1. Economic Policy Chapter 18 American Government: Continuity and Change
9th Edition
to accompany Comprehensive, Alternate, Texas, and Essentials Editions
O’Connor and Sabato
Pearson Education, Inc. © 2008 1

2. 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

3. The Nineteenth Century
After Civil War, U.S. experienced rapid economic growth.
Large scale manufacturing enterprises
New problems arose
Business cycle/BOOM&BUST (handout):
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

4. The Nineteenth Century
Laissez-faire (Bovine 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

5. The Progressive Era(Trust Busters=?)
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
16th Amendment: income tax

6. 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.
Administrations of Harding, Coolidge and Hoover 6

8. http://www. fdrlibrary. marist. edu/education/resources/periodictable

9. Financial Reforms Bank holiday New banking laws
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)

10. 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
Paid farmers not to farm
Protected farmers, but many thought it a wasteful program

11. 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

12. 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

13. 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

14. 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 (OSHA)
Environmental Protection Agency (EPA)
All based on commerce clause authority
Set up new regulatory agencies to implement the new regulations
More industries affected by government

15. 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.
Rachel Carson’s Silent Spring
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.
The liberal Johnson and the pragmatic Nixon 15

16. Deregulation
A reduction in market controls in favor of market-based competition -- return of laissez-faire
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

17. Macro- Stabilizing the Economy
Keynesianism!!!!!!
Planned deficit spending (1936)
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

18. Boom
Expansion
Recession
Depression

19. Monetary Policy: Controlling the Money Supply
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
Janet Yellen 2015 Fed. Res. Chair
Very essential definition for AP Govt

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21. 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

22. 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

23. Fiscal Policy: Taxing and Spending
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 (commercial Keynesianism)
Reduced personal and corporate income tax rates
Tax cuts to stimulate the economy
Reagan in 1981 and G.W. Bush in 2001 and 2003

24. 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.

26. 80%+ 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
80%+

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28. Congress and the Budgetary Process [Video]
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
3 committees, oversight, budget, appropriations
Congress and the appropriations committees actually provide the funding needed to carry out programs.
Budget and Impoundment Control Act of 1974

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32. Major Budget Conflicts
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.
2010s - Debt Ceiling Crisis
Debt Ceiling sets limit to money that the government can borrow
Going over the ceiling was inevitable: either
raise the ceiling (democrats)
cut spending (republicans)
Spending was cut → sequester

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35. 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

36. 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

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39. MICRO-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. 39

40. 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

41. 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 1980 YIKERS!!!!!!!
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