Economic and Environmental Policy AP U.S. Government

The Public Policy Process Public policy – a decision by government to follow a course of action designed to produce a particular result. – 3 stages make up the policy process: 1. problem recognition – refers to the emergence of issues. 2. policy formulation – the formulation and enactment of a policy response to the problem. 3. policy implementation – the carrying out of policy.

Gov’t as a regulator of the economy The economy is a system of production and consumption of goods and services that are allocated through exchange. – In The Wealth of Nations (1776), Adam Smith promoted laissez- faire economics, claiming that private firms should be free to make their own production and distribution decisions, without government regulation or control. Laissez-faire economics prevailed in the U.S. until the 1930s, when the Great Depression caused the government to assume a large economic role. Today the U.S. has a mixed economy, in which the economy operates mainly through private transactions, with the government plays a substantial role. – One way the government participates in the economy is through regulation, government restrictions on the practices of private firms.

Efficiency through Gov’t Intervention Economic efficiency occurs when the output of goods and services is the highest possible given the input that is used to produce them. Use as few resources as possible to produce goods and services, keeping prices low and making them attractive to customers. – Markets are not always competitive. The government will intervene when they see fit to promote economic competition. In 1887, Congress enacted the Interstate Commerce Act, creating the Interstate Commerce Commission and regulating railroad practices in order to break monopolies.

– The goal of regulation is to improve efficiency by restoring competition or limiting what producers can charge for goods and services. Economic inefficiency also occurs when businesses fail to pay the full costs of resources used in production. – Externalities – burdens that society incurs when firms fail to pay the full costs of production. Example: pollution that results when corporations dump industrial waste into lakes. – Although regulation is intended to increase economic activity, it can have the opposite effect if it unnecessarily increases costs.

– Overregulation can lead to higher-priced goods and can hinder companies’ ability to compete in markets. – Deregulation, the rescinding of excessive government regulations to improve economic activity, has occurred in response to overregulation. Deregulation of airlines in the 1970s had the desired effect, it increased competition and lowered prices. – Deregulation can be carried too far. Firms, free of regulatory restrictions, can engage in reckless or unethical behavior. – Example: recent mortgage crisis This demonstrates the major issue of business regulation. – Too much regulation can burden firms with excessive implementation costs, while too little regulation can give firms the leeway to engage in risky or unethical behavior.

Equity Through Gov’t Intervention The government intervenes to try to bring equity to the marketplace. – Economic equity occurs when an economic transaction is fair to each party. The Progressive Era was marked by equity efforts, including the creation of the Food and Drug Administration, which helped end the production of unsafe food and drugs. The New Deal Era also provided equity measures, including financial regulation. – The Securities and Exchange Act of 1934 – protected investors from dishonest stock and bond brokers. 1960s and 1970s featured the greatest number of equity reforms. – Ten federal agencies were established to protect consumers. – This regulatory activity produced remarkable improvements in public health.

Politics of Regulatory Policy Economic regulation comes as a result of changes in national conditions, which creates social awareness. – Businesses fought the Progressive Era and New Deal reforms. Their opposition diminished gradually as they adapted to the new regulatory agencies. – These arrangements led to the regulated industry developing a close relationship with the regulatory agency in an effort to serve their interest. – The regulatory reform of the 1960s and 1970s was broader. focus on environmental and consumer protection, and worker safety. – Regulatory agencies had a broad scope, like the EPA. Newer agencies tend to be more responsive to the president, as he nominates and removes heads. – Older agencies are run by a commission, whose members are nominated by the president and serve a fixed term, but can’t be removed.

Gov’t as a Protector of the Environment Dramatic changes in public opinion and public policy relating to the environment have occurred over the last few decades. – Although anti-pollution policies are relatively new, the government has been involved in land conservation for over a century. – The nation’s parks and forests are subject to a “dual use” policy. They are nature preserves and recreation areas, but permits are sold to companies to take some resources from these lands. – Ex. Alaska’s Arctic National Wildlife Refuge (ANWR) – oil companies want to drill, while environmental groups have sought to prohibit drilling. Endangered Species Act of 1973 – requires federal agencies to protect endangered species.

The Environmental Protection Agency (EPA) was created in – The EPA issued regulations so rapidly that businesses couldn’t keep up with them. Costs of complying with regulations slowed the U.S. economy. – In 2001, the Supreme Court determined that public health is the only thing the EPA should focus on. Costs to industry were not to be considered. – Environmental regulation has led to dramatic improvements in air and water quality since the 1960s.

Global Warming and Energy Policy Scientific evidence indicates that emissions from carbon-based fuels are causing a “greenhouse effect.” – The effects of this include the melting of the polar ice caps and a rise in ocean levels. Some Americans consider global warming to be a myth. Over the past century, the earth has warmed considerably and the rate of this increase has accelerated. – Global warming can be slowed only through controlling carbon-based emissions, which is a very costly measure. No single nation can solve this problem alone. The growth of China, India, and other developing nations led to an increase in the use of carbon-based fuels.

– The U.S. lags behind most western countries in reducing greenhouse gas emissions. U.S. policymakers are pursuing alternative energy sources and energy conservation as answers to global warming.

