1. 17 Economic Policy Kevin Dietsch/ UPI/Newscom
What role does the government play in stimulating the economy? Congressional Budget Office Director Douglas Elmendorf testifies that projected tax hikes and spending cuts for 2013 could put the United States back into recession.
Kevin Dietsch/ UPI/Newscom

2. 17
Learning Objectives
Trace the evolution of economic policy in the United States.
17.1
Assess the impact of the budget process on fiscal policy.
In this chapter, we'll learn about economic policy, what is it is and how it affects the budget. We'll examine the sources of government revenue and how this revenue is spent. We will conclude by looking at the roles that fiscal, monetary, and income policies play during periods of recession and recovery.
17.2

3. 17
Learning Objectives
Analyze the effect of the Federal Reserve System on monetary policy.
17.3
Describe the evolution of income security policy in the United States.
17.4

4. 17
Learning Objectives
Evaluate the role of fiscal, monetary, and income security policy in the economic recession and recovery.
17.5

5. Roots of Economic Policy
17.1
Roots of Economic Policy
The Nineteenth Century
The Progressive Era
The Great Depression and the New Deal
Deregulation
For much of our history, the federal government was not deeply involved with the economy, though it did collect tariffs, fund public improvements, and encourage private development. That changed, however, during the Progressive and New Deal eras, when the federal government became more involved with economic regulation. More recently, it has been busy with financial regulation and deregulation. In this section we will look at the roots of our economic policy and the different directions it has taken.

6. The Nineteenth Century
17.1
The Nineteenth Century
Laissez-faire
"To leave alone" economic philosophy
Industrialization
Increased accidents and disease
Disrupted the natural business cycles
Interstate Commerce Act (1887)
Intended to rein in the railroads
Sherman Anti-Trust Act of 1890
Prohibited restraints of trade
Prior to industrialization, the federal government adhered to a simple form of laissez-faire when it came to economic policy. At the time, people believed the government should meddle as little as possible in the economy, and should restrict itself to maintaining general order.
That changed when industrialization brought increased accidents and disease, and huge corporations exploited workers and the economy. Industrialization worsened the effects of the natural business cycle of growth followed by recession.
The first time the government stepped in to regulate on a large scale involved the railroads. The Interstate Commerce Act, passed in 1887, required railroads to be "just and reasonable." This was followed by the Sherman Anti-Trust Act of 1890, which prohibited price-fixing, bid-rigging and monopolies.

7. The Progressive Era 17.1 Drew support from the middle class
Sought to reform political, economic and social systems
Pure Food and Drug Act; Meat Inspection Act (1906)
Beginning of consumer protections
Banking and business regulation
Federal Reserve Act (1913)
Sixteenth Amendment
Collection of federal income taxes
The Progressive movement, which drew support from the middle class, sought to reform the political, economic and social systems in the United States. For example, the Pure Food and Drug Act and the Meat Inspection Act were passed in They represented the beginning of consumer protections.
Regulation of the financial and business sectors soon followed. Congress passed the Federal Reserve Act in 1913 to regulate the national banking system and provide for more flexibility in the money supply. Flexibility was needed to meet commercial needs and prevent financial panic attacks.
But regulation costs money, and by 1913 Congress was searching for ways to raise revenue. The Sixteenth Amendment was passed in 1913 to allow for collection of the federal personal income tax.

8. How Did the Progressive Era Change Government Regulation of the Economy?
17.1
During this era, the national government began to pass workplace and product safety measures such as the Meat Inspection Act to prevent the public from eating tainted beef.
Library Of Congress Prints and Photographs Division [LC-USZ ]

9. Great Depression and the New Deal
17.1
Great Depression and the New Deal
Financial reforms
Glass-Steagall Act; created Federal Deposit Insurance Corporation (FDIC)
Agricultural
Granted subsidies to farmers
As you may recall, the American economy grew at a rapid rate until the stock market crash. During the Great Depression, the federal government added layers of regulation to the economy. Some of the financial reforms included the Glass-Steagall Act, which created the Federal Deposit Insurance Corporation, or FDIC, which guaranteed deposits.
Other financial regulations included the Securities Act and the Securities Exchange Act, which set up the independent Securities Exchange Commission and required that prospective investors be accurately informed before investing.
In the agricultural industry, the government provided additional regulation through the Agricultural Adjustment Act, which granted subsidies to farmers. Also during this time, the National Labor Relations Act, also known as the Wagner Act, sought to regulate industry by guaranteeing workers the right to unionize. The government also expanded regulations in the communications, civil aviation and trucking industries.

