Economic and Environmental Policy: Contributing to Prosperity Chapter 15

Government as Regulator of the Economy Efficiency through government intervention Efficiency through government intervention Promoting competition Promoting competition Making business pay for indirect costs Making business pay for indirect costs Deregulation and underregulation Deregulation and underregulation Equity through government intervention Equity through government intervention The politics of regulatory policy The politics of regulatory policy © 2011, The McGraw-Hill Companies, Inc. All Rights Reserved.2

The Main Objectives of Regulatory Policy © 2011, The McGraw-Hill Companies, Inc. All Rights Reserved.3

Opinions on the Environment and Economic Growth © 2011, The McGraw-Hill Companies, Inc. All Rights Reserved.4

Government as Protector of the Environment Conservationism: the older wave Conservationism: the older wave Environmentalism: the newer wave Environmentalism: the newer wave Environmental protection Environmental protection Global warming and energy policy Global warming and energy policy © 2011, The McGraw-Hill Companies, Inc. All Rights Reserved.5

Average Temperature of the Earth’s Surface, © 2011, The McGraw-Hill Companies, Inc. All Rights Reserved.6

Government as Promoter of Economic Interests Promoting business Promoting business Government promotion of business Government promotion of business Government-provided loans Government-provided loans Special tax breaks Special tax breaks Traditional services: education, transportation, and defense Traditional services: education, transportation, and defense Tax burden has shifted from business to individuals Tax burden has shifted from business to individuals © 2011, The McGraw-Hill Companies, Inc. All Rights Reserved.7

Government as Promoter of Economic Interests Promoting labor Promoting labor National Labor Relations Act of 1935 National Labor Relations Act of 1935 Minimum wage Minimum wage Maximum work week Maximum work week Unemployment benefits Unemployment benefits Nondiscriminatory hiring practices Nondiscriminatory hiring practices © 2011, The McGraw-Hill Companies, Inc. All Rights Reserved.8

Government as Promoter of Economic Interests Promoting agriculture Promoting agriculture Homestead Act of 1862 Homestead Act of 1862 Farm programs to eliminate some farming risk Farm programs to eliminate some farming risk Federal payments account for more than a fourth of net agricultural income Federal payments account for more than a fourth of net agricultural income American farmers among the most heavily subsidized in the world American farmers among the most heavily subsidized in the world © 2011, The McGraw-Hill Companies, Inc. All Rights Reserved.9

Fiscal Policy as an Economic Tool Demand-side policy Demand-side policy John Maynard Keynes John Maynard Keynes Government spending to alleviate economic depression or recession Government spending to alleviate economic depression or recession Can result in budget deficit and increased national debt Can result in budget deficit and increased national debt Generally preferred by Democratic lawmakers Generally preferred by Democratic lawmakers © 2011, The McGraw-Hill Companies, Inc. All Rights Reserved.10

Fiscal Policy: A Summary of the Government’s Role © 2011, The McGraw-Hill Companies, Inc. All Rights Reserved.11

The Federal Budget Dollar, Fiscal Year 2011 © 2011, The McGraw-Hill Companies, Inc. All Rights Reserved.12

The Federal Budget Deficit/Surplus © 2011, The McGraw-Hill Companies, Inc. All Rights Reserved.13

Fiscal Policy as an Economic Tool Supply-side policy Supply-side policy Emphasizes the business (supply) component of the supply-demand equation Emphasizes the business (supply) component of the supply-demand equation President Reagan’s and President George W. Bush’s response to economic downturn President Reagan’s and President George W. Bush’s response to economic downturn Can also increase deficit Can also increase deficit Generally preferred by Republicans Generally preferred by Republicans Controlling inflation Controlling inflation © 2011, The McGraw-Hill Companies, Inc. All Rights Reserved.14

The Annual Rate of Inflation, © 2011, The McGraw-Hill Companies, Inc. All Rights Reserved.15

Monetary Policy as an Economic Tool The Fed The Fed Control over money supply Control over money supply Raise or lower the cash reserve that member banks are required to deposit with the Federal Reserve Raise or lower the cash reserve that member banks are required to deposit with the Federal Reserve Raise or lower interest rate on member banks Raise or lower interest rate on member banks The politics of the Fed The politics of the Fed © 2011, The McGraw-Hill Companies, Inc. All Rights Reserved.16

Monetary Policy: A Summary of the Fed’s Role © 2011, The McGraw-Hill Companies, Inc. All Rights Reserved.17