1. Making Economic and Regulatory Policy
Chapter 18

2. Federal Grants to States
Categorical Grants – Congress appropriates funds for specific purposes such as for building highways
Subject to detailed federal conditions
Project Grants – Congress appropriates a certain sum, which is allocated to states based on applications from those who wish to participate
Block grants – broad grants to states for prescribed activities—welfare, education, social services, etc.—with only a few strings attached
Gives states great discretion in spending and policy-making

3. Policy Making Alliances
Iron Triangles
Federal department or agency
House and/or Senate Authorizing Committee
Interest groups
Issue Networks
Federal department or agency
= small, highly specialized interest groups
House and/or Senate Authorizing Committee

4. Economic Policy Fiscal Policy
The taxing, spending, and borrowing activities of the national government.
Congress controls fiscal policy.
Monetary Policy
Decisions regarding the supply of money in the economy, including private borrowing, interest rates, and banking activity.
The Fed controls monetary policy.

5. Fiscal Policy: The Federal Budget

6. Politics and Economics
Deficit: when expenditures exceed revenues
National debt: the total amount of money the federal government has borrowed to finance deficit spending

7. Fiscal Policy: The Federal Deficit

8. History of the National Debt
Economic Reports of the President, various years.

10. Fiscal Policy: The Budget Process

11. Taxing Policy Throughout the World

12. Where the Money Comes From

13. Where the Money Goes

14. When Will The Crunch Come
When Will The Crunch Come? Projections of the Growth in Federal Spending
Congressional Budget Office, The Economic and Budget Outlook: An Update (July 1, 1999).

15. Federal Taxes on Income, Top Percentage Rates, 1913-2002
Insert Figure 18.6 (formerly figure 16.5 in 9e)
Updated from Congressional Quarterly Weekly Report (September 18, 1993), 2488.

16. The Federal Reserve System
In order to avoid politically-derived inflation, most democracies have taken the responsibility of monetary policy out of the direct control of politicians
Between the two world wars, inflation in Germany reached such levels that the nation’s currency was often weighed, rather than counted, in order to speed transactions

17. Monetary Policy: The Federal Reserve Board
The Federal Reserve System is designed to be politically neutral
Federal Open market Committee (FOMC) is the Fed’s policymaking arm

18. The Fed and Monetary Policy
The goal of the FED is to maximize GDP and employment, while minimizing inflation.

19. The “Misery