10. Great Depression and the New Deal
17.1
Great Depression and the New Deal
Labor
Guaranteed workers' right to unionize
Industry Regulations
Expanded regulations for communications, civil aviation, trucking industries
As you may recall, the American economy grew at a rapid rate until the stock market crash. During the Great Depression, the federal government added layers of regulation to the economy. Some of the financial reforms included the Glass-Steagall Act, which created the Federal Deposit Insurance Corporation, or FDIC, which guaranteed deposits.
Other financial regulations included the Securities Act and the Securities Exchange Act, which set up the independent Securities Exchange Commission and required that prospective investors be accurately informed before investing.
In the agricultural industry, the government provided additional regulation through the Agricultural Adjustment Act, which granted subsidies to farmers. Also during this time, the National Labor Relations Act, also known as the Wagner Act, sought to regulate industry by guaranteeing workers the right to unionize. The government also expanded regulations in the communications, civil aviation and trucking industries.

11. Deregulation 17.1 President Gerald Ford
Deregulation a major part of his administration
Airline Deregulation Act of 1978
Eliminated economic regulation of airlines
Ultimately resulted in less competition
Agriculture
Congress reduced, then replaced, subsidies
Financial Sector
Deregulation in the 1990s helped lead to subprime mortgage crisis
After decades of increasing regulations, political leaders began calling for deregulation of industries. Deregulation involves reducing government control in favor of market-based competition.
One of the first industries to undergo deregulation was the airline industry. The Airline Deregulation Act of 1978 eliminated all economic regulations of the industry. But deregulation actually reduced the number of carriers and competition, which was not what people had expected.
Despite this, Congress also sought to deregulate agriculture and limit farm subsidies in But in 2002 those subsidies were put back in place.
We now know that the deregulation of the financial and banking sectors in the 1990s played a major role in the subprime mortgage crisis that began in 2007.

12. 17.1 How Do Agriculture Subsidies Regulate the Economy?
Subsidies are government funds paid to farmers to grow—or not grow—particular crops. They have come under fire in recent years because they disproportionately benefit the wealthiest farmers.
Creators Syndicate

13. 17.1
17.1 This piece of legislation sought to regulate the banking industry and respond to financial panics.
The Securities Act
The Glass-Steagall Act
The Wagner Act
None of the above
We have discussed quite a few laws passed to regulate various industries. Do you remember which did what?

14. 17.1
17.1 This piece of legislation sought to regulate the banking industry and respond to financial panics.
The Securities Act
The Glass-Steagall Act
The Wagner Act
None of the above
The Glass-Steagall Act set up the Federal Deposit Insurance Corporation and created other panic-reducing measures.

15. Fiscal Policy 17.2 The Foundations of Fiscal Policy
Responding to Recession
The Debt Ceiling
Fiscal Policy in a Global Context
Put simply, fiscal policy is the deliberate use of the national government's taxing and spending policies to maintain economic stability. These tools are used as needed to expand or contract the economy.
Economists have long known that government spending can stimulate the economy, but it can also lead to deficits, which can have long-term consequences. In this section we will look at the foundations of American fiscal policy and how it has evolved.

16. The Foundations of Fiscal Policy
17.2
The Foundations of Fiscal Policy
British economist John Maynard Keynes
Argued that government could avoid recession by stimulating demand, even if it caused deficits
Revenue Act of 1964
Reduced personal and corporate income taxes
Expanded the economy
Led to 4% unemployment
Budget Deficits
Long term can lead to inflation
In the 1930s, British economist John Maynard Keynes suggested that governments could prevent the worst of recession by stimulating overall demand, even if it meant running a temporary deficit. This was a major departure from the laissez-faire thinking that had dominated economic policy up to this point.
Keynesian economists argued that increasing demand would increase employment and stimulate a cycle of economic growth. But in America, conservatives objected to running up deficits, even to boost the economy. A compromised was reached in the form of the Revenue Act of 1964, which increased demand by cutting personal and corporate taxes rather than by increasing government spending.
In fact, the legislation did expand the economy and even led to just 4 percent unemployment. But the deficit did increase, and grew even larger when President Ronald Reagan cut taxes even more. Economists warn that budget deficits may be fine in the short term, but in the long run can lead to harmful inflation.

17. 17.2
FIGURE How Does the Federal Government Raise and Spend Money?
The federal government budget outlines how taxpayer revenues are raised and spent, summarizing the priorities of federal government policy making.
Source: United States Budget, Fiscal Year 2011,

18. Responding to Recession
17.2
Responding to Recession
Economic Slowdown of 2008
$168 billion stimulus package
$700 billion financial crisis bailout package (Emergency Economic Stabilization Act)
Troubled Assets Relief Program (TARP)
American Recovery and Reinvestment Act
It may be too soon to call the economic slowdown that began in 2008 history. But when it began, government responded in true Keynesian fashion: it created demand. First came the $168 billion stimulus package that included tax rebates that the government hoped middle class people would use to spend money and boost the economy. But that wasn't enough, especially with the subprime mortgage industry in crisis.
Another $700 billion went to bailout that industry, and the Troubled Assets Relief Program, or TARP, sought to buy up the assets that had led to the crisis. Even that wasn't enough; although TARP had helped stabilize the banks, individuals were still hurting.
In 2009, Congress passed the $787 billion American Recovery and Reinvestment Act, which authorized spending on a variety of tax cuts and public works programs to stimulate the economy and create jobs. But many of those gains were negated by cuts in government spending at the state and local levels.

