Chapter 18 Economic Policy Pearson Education, Inc. © 2006 American Government 2006 Edition (to accompany Comprehensive, Alternate, Texas, and Essentials Editions) O’Connor and Sabato

Pearson Education, Inc. © 2006 The Roots of Government: Involvement in the Economy  During the nation’s first century states bore the responsibility of managing economic affair.  Nineteenth Century Government long role in economy 1. What were the main areas in which the government influenced Economic Policy?  Tax, tariff, public lands disposal, and public works projects and the national bank But national regulatory programs were few and restricted. State governments active in promoting and regulating private economic activity.

Pearson Education, Inc. © 2006 The Nineteenth Century  After Civil War, U.S. experienced rapid economic growth. Large scale manufacturing enterprises New problems arose Business cycle: fluctuations between expansion and recession that is a part of modern capitalist economics. During recessions people lose their jobs and income, and the economy experiences a low or even negative growth rate.

Pearson Education, Inc. © 2006 The Nineteenth Century  2. What is Laissez-faire economics? A French term literally meaning “to allow to do, to leave alone.” It is a hands-off governmental policy that is based on the belief that governmental involvement in the economy is wrong.  Major reform A. Interstate Commerce Act 1887 B. Sherman Antitrust Act 1890 Establishment of the Department of Agriculture (1862) C. Homestead Act D. Morrill Land Grant Act

Pearson Education, Inc. © 2006 The Great Depression and the New Deal  During 1920s, conservative administrations reduced the role of the government in restricting private business activities.  3. What were the conditions during the Great Depression?  Prices dropped, production declined, unemployment rose Few believed there was much for the government to do. Franklin D. Roosevelt called for a “New Deal” 4. What is an Interventionist State: Alternative to the laissez-faire state, the government takes an active role in guiding and managing the private economy.

MONETARISM  Supply side economics  Developed by Milton Friedman  Inflation occurs due to too much money chasing too few goods.  Economy needs steady increase in money supply equal to economic growth. Pearson Education, Inc. © 2006

Keynesianism  Demand Side economics  John Maynard Keynes  Economy’s health depends on savings and spending by consumers  Activist government  If Demand decreases causes increase in government spending  If Demand increases causes increase in taxes Pearson Education, Inc. © 2006

Planning  Wage controls  Price controls  John Kenneth Galbraith  Wage / Price Spiral If Price increases then wages increase causing Price to increase yielding inflation. Requires extreme government regulation of the market Pearson Education, Inc. © 2006

Supply-side  Arthur Laffer and Paul Craig Roberts  More planning with less government interference 1. Cutting taxes to increase incentive to save and invest 2. Investment = increase in jobs 3. Increase in Jobs = Increase in taxes at the lower rates 4. Less cheating on tax returns Pearson Education, Inc. © 2006

Reganomics  Combination of monetarism / supply- side / domestic budget cutting  Reagan’s economic advisors 1. Reduce size of government 2. Stimulate growth 3. Increase military strength  Created large government deficits Pearson Education, Inc. © 2006

Effects of Reaganomics  1. Only slowed growth of domestic spending  2. increased military  3. controlled money supply  4. cut taxes  5. increased Social Security  6. decreased unemployment  7. increased business activity Pearson Education, Inc. © 2006

Financial Reforms  Bank holiday Only financially sound banks were permitted to reopen.  New banking laws A. Glass-Steagall Act (1933)  Required the separation of commercial and investment banking and set up of the FDIC B. Securities Act (1933)  Required that prospective investors be given full and accurate information about the stocks or securities being offered to them. C. Securities Exchange Act (1934)  Created the Securities and Exchange Commission authorized to regulate the stock exchange and to reduce the number of stocks bought on margin (on borrowed money).

Pearson Education, Inc. © 2006 Agriculture  D. Agricultural Adjustment Act (1933) Sought to boost farm income by restricting agricultural production in order to being it into better balance with demand. Supreme Court found it unconstitutional. Constitution did not grant Congress the authority to regulate commerce in Article 1. E. Replaced by the Soil Conservation and Domestic Allotment Act.  Did not work well. Congress passed a second AAA  Provided subsidies to farmers to limit their crops.  Protected farmers, but many thought it a wasteful program.  E. What is a subsidy?

Pearson Education, Inc. © 2006 Labor  5. National Labor Relations Act of 1935 (Wagner Act) Guaranteed worker’s rights to organize and bargain collectively through unions of their own choosing  6. National Labor Relations Board Created to carry out the act and to conduct elections to determine which union, if any, employees wanted to represent them.  7. Fair Labor Standards Act (1938) Intended to protect the interests of low-paid workers, the law set 25 cents per hour and 44 hours per week as initial minimum standards.

Pearson Education, Inc. © 2006 Growth in the Minimum Wage Over Time

Pearson Education, Inc. © 2006 Labor Industry Regulations 8. Federal Communications Commission (1934)  Given extensive jurisdiction over the radio, telephone, and telegraph industries. 9. The Civil Aeronautics Board (1938)  Put into place to regulate the commercial aviation industry. 10. Motor Carrier Act (1935)  Put the trucking industry under the jurisdiction of the Interstate Commerce Commission.

Pearson Education, Inc. © 2006 The Social Regulation Era  Economic regulation Governmental regulation of business practices, industry rates, routes, or areas serviced by particular industries.  Social regulation Governmental regulation of the quality and safety of products as well as the conditions under which goods and services are produced.

Pearson Education, Inc. © 2006 The Social Regulation Era  From the 1960s to the mid-1970s the national government passed social regulatory legislation on such topics as: Consumer protection Health and safety Environmental protection  All based on commerce clause authority Set up new regulatory agencies to implement the new regulations More industries affected by government.

