environmental impact statement: A document federal agencies must issue that analyzes the environmental impact of any significant actions they plan to take. Environmental impact statement: A document federal agencies must issue that analyzes the environmental impact of any significant actions they plan to take. Federal Reserve System: An independent regulatory commission that Congress created in 1913 to oversee the nation’s money supply. Federal Reserve System: An independent regulatory commission that Congress created in 1913 to oversee the nation’s money supply. Fiscal policy: Using the federal government’s control over taxes and spending to influence the condition of the national economy. Fiscal policy: Using the federal government’s control over taxes and spending to influence the condition of the national economy. Food Stamp program: A public assistance program established in 1964 that provides stamps (or coupons) to low-income people to buy food. Food Stamp program: A public assistance program established in 1964 that provides stamps (or coupons) to low-income people to buy food. Gross domestic product (GDP): A measure of a country’s total economic output in any given year. Gross domestic product (GDP): A measure of a country’s total economic output in any given year. Industrial policy: The policy of seeking to strengthen selected industries by targeting them for governmental aid rather than letting the forces of the free market determine their fates. Industrial policy: The policy of seeking to strengthen selected industries by targeting them for governmental aid rather than letting the forces of the free market determine their fates.

59 59 Domestic Policy- Key Terms (2) Keynesian economics: An economic theory, based on the work of British economist John Maynard Keynes, that contends that the national government can manage the economy by running budget surpluses and budget deficits. Keynesian economics: An economic theory, based on the work of British economist John Maynard Keynes, that contends that the national government can manage the economy by running budget surpluses and budget deficits. Laissez faire: An economic theory, dominant at the start of the twentieth century, that argued that the federal government’s only role in the economy was to ensure a stable supply of money. Laissez faire: An economic theory, dominant at the start of the twentieth century, that argued that the federal government’s only role in the economy was to ensure a stable supply of money. Lucas critique: An economic theory that contends that if people act rationally, then their reactions to changes in government policy will often negate the intent of those changes. Lucas critique: An economic theory that contends that if people act rationally, then their reactions to changes in government policy will often negate the intent of those changes. Means test: A requirement that people must fall below certain income and wealth requirements to qualify for government benefits. Means test: A requirement that people must fall below certain income and wealth requirements to qualify for government benefits. Medicaid: A public assistance program that provides publicly subsidized health care to low-income Americans. Medicaid: A public assistance program that provides publicly subsidized health care to low-income Americans. Medicare: A social insurance program that provides basic hospital insurance and supplementary insurance for doctors’ bills and other health care expenses for people over the age of 65. Medicare: A social insurance program that provides basic hospital insurance and supplementary insurance for doctors’ bills and other health care expenses for people over the age of 65. Monetary theory: An economic theory that contends that a nation’s money supply, or the amount of money in circulation, is the primary if not sole determinant of the health of the national economy. Monetary theory: An economic theory that contends that a nation’s money supply, or the amount of money in circulation, is the primary if not sole determinant of the health of the national economy.

60 60 Domestic Policy- Key Terms (3) Public assistance: Government programs, such as Medicaid and food stamps, that are funded out of general tax revenues and that are designed to provide benefits only to low- income people. Public assistance: Government programs, such as Medicaid and food stamps, that are funded out of general tax revenues and that are designed to provide benefits only to low- income people. Regulatory policy: Laws and government rules targeting private business for the purpose of (1) protecting consumers and other businesses from what the government deems unfair business practices; (2) protecting workers from unsafe or unhealthy working conditions; (3) protecting consumers from unsafe products; and (4) protecting a number of groups from discrimination. Regulatory policy: Laws and government rules targeting private business for the purpose of (1) protecting consumers and other businesses from what the government deems unfair business practices; (2) protecting workers from unsafe or unhealthy working conditions; (3) protecting consumers from unsafe products; and (4) protecting a number of groups from discrimination. Social insurance: Government programs such as Social Security and Medicare that require those who will receive benefits to make contributions (otherwise known as taxes) and that distribute those benefits without regard to the recipient’s level of income. Social insurance: Government programs such as Social Security and Medicare that require those who will receive benefits to make contributions (otherwise known as taxes) and that distribute those benefits without regard to the recipient’s level of income. Social regulation: Laws and governmental rules designed to protect Americans from dangers or unfair practices associated with how private businesses produce their products as well as from dangers associated with the products themselves. Social regulation: Laws and governmental rules designed to protect Americans from dangers or unfair practices associated with how private businesses produce their products as well as from dangers associated with the products themselves. Social welfare policy: Government programs that provide goods and services to citizens for the purpose of improving the quality of their lives. Social welfare policy: Government programs that provide goods and services to citizens for the purpose of improving the quality of their lives. Supply-side economics: An economic theory that argues that if the government cuts taxes, reduces spending, and eliminates regulations, resources will be freed up to fuel the economy to produce even more goods and services. Supply-side economics: An economic theory that argues that if the government cuts taxes, reduces spending, and eliminates regulations, resources will be freed up to fuel the economy to produce even more goods and services. Temporary Assistance for Needy Families (TANF): A public assistance program that provides government aid to low-income families with children for a limited amount of time. Temporary Assistance for Needy Families (TANF): A public assistance program that provides government aid to low-income families with children for a limited amount of time.


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