19. 17.2 FIGURE 17.2 Where Did the Economic Stimulus Funds Go?
The American Recovery and Reinvestment Act allocated almost $800 billion to aid in the economic recovery. The largest proportion of these funds—more than one-third—went to tax cuts.
Source: U.S. Government,

20. The Debt Ceiling 17.2 National Debt Debt Ceiling
Effect of Bush Administration tax cut, wars in Iraq and Afghanistan, and bailout bills
National debt reached $14.2 trillion in 2011
Debt Ceiling
Similar to a credit card limit
Congress must vote to spend above it.
Budget Control Act of 2011
Authorized a series of automatic debt ceiling increases
Triggered automatic spending cuts in 2013
Debate over the debt ceiling raged in Congress had merely increased it as needed over the years. But the cumulative effect of Bush-era tax cuts, wars in Iraq and Afghanistan, and various bailout packages had led to a national debt that reached $14.2 trillion in That was the limit of the debt ceiling, which is similar to a credit card limit except Congress can vote to raise the ceiling as needed to pay for Medicare obligations or make interest payments on the debt.
But this time, conservatives in Congress refused to raise the ceiling without significant cuts in spending. Government reached a standstill, until compromise was reached in the form of the Budget Control Act of This authorized a series of debt ceiling increases, but also required extensive spending cuts in 2013 that Congress acted to stop late on New Year's Eve, after partisan gridlock had stalled compromise for weeks. By 2014, the national debt increased to $18.2 trillion, over 100 percent of GDP. The federal government budget included a projected $744 billion deficit for fiscal year 2014.

21. Fiscal Policy in a Global Context
17.2
Fiscal Policy in a Global Context
Globalization benefits
Seen in greater movement of goods, services and capital across borders
Increases variety of goods to consumers, lowers costs and raises standard of living
Globalization concerns
Greater risk that financial collapse in one country can spread to others
Examples: Greece and Spain
Our fiscal policy doesn't affect us alone. Increasing globalization means that the fiscal policies of one country can affect others. We have seen increasing globalization in recent years in the form of greater movement of goods, services and capital across borders, and this has led to greater variety of goods for consumers, lower costs and increased standards of living in developing countries.
Increased globalization also carries risks. As we saw in 2012 with Greece and Spain, economic downturn in one country can significantly affect countries that are connected through globalization. One way to measure this increasing interdependence is through regional share of gross domestic product, or GDP. In 2012, the United States, the European Union and Asia each represented about 25 percent of the world's GDP. In contrast, Latin America and the Middle East each held another 3 to 7 percent.

22. Fiscal Policy in a Global Context
17.2
Fiscal Policy in a Global Context
Increasing interdependence
Measured by regional share of gross domestic product (GDP)
Our fiscal policy doesn't affect us alone. Increasing globalization means that the fiscal policies of one country can affect others. We have seen increasing globalization in recent years in the form of greater movement of goods, services and capital across borders, and this has led to greater variety of goods for consumers, lower costs and increased standards of living in developing countries.
Increased globalization also carries risks. As we saw in 2012 with Greece and Spain, economic downturn in one country can significantly affect countries that are connected through globalization. One way to measure this increasing interdependence is through regional share of gross domestic product, or GDP. In 2012, the United States, the European Union and Asia each represented about 25 percent of the world's GDP. In contrast, Latin America and the Middle East each held another 3 to 7 percent.

23. 17.2 How Has Economic Interdependence Altered the American Economy?
The cheap cost of labor abroad has led many Americans to lose their jobs, particularly at manufacturing plants. Here, workers at a factory in Pakistan assemble soccer balls.
RAHAT DAR/EPA/Landov

24. 17.2 Which recession-response
program bought up assets?
TARP
Emergency Economic Stabilization Act
American Recovery and Reinvestment Act
None of the above
Let's see what you have learned about the federal government's response to the recent economic recession.

25. 17.2 Which recession-response
program bought up assets?
TARP
Emergency Economic Stabilization Act
American Recovery and Reinvestment Act
None of the above
As you'll recall from this section, TARP stands for Troubled Assets Relief Program.