1. 15: Economic and Environmental Policy
Contributing to Prosperity

2. Government as Regulator of the Economy
Economy: a system of production and consumption of goods and services allocated through exchange
The Wealth of Nations (1776), Adam Smith
Advanced the doctrine of laissez-faire economics
Demand guiding supply: the “invisible hand”
Acknowledged that laissez-faire capitalism has limits
Need for regulation of banking, currency, and contracts
Today’s mixed economy

3. Efficiency through Government Intervention
Promoting competition:
Free market argument for economic efficiency
Markets are not always competitive
Price fixing, monopolies etc.
Federal Trade Commission and other agencies provide oversight
Deregulation and underregulation:
Regulation is intended to increase economic efficiency
Overregulation has been curbed with deregulation
Deregulation carried too far: the 2008 mortgage crisis
Dodd-Frank Wall Street Reform and Consumer Protection Act

4. The Subprime Mortgage Crisis
The subprime home mortgage crisis triggered the near collapse of the financial sector in Financial regulations had been reduced to allow banks to grant mortgages to a wider range of borrowers. By 2006, a third of mortgages were being given to people with weak or unconfirmed credit records. When the economy went into a severe downturn, banks found themselves in possession of millions of empty houses.

5. Equity through Government Intervention
Economic equity: a transaction fair to each party
Equity regulation has come in waves
First wave: the Progressive Era, early twentieth century
Sought to stop corrupt business practices
Food and Drug Administration founded, 1907
Second wave: New Deal, 1930s
Sought to restrict destructive business practices
Investor and organized labor protections; minimum wage
Third wave: 1960s and 1970s
Environmental and consumer protections; worker safety
Unsafe products: cigarettes; leaded paint and gasoline

6. Table 15-1 The Main Objectives of Regulatory Policy
Definition
Representative Actions by Government
Efficiency
Fulfillment of society’s needs with as few of its resources as possible. The greater the output for a given input, the greater the efficiency.
Preventing restraint of trade; requiring producers to pay the costs of environmental damage; regulating business only when justified on a cost–benefit basis.
Equity
Ensuring that the outcome of an economic transaction is fair to each party.
Requiring firms to treat workers and consumers fairly.

7. The Politics of Regulatory Policy
Progressive Era and New Deal regulatory agencies were charged with overseeing particular industries
Industry opposition diminished as regulated industries began to influence agency regulators in their favor
Most newer agencies were granted a broader mandate
Regulate an activity across a variety of industries
No single industry can easily influence their decisions
President’s discretion in installing and removing agency heads has led them to be more responsive to the president than to the firms they oversee

8. Government as Protector of the Environment
Externalities: the unpaid costs of business activity
Before the 1960s, the federal government did not require firms to pay to reduce externalities
Silent Spring helped launch the environmental movement and inspired new legislation
1963 Clean Air Act
1965 Water Quality Act

9. Environmental Protection
Environmental Protection Agency (EPA), 1970
Responsible for enforcing environmental law
EPA moved quickly to issue a wide range of regulations
Business criticism and a sluggish economy halted support for more regulation
Today’s emphasis is on enforcement of the laws put in place in the 1960s and 1970s
Regulation has led to dramatic improvements in air and water quality

10. Global Warming and Energy Policy
Global warming receives more attention today than any other environmental issue
Scientific consensus: greenhouse gas emissions are to blame; and the result will be water shortages, rising sea levels, and extreme heat waves
There is a lack of consensus among U.S. policymakers
Most policy efforts have been stymied
Some success: Energy Independence and Security Act
U.S. lags behind in greenhouse gas reduction efforts
No single nation can solve the problem on their own
Complicated by the expansion of developing nations

11. Figure 15-1 Average Temperature of the Earth’s Surface
The average surface temperature of the earth has risen substantially in the past century and has done so at an accelerating pace in the past three decades.
Source: National Weather Service, Great Britain, 2014.

12. Carbon-Fuel Emissions and Global Warming
Data from the European Commission indicate the five leading sources of carbon-fuel emissions account for two-thirds of the world’s total.

13. Government as Promoter of Economic Interests
United States has a long history of promoting its economic interests
Tariff on goods brought into the U.S. on foreign ships, 1789
Importers switched to a greater reliance on American ships
Support continues today for a variety of interests

14. Promoting Business Financial support and tax policy
Government-provided loans
Special tax breaks
Subsidies
Most significant contribution is in the traditional services government provides
Public education
Transportation infrastructure
National defense

15. Promoting Labor National Labor Relations Act of 1935
Protects union activities and workers
Today’s additional support
Minimum wage
Maximum work week
Unemployment benefits
Nondiscriminatory hiring practices
Government support of labor is much less extensive than its support of business

16. Promoting Agriculture
Homestead Act of 1862
Today more than 20 percent of net agricultural income comes in the form of federal payments
American farmers are among the most heavily subsidized
Subsidies are intended to reduce market risks and stabilize farm incomes

