Chapter 18 Economic Policy Pearson Education, Inc. © 2008 American Government: Continuity and Change 9th Edition to accompany Comprehensive, Alternate, Texas, and Essentials Editions O’Connor and Sabato

The Roots of Government: Involvement in the Economy  Nation’s first century: states bore the responsibility of managing economic affair  Nineteenth Century National government has played role in economy for a long time  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

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

The Nineteenth Century  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 Interstate Commerce Act 1887 Sherman Antitrust Act 1890 Establishment of the Department of Agriculture (1862) Homestead Act Morrill Land Grant Act

The Progressive Era  Drew support from middle class  Sought to reform political, economic, and social systems of U.S Pure Food and Drug Act Meat Inspection Act The Federal Reserve Act Federal Trade Commission Act Clayton Act of 1914  Expansion of federal government placed strain on treasury 16 th Amendment: income tax

The Great Depression and the New Deal  During 1920s, conservative administrations reduced the role of the government in restricting private business activities  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” Interventionist State: Alternative to the laissez-faire state, the government takes an active role in guiding and managing the private economy.

Financial Reforms  Bank holiday Only financially sound banks were permitted to reopen.  New banking laws Glass-Steagall Act (1933)  Required the separation of commercial and investment banking and set up of the FDIC Securities Act (1933)  Required that prospective investors be given full and accurate information about the stocks or securities being offered to them 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)

Agriculture  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 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

Labor  National Labor Relations Act of 1935 (Wagner Act) Guaranteed workers’ rights to organize and bargain collectively through unions of their own choosing  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  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

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

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

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

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.

Deregulation  A reduction in market controls in favor of market-based competition  In theory, deregulation would increase market competition and lead to lower prices for consumers.  Ford administration made deregulation a major objective  Senator Ted Kennedy held hearings on airline deregulation  Priority of the Carter Administration as well Airline Deregulation Act of 1978  Other areas Communications Agriculture

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  Inflation A rise in the general price levels of an economy  Recession A short-term decline in the economy that occurs as investment sags, production falls off, and unemployment increases

Monetary Policy: Controlling the Money Supply  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  Federal Reserve: Board of Governors A seven-member board that sets member banks’ reserve requirements, controls the discount rate, and makes other economic decisions

Monetary Policy: Controlling the Money Supply  Reserve requirements Governmental requirements that a portion of member banks’ deposits must be retained to back loans made  Discount rate The rate of interest at which member banks can borrow money from their regional Federal Reserve Bank  Open Market Operations The buying and selling of government securities by the Federal Reserve Bank in the securities market

The FRB and the Executive and Legislative Branches  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

Fiscal Policy: Taxing and Spending  Fiscal policy: 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  Keynesian theory  Discretionary fiscal policy: deliberate decisions by the president and Congress to run budget surpluses or deficits John F. Kennedy first to apply fiscal policy theory  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

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.

The Budgetary Process  Federal government raises money from: Individual income taxes Social insurance Retirement receipts Corporate income taxes make up less than 10 percent of receipts  Most government spending goes toward: National defense Human resources

Congress and the Budgetary Process  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. Budget and Impoundment Control Act of 1974

Major Budget Conflicts  1980s Conflict between Democrats in Congress who favored more domestic spending and less military spending versus President Reagan’s administration who favored less domestic spending and more spending on defense  1990s Gingrich and the Republican Congress clashed with Clinton over which programs to cut in order to balance the budget.

Budget Initiatives of the G.W. Bush Administration  Economic Growth and Tax Relief Reconciliation Act of 2001 Lowered income tax rates Expanded deductions Rebates  2003 economy stagnant; another round of tax cuts  Cost of war  Budget deficit

The Budget Deficit and the Debt  Federal budget deficit The amount by which federal expenditures exceed federal revenues  Gross domestic product (GDP)  The total market value of all goods and services produced in a country during a year  Deficit reduction legislation Gramm-Rudman-Hollings Act of 1985 Budget Enforcement Act of 1990  Budget surplus 1998  Budget deficit by 2003

The Economics of Environmental Regulation  Since the 1970s, Congress has enacted a large volume of pollution control legislation.  Clean Air Act  Clean Water Act  Toxic Substance Control Act  Resource Conservation and Recovery Act  Federal Insecticide, Fungicide, and Rodenticide Act  Implementation of these laws rests primarily with the Environmental Protection Agency.

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

Environmental Protection: Two Examples  Hazardous and Toxic Wastes Toxic Substance Control Act (1976) Resource Conservation and Recovery Act (1976) Comprehensive Environmental Response, Compensation, and Liability Act (1980)  Love Canal  Atmospheric Pollution, Acid Rain, and Climate Change Global warming  Regulation of carbon dioxide pollution: Bush administration Clean Air Act and the Supreme Court  2006 California begins to restrict carbon dioxide emissions within its borders