Pearson Education, Inc. © 2006 Why the surge of social regulations?  The late 1960s and early 1970s were a time of social activism. The consumer and environmental movements were at the peak of their influence.  The public had become much more aware of the dangers to health, safety, and the environment associated with various modern products.  Members of Congress saw the advocacy of social regulation as a way to gain visibility and national prominence.  The presidents in office during most of this period each gave support to the social regulation movement.

Pearson Education, Inc. © What is Deregulation  A reduction in market controls.  In theory, deregulation would increase market competition and lead to lower prices for consumers.  Ford administration made deregulation a major objective. Conservative Republican  Senator Ted Kennedy held hearings on airline deregulation.  Priority of the Carter Administration as well.  Agricultural regulation still controversial Bush signed into law a six-year agricultural bill with a price tag of $100 billion.

Pearson Education, Inc. © 2006 Stabilizing the Economy  Massive scale and persistence of the Great Depression led to the 12. Employment Act of 1946  Committed the government to maintaining “maximum employment, production, and purchasing power”

Pearson Education, Inc. © 2006 Stabilizing the Economy  Economic stability A situation in which there is economic growth, rising national income, high unemployment, and steadiness in the general level of prices.  13. What is Inflation? A rise in the general prices levels of an economy.  14. What is a Recession? A short-term decline in the economy that occurs as investment sags, production falls off, and unemployment increases.

Pearson Education, Inc. © 2006 Monetary Policy: Controlling the Money Supply  15. What is Monetary Policy? A form of government regulation in which the nation’s money supply and interest rates are controlled.  Money A system of exchange for goods and services that includes currency, coins and bank deposits.  16. What is the job of the Federal Reserve Board? A seven-member board that sets member banks’ reserve requirements, controls the discount rate, and makes other economic decisions.

Pearson Education, Inc. © What are the five parts of the Federal Reserve System?

Pearson Education, Inc. © 2006 Monetary Policy: Controlling the Money Supply  18. What are the Reserve requirements? Governmental requirements that a portion of member banks’ deposits must be retained to back loans made.  19. What is the Discount rate? The rate of interest at which member banks can borrow money from their regional Federal Reserve Bank.  20. What is the purpose of Open Market Operations? The buying and selling of government securities by the Federal Reserve Bank in the securities market.

Pearson Education, Inc. © 2006 The President and the FRB  President shares responsibility for fiscal policy with Congress  Congress authorizes the FRB to make monetary policy  But there are many formal and informal contacts between the White House and the FRB.

Pearson Education, Inc. © What is Fiscal Policy: Taxing and Spending  Federal government policies on taxes, spending, and debt management  Intended to promote the nation’s macroeconomic goals, particularly with respect to employment, price stability, and growth.  Revenue Act of 1964 Reduced personal and corporate income tax rates  Tax cuts to stimulate the economy Reagan in 1981 and G.W. Bush in 2001 and 2003

Pearson Education, Inc. © 2006 Sample Tax Savings Based on 2001 Rate Cuts

Pearson Education, Inc. © What are the Effects of Globalization?  International economy Increased competition benefits consumers Expands the market for American products Labor unions are strongest critics of free trade  Stress need to restrict “dumping”  Fair trade rather than free trade Analysis suggests that globalization further segments the market into winners and losers  Losers tend to be smaller businesses and workers

Pearson Education, Inc. © 2006 The Budgetary Process  23. How does the Federal government raises money for expenditures? individual income taxes social insurance retirement receipts corporate income taxes make up less than 10 percent of receipts  24. Most government spending goes toward? National defense Human resources

Pearson Education, Inc. © 2006 The Federal Budget Process

Pearson Education, Inc. © 2006 Congress and the Budgetary Process  25. What was the Budget and Accounting Act of 1921? Gave the president authority to prepare an annual budget and submit it to Congress  Staff agency now called the Office of Management and Budget was created to assist the president in this process.  President sends budget proposal to Congress in January or February of each year.  Congress and the appropriations committees actually provide the funding needed to carry out programs. 26. What was the Budget and Impoundment Control Act of 1974?

Pearson Education, Inc. © 2006 The Budget Deficit and the Debt  1980s government finance Large annual budget deficits and rapidly growing national debt. 27. What were causes of budget deficits?  Result of recession, large tax cuts, increased defense spending, spending on entitlements 28. What is the difference between yearly deficits add to total national debt? Deficits are justified in times of recession to get the economy going; however, they are criticized if they are viewed as “structural” or built into the economy even in times of prosperity.

Pearson Education, Inc. © 2006 TAXES

Pearson Education, Inc. © 2006 Entitlements and Discretionary Spending,

Pearson Education, Inc. © What actions are regulated by the Environmental Protection Agency?  Since the 1970s, Congress has enacted a large volume of pollution control legislation.  Brownfields Revitalization and Environmental Restoration Act of 2001  Clean Air Act  Clean Water Act  Safe Drinking Water Act  Toxic Substance Control Act  Resource Conservation and Recovery Act  Comprehensive Environmental Response, Compensation, and Liability Act  Federal Insecticide, Fungicide and Rodenticide Act  National Environmental Policy Act  Pollution Prevention Act EPA responsible for implementation

Pearson Education, Inc. © What is the Environmental Protection Agency  Nation’s largest regulatory agency  Works with state agencies to enforce environmental legislation.  Three major eras of EPA’s political life 1970s: organizational growth 1980s: Reagan administration and hostility toward EPA goals; budget cuts 1983 onward: increase in budget and staff; focus on balance between environmental protection and economic costs