17. Fiscal Policy as an Economic Tool
Until the Great Depression, the prevailing economic theory held that the economy was self-regulating
Economy did not recover but continued to contract
FDR used government spending to stimulate the economy
Today, government is expected to intervene when the economy slows
Fiscal policy: the government’s taxing and spending decisions

18. Demand-Side Policy Keynesian economic theory:
Demand-side economics: emphasis on the consumer (demand) component of the supply–demand equation
Increase government spending to alleviate economic depression or recession
Economic depression: an exceptionally steep and sustained decline in the economy
Economic recession: less-severe downturn
Generally preferred by Democratic lawmakers
Can result in higher budget deficits and an increased national debt

19. Figure 15-2 Demand-Side Economic Stimulus
When the economy is sluggish, demand-side economics holds that government should increase its spending in order to boost consumer spending (demand), which will create jobs and stimulate production (supply).

20. Supply-Side Policy
Supply-side economics: emphasis on the production side 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 higher budget deficits and an increased national debt

21. 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).

22. Fiscal Policy: Practical and Political Limits
Both economic models have benefits and drawbacks
Stimulate the economy, but always with a cost
Annual budget deficit: the federal government spends more in a year than it receives in tax and other revenues
Increased national debt: the total the federal government owes to its creditors
Last balanced budget was in the late 1990s
National debt exceeds $19 trillion
Interest payments: 15 percent of the annual budget
Each political party blames the other

23. 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 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.

24. Federal Taxes and Benefits: Winners and Losers
Fiscal policy varies in its effect on the states, as data from the Tax Foundation indicate. This map categorizes the tax-to-spend ratio of each state—that is, the amount of taxes paid compared to the amount taxpayers get back in federal spending in their state.
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25. Monetary Policy as an Economic Tool
Monetary policy: based on adjustments to the amount of money in circulation
Monetarists contend the money supply is the key to a healthy economy
Supply and demand are best controlled by the money supply
Federal Reserve Act of 1913 created the Federal Reserve System (“the Fed”), which controls the money supply

26. The Fed Tools of the Fed: Fed essentially has the power to print money
Control over the money supply
Raise/lower the cash reserve required of member banks
Raise/lower interest rate on member banks
To fight an economic downturn
Decreasing the interest rate on loans to member banks
Lowering the reserve rate
Buying government securities (bonds, notes, etc.)
Quantitative easing: buying assets from member banks
Fed essentially has the power to print money

27. Table 15-2 Monetary Policy: A Summary of the Fed’s Policy Tools
Description
Reserve Rate
Amount of their assets that member banks must keep on hand. The rate can be lowered to increase the money supply or raised to decrease it.
Interest Rate
Interest rate charged to member banks when they borrow from the Fed. The rate can be lowered to increase the money supply or raised to decrease it.
Buying of Securities
By buying securities, the Fed gives money to the seller, which increases the money supply. By selling securities, the Fed receives money from the buyer, which decreases the money supply.

28. The Fed and Control of Inflation
Inflation: increases in the average level of prices of goods and services while wages stagnate
Impact of inflation rate of 13 percent in 1979 was substantial
To fight inflation, the Fed reduces the currency in circulation
Increasing the interest rate on loans to member banks
Raising the reserve rate
Selling government securities (bonds, notes, etc.)

29. The Politics of the Fed
Fed has the ability to react relatively quickly
Created before monetary theory existed, the Fed’s prominent role could not have been predicted
Questions have been raised about the power it wields
Whose interests does the Fed actually serve?
To whom is the Fed accountable?
Fed is part of the new way of thinking about the federal government’s role in the economy that emerged during the Great Depression

30. Critical Thinking
Define economic efficiency and economic equity. Provide an example of a regulatory policy aimed at achieving economic efficiency. Also provide one that has economic equity as its goal.
Contrast demand-side economics and supply-side economics in terms of theory, government policy, and partisan politics.
What are the tools of monetary policy? How are they applied to deal with an economic recession? How are they applied to deal with high inflation?

31. Long image descriptions
Appendix A

32. Federal Taxes and Benefits: Winners and Losers Appendix
The “winners” are Alabama, Alaska, Kentucky, Louisiana, Mississippi, New Mexico, North Dakota, South Dakota, Virginia, and West Virginia. These states receive $1.50 or more in federal spending for every dollar they pay in federal taxes.
States that receive $1.10 to $1.49 for every dollar include Arizona, Arkansas, Hawaii, Idaho, Iowa, Kansas, Maine, Maryland, Missouri, Montana, Nebraska, Oklahoma, South Carolina, Tennessee, and Wyoming.
States that receive 80 cents to $1.09 for every dollar include Colorado, Florida, Georgia, Indiana, Massachusetts, Michigan, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, Texas, Utah, Vermont, Washington, and Wisconsin.
States that receive 79 cents or less for every dollar include California, Connecticut, Delaware, Illinois, Minnesota, Nevada, New Hampshire, New Jersey, and New York.
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