Chapter 15

1. Economic and Environmental Policy: Contributing to Prosperity Chapter 15

2. Preamble, U.S. Constitution We the people of the United States, in order to… insure domestic tranquility…

3. Government as Regulator of the Economy • Economy • a system of production & consumption of goods & services • In The Wealth of Nations (1776), Adam Smith made all of the following arguments for laissez-faire capitalism: • The desire for profit is the invisible hand that guides a capitalist system • Private firms should be left alone to make their production and distribution decisions • Firms will try to use as few resources as possible in order to keep their prices low • Certain areas of the economy were better run by government agencies • Karl Marx • the free-market system is exploitive of workers • wages are lower than the value they add to production • proposed a worker-controlled economy

4. Government as Regulator of the Economy • In the relationship today between government and the economy in the United States, the government has an important role in regulating and maintaining the U.S. economy. • policies to promote efficiency & equity • The federal government has assumed a permanent, strong role in the economy, contributing to its stability and efficiency, since the 1930s. • The Tennessee Valley Authority is an electricity industry owned by the United States. • Efficiency • requires that the output of goods and services is the highest possible given the amount of input used to produce them. • Externalities • unpaid costs of production that are incurred by society.

5. Government as Regulator of the Economy • Equity • Fairness of the outcome of an economic transaction to each party • The creation of the Food and Drug Administration and the passage of the Securities and Exchange Act were intended to promote equity in the economy. • example: FDA ruling that a drug is dangerous to use and therefore cannot be marketed • Fair Labor Standards Act of 1938 • established min. wages, max working hours, & constraints on the use of child labor • The Enron bankruptcy case of 2001: • evidence that the free-market has its limits • under-regulation can result in harmful business practices • some top executives engage in unethical practices • workers are vulnerable to unscrupulous executives

7. Government as Protector of the Environment • Environmentalism: • National Parks • Dual use policy • The national parks are subject to a dual use policy • Preservation & recreation • exploitation of the rich natural resources. • The first national park was created at Yellowstone in 1872. • Earth Day • initiated by Senator Gaylord Nelson (D- Wis.) • EPA • The Superfund program is designed to provide funds for cleaning up badly contaminated and polluted sites. • Regulatory activity relating to the environment has actually meant that the environment today is vastly more clean than it was during the 1960s.

8. Government as Protector of the Environment • Kyoto Agreement-greenhouse gas emissions; • It was a multinational effort to reduce carbon emissions. • The United States is the largest single producer of greenhouse emissions in the world, on a per-capita basis. • President George W. Bush rejected the agreement. • The burden of addressing the global warming problem will fall unevenly on nations.

9. Average Temperature of the Earth’s Surface, 1850-2010

11. Government as Promoter of Economic Interests • Government Benefits • Promoting Business • low-interest loans and government-guaranteed loans. • corporate tax breaks. • a national transportation system. • a national education system.

12. Government as Promoter of Economic Interests • Promoting Labor • National Labor Relations Act- 1935 • workers were given the right to bargain collectively. • Over the past forty years, the burden of federal taxation has shifted from corporations to individuals.

13. The Federal Budget Dollar, Fiscal Year 2011

14. Government as Promoter of Economic Interests • Promoting Agriculture • Homestead Act of 1862 • Farm programs to eliminate some farming risk • Federal payments account for more than a fourth of net agricultural income • American farmers among the most heavily subsidized in the world • Crop subsidies • helps to stabilize farm income, which could fluctuate greatly due to market and weather conditions

15. Government as Promoter of Economic Interests • The Federal Trade Commission, Interstate Commerce Commission, and Antitrust Division of the Justice Department are government agencies that regulate business competition. • The Progressive Era of government regulation focused on stopping the unfair business practices of the new monopolies, such as the railroads. • The era of “new social regulation,” • addressed issues such as the environment and worker safety • differed from the previous two eras of regulatory reform: • the aim was to regulate activities of firms of many types • not just those in a particular industry • The U.S. gov. has been substantially more supportive of business than labor • Deregulation- advocates are concerned with efficiency • To reduce overregulation, in 1995 Congress enacted legislation that prohibits administrators in some instances from issuing a regulation unless they can show that its benefits outweigh its costs.

16. Fiscal Policy: Government as Manager of Economy, I • Fiscal policy • a mechanism which the gov. employs to influence the economy • based on taxing and spending - • Deficit Spending • Economic Depression/Recession • If the economic problem is low productivity and high unemployment, the fiscal policy action on the demand side would be to increase spending. • John Maynard Keynes’s demand-side economic theory: • an economic recession can be shortened through government spending programs • Franklin Roosevelt use of government policy as economic stimulus ushered in the modern era of U.S. government fiscal policy.

17. Fiscal Policy: Government as Manager of Economy, I • Budget Deficit- • projected to continue for the next several years • National Debt • About 15%of the annual federal budget is accounted for by the interest paid on the national debt. • Balanced Budget • 1998-reached for the first time in several decades • Budget Surplus • disappeared after 2001 • economic downturn • war on terror • tax cut

19. Fiscal Policy: Government as Manager of Economy, I • Taxing and Spending Policy (continued) • Supply-Side Stimulation • Supply-side economics is based primarily on stimulation of the business (supply) component. • Reagan’s policies • stimulated the national economy • resulted in tax cuts for business & the wealthy • increased the national debt • Capital-Gains Tax • George W. Bush while in office were premised largely on supply-side economics. • Involved the supply component of the supply-demand equation. • stressed the importance of tax cuts for businesses. • stressed the importance of tax cuts for the wealthy. • increased in the size of the national debt. • Inflation • occurs when jobs are plentiful and people have extra money to spend • A fiscal policy solution to inflation would be to increase the tax rate.

20. Fiscal Policy: Government as Manager of Economy, I • The Process and Politics of Fiscal Policy • The Budgetary Process • OMB (Office of Management and Budget) • assists the president in creating the annual budgetary proposal to Congress • President and Congress • Congress relies heavily on the CBO (Congressional Budget Office) • Partisan Differences • Republicans • seek ways to protect or stimulate business activity • Democrats • respond to high unemployment levels with increased gov. spending

22. Monetary Policy: Government as Manager of Economy, II • The Federal Reserve plays a large part in establishing monetary policy. • Monetary policy includes all the following assumptions; • the money supply is the key to sustaining a healthy economy. • too little money in circulation contributes to a slowdown in consumer buying. • too little money in circulation contributes to a slowdown in production. • too much money in circulation contributes to inflation. • Monetary policy differs from fiscal policy in that it can be implemented more quickly than fiscal policy. • Federal Reserve System “The Fed”- • controls the money supply through the following actions; • Reserve Requirements • can raise or lower the cash reserves the member banks must keep in the fed • Interest rates • controls the money supply through the lowering or raising of interest rates

23. Monetary Policy: Government as Manager of Economy, II • Federal Reserve System “The Fed”- • The Politics of the Fed • example of elitist policy at work • A major point of debate surrounding the Federal Reserve’s role in economic policy is the Fed’s political accountability • Members of the Federal Reserve Board are appointed by the president and are not subject to removal. • When the Fed was created in 1913, it had no role in the management of the nation’s economy.