Gov’t as Promoter of Economic Interests Throughout U.S. history, the government has provided many benefits to the nation’s economic interests. – The government promotes business interests through loans and tax breaks. Colleges and universities, which are primarily funded by the government, provide businesses with most of their professional and technical workforce. – The Great Depression brought a change in the government’s role in labor. The National Labor Relations Act of 1935 gave workers the right to bargain collectively and prohibited businesses from interfering in union activity and discriminating against union employees. – The government’s support of labor is less extensive than its support of business.

– Government also provides assistance to agriculture. Billions of dollars are given by the government to assist farmers. Many politicians have attempted to wean government spending on farmers, but it has been difficult to achieve. – Presidents Bush and Obama both attempted to cut subsidies to agriculture, but were overridden by Congress. Federal payments account for ¼ of net agricultural income, making American farmers among the most heavily subsidized in the world.

Fiscal Policy as an Economic Tool Fiscal policy deals with the government’s taxing and spending. The Great Depression of the 1930s shattered the idea that the economy was self-regulating. – The economy did not recover on its own, and today the government is expected to intervene when the economy slips. – Through fiscal policy, the government can stimulate or slow the economy.

The Federal Budget Dollar, 2011 Fiscal Year

Demand-Side Policy Fiscal policy has its origins in the economic theory of John Maynard Keynes. – Keynesian theory holds that economic downturn can be shortened if the government compensates for the slowdown in private spending by increasing its spending. The government will pump money into the economy, which will stimulate consumer spending and hasten economic recovery. Keynesian theory believes that the level of government response should be based on the severity of the downturn. – Keynesian theory is based on demand-side economics.

Demand-side economics emphasizes consumer “demand.” When the economy is sluggish, the government increases its spending, placing more money in consumers’ hands. – The theory believes that having more money in their pockets will lead to consumers spending more, which boost economic activity. – While increased government spending can promote economic activity, it needs to be applied sensibly. Excessive government spending results in a budget deficit. This shortfall increases the national debt. – The government pays interest on the debt, consuming money that would otherwise remain in taxpayer’s pockets. Only rarely in recent decades has the U.S. government had a balanced budget or a budget surplus.

Supply-Side Policy Democratic lawmakers tend to prefer demand-side economics, while Republicans will typically favor a supply-side policy. – Supply-side economics emphasizes the business (supply) side of the supply-demand equation. Example: “Reaganomics,” which used large tax breaks for businesses and wealthy individuals in an effort to stimulate business activity. – These policies were intended to encourage business investment, which would result in employment and income. Supply-side economics was the basis for George W. Bush’s economic initiatives, which were based on reductions in personal income tax and in the capital-gains tax.

– Capital-gains tax – tax that individuals pay on money gained from the sale of a capital asset, like property or stocks. Bush argued that taxes on wealthy were stunting economic growth, so he persuaded Congress to reduce capital gains tax and income tax on wealthy Americans. – Democratic lawmakers have pursued graduated (progressive) personal income taxes. These are taxes on personal income that increase as the income increases. – Higher income level = higher taxes – Supply-side economics also have their costs. Bush’s predictions that revenue would increase proved wrong, and the budget deficit and national debt increased greatly.

Controlling Inflation Another economic problem is inflation, an increase in the average price of goods and services. – When inflation occurs, prices rise but income remains stagnant. – To fight inflation, the government will cut spending or raise taxes. This takes money away from consumers, reducing demand and causing prices to drop. – The main policy tool for addressing inflation is monetary policy.

Monetary Policy as an Economic Tool Monetary policy is a tool of economic management based on manipulation of money in circulation. – Monetarists, economists who emphasize monetary policy, hold that supply and demand are best controlled by manipulating the money supply. Too much money in circulation contributes to inflation. Too little money leads to a slowing economy and rising unemployment. – Control over the money supply rests with the Federal Reserve Board, also called “the Fed.” The Fed regulates all national banks and state banks that meet certain standards and choose to become members of the Federal Reserve System.

– The Fed decided how much money to add or subtract from the economy, seeking a balance that will permit steady growth without increasing inflation. One way the Fed does this is to raise or lower the cash reserve that member banks are required to deposit with the Federal Reserve. – This alters the amount of money the banks can loan out, thus reducing or increasing the amount of money in circulation. Another way the Fed affects the money supply is by lowering or raising the interest rates for banks borrowing money from the Federal Reserve. – In turn, banks alter their interest rates for customers taking loans. – High interest rates discourage borrowing, low interest rates promote it. One advantage of monetary over fiscal policy is that it can be implemented quickly.

The Politics of the Fed The Fed has a significant role in keeping the U.S. economy on a steady course. – When the Fed was created, it had no role in the management of the nation’s economy but now it plays a large role. Concerns with the Fed – Whose interests should the Fed serve? Entire public vs. banking sector – Should the Fed, an unelected body, have so much power? Members of the Fed are appointed by President and approved by Congress, but aren't subject to removal. They serve fixed terms and are relatively insulated from political pressure. Checks on the Fed are weaker than those on other institutions.