Economic and Environmental Policy: Contributing to Prosperity Chapter 15

Government as Regulator of the Economy Efficiency through government intervention Promoting competition Deregulation and underregulation Equity through government intervention The politics of regulatory policy © 2017, McGraw-Hill Education. All Rights Reserved.

© 2017, McGraw-Hill Education. All Rights Reserved.

Government as Protector of the Environment Conservationism: the older wave Environmentalism: the newer wave Environmental protection Global warming and energy policy © 2017, McGraw-Hill Education. All Rights Reserved.

© 2017, McGraw-Hill Education. All Rights Reserved. The Subprime Mortgage Crisis, “Moral hazard” is a justification for government regulation. Economist Paul Krugman describes moral hazard as the situation where “one person makes the decision about how much risk to take, while someone else bears the cost if things go badly.”   Few developments illustrate the problem more clearly than the subprime home mortgage crisis that triggered the near collapse of the America’s financial sector in 2008. A decade earlier, financial regulations had been reduced to allow banks to grant mortgages to a wider range of borrowers. Banks jumped at the chance. By 2006, as the figure indicates, a third of mortgages were being given to people with weak or unconfirmed credit records. Banks had leveraged their assets at roughly 30 to 1—up from the previous level of 12 to 1—in an effort to make ever larger profits from home lending. It put the entire housing industry at risk if the economy went into a severe downturn and homeowners were unable to keep up with their mortgages, which is exactly what happened in 2007–2008. Banks suddenly found themselves in possession, not of billions of dollars in mortgage payments each month, but of millions of empty houses that people had abandoned. © 2017, McGraw-Hill Education. All Rights Reserved.

© 2017, McGraw-Hill Education. All Rights Reserved.

© 2017, McGraw-Hill Education. All Rights Reserved. Jason Reitman’s Thank You for Smoking is a satirical film about the efforts of big tobacco companies to hook young people on smoking. A leading cause of death, cigarettes were a target of the wave of regulatory reform that began in the late 1960s. After a tough new tobacco law was passed in 2009, the FDA ordered tobacco makers to place graphic warnings, such as a photo of diseased lungs, on cigarette packages, but a federal appellate court ruled in 2012 that the mandate violated tobacco companies’ free-speech rights. What’s your view on this issue? Should the government have the regulatory authority to require firms to warn consumers of dangerous products, even to the extent of requiring these firms to display graphic images? © 2017, McGraw-Hill Education. All Rights Reserved.

© 2017, McGraw-Hill Education. All Rights Reserved.

Government as Promoter of Economic Interests Promoting Business Government promotion of business Government-provided loans Special tax breaks Traditional services: education, transportation, and defense Tax burden has shifted from business to individuals © 2017, McGraw-Hill Education. All Rights Reserved.

© 2017, McGraw-Hill Education. All Rights Reserved. Carbon-Fuel Emissions and Global Warming   The United States is topped only by China as the world’s largest source of carbon-fuel emissions. In fact, as European Commission data indicate, the five leading sources account for two-thirds of the world’s total. Developing nations say the global warming problem was caused largely by decades of pollution by the United States and other fully industrialized nations. Industrialized nations say that China and other developing nations are today the biggest source of the problem. © 2017, McGraw-Hill Education. All Rights Reserved.

Government as Promoter of Economic Interests Promoting labor National Labor Relations Act of 1935 Minimum wage Maximum work week Unemployment benefits Nondiscriminatory hiring practices © 2017, McGraw-Hill Education. All Rights Reserved.

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 © 2017, McGraw-Hill Education. All Rights Reserved.

Fiscal Policy as an Economic Tool Demand-side policy Emphasizes the consumer (demand) component of the supply–demand equation. Government spending to alleviate economic depression or recession Generally preferred by Democratic lawmakers Can result in budget deficit/increased national debt © 2014, McGraw-Hill Education. All Rights Reserved.

Fiscal Policy as an Economic Tool Supply-side policy Emphasizes the business (supply) component of the supply–demand equation Tax breaks for firms and upper-income individuals intended to encourage business investment with resulting increases in employment and income Generally preferred by Republican lawmakers Can result in budget deficit/increased national debt © 2017, McGraw-Hill Education. All Rights Reserved.

Fiscal Policy as an Economic Tool Fiscal policy: practical and political limits Demand-side or supply-side work most effectively with smaller government and balanced budgets Republican and Democratic lawmakers are miles apart on how best to deal with recessionary periods © 2015, McGraw-Hill Education. All Rights Reserved.

© 2017, McGraw-Hill Education. All Rights Reserved. SUPPLY-SIDE POLICY © 2017, McGraw-Hill Education. All Rights Reserved.

© 2017, McGraw-Hill Education. All Rights Reserved.

© 2017, McGraw-Hill Education. All Rights Reserved.

© 2017, McGraw-Hill Education. All Rights Reserved. Federal Taxes and Benefits: Winners and Losers   Fiscal policy (the federal government’s taxing and spending policies) varies in its effect on the states, as data from the Tax Foundation indicate. The biggest loser is New Jersey, whose taxpayers get back in federal spending in their state only $0.61 for every dollar they pay in federal taxes. The biggest winners are New Mexico and Mississippi, whose taxpayers get back $2.03 and $2.02, respectively, in federal spending in their states for every dollar they pay in federal taxes. © 2017, McGraw-Hill Education. All Rights Reserved.

© 2017, McGraw-Hill Education. All Rights Reserved.

© 2017, McGraw-Hill Education. All Rights Reserved. figure 15-3 SUPPLY-SIDE ECONOMIC STIMULUS When the economy is sluggish, supply-side economics holds that government should cut taxes on business and wealthy taxpayers in order to boost investment in production (supply), which will create jobs and increase consumer spending (demand). © 2017, McGraw-Hill Education. All Rights Reserved.

© 2017, McGraw-Hill Education. All Rights Reserved. figure 15-4 INCREASE IN NATIONAL DEBT UNDER RECENT PRESIDENTS The national debt, which is the total cumulative amount the federal government owes to its creditors, jumped under Presidents Bush and Obama, owing to overly steep tax cuts, wars in the Middle East, and the severe economic downturn that began in 2008. The debt burden could limit future administrations’ ability to apply a supply-side or demand-side stimulus in response to a recession. (Source: Federal Reserve.) © 2017, McGraw-Hill Education. All Rights Reserved.

Monetary Policy as an Economic Tool The Fed Control over money supply Raise/lower the cash reserve required of member banks Raise/lower interest rate on member banks Fighting an economic downturn Decreasing interest rate on loans to member banks Lowering reserve rate Buying government securities (bonds, notes, etc.) © 2017, McGraw-Hill Education. All Rights Reserved.

© 2017, McGraw-Hill Education. All Rights Reserved.

© 2017, McGraw-Hill Education. All Rights Reserved.

Monetary Policy as an Economic Tool The Fed and control of inflation Opposite of fighting an economic downturn Increasing interest rate on loans to member banks Raising reserve rate Selling government securities (bonds, notes, etc.) The politics of the Fed © 2017, McGraw-Hill Education. All Rights Reserved.

© 2017, McGraw-Hill Education. All Rights Reserved.