Economic Policy Chapter 18

Roots of Economic Policy The early years of our nation were marked by a laissez faire economic policy. Interstate Commerce Commission (ICC)- 1 st attempt at gov’t regulation in To Learning Objectives

Consumer Protection (Progressive Era) Sherman Anti-Trust Act of 1890 Meat Inspection Act (1906) Federal Reserve Act (1913)

Great Depression/ New Deal The economy collapsed in 1929 FDR’s New Deal created programs that were supposed to safeguard our economy. Laissez faire replaced with interventionism- gov’t having an active role in the economy

Government Regulation The decades of the 1930s thru the 1970s were marked by economic and social regulation. Social activism combined with grandstanding politicians led the way for government regulation.

Deregulation A reduction in market controls in favor of market based competition began in the mid 1970s. Starting with Jimmy Carter, most presidents have continued to deregulate industries with mixed results.

Fiscal Policy Congress controls Fiscal policy- government expenditures, revenues, and debt It is conducted through the federal budget process.

The Budget The Budget Account Act of 1921: This created the OMB and delegated budget power to the President. The Congressional Budget Act of 1974: This created new procedures for the budget. First, the President submits the budget. Then, the House and Senate budget committees analyze the budget with the Congressional Budget Office (CBO). 2/3 of spending is on entitlements: A government program that guarantees and provides benefits to a particular group. This is uncontrollable spending.

Budget The primary purpose of the budget is to fund government programs. Most spending goes toward national defense and human resource spending. Mandatory vs discretionary spending

Entitlements Entitlement programs are benefits paid to American citizens who meet criteria set by the government. Examples: social security, medicaid, food stamps, etc.

Social Security Insurance for the unemployed and elderly –insurance program- created for the unemployed and the elderly Everybody would be taxed and all would be eligible for insurance –Assistance program- created for the blind, dependent children, and aged Only poor ( by the means test) are considered for assistance

Problems with social security 1) baby boomers reaching retirement age 2) not as many workers as recipients 3) payouts not progressing with cost of living increases Surplus projected to disappear in next few years.

Deficits/Debt Deficit- expenditures > revenues Debt- collection of yearly deficits Most our our debt is owned by China

Monetary Policy The Federal Reserve System (“the Fed”) manages monetary policy They control the money supply and interest rates.

Machinery of Economic Policy Making There is fragmented policy-making that is not under the presidents full control because within the executive branch, numerous organizations influence policy. Congress is most important in economic policy making. It approves all taxes and most expenditures. It consents to wage and price controls. It can influence the Fed by threatening to reduce it powers.

Path to Reducing Spending The Gramm-Rudman Balanced Budget Act of 1985 was unsuccessful. New Strategy of 1990: –If entitlements increase, then taxes have to increase

Levying Taxes Policies on Taxing: The tax burden is too low on citizens, however, there are loopholes for industry (client politics). The rise of Income tax: The 16 th amendment (1913) Usually, taxes increase during wartime and decrease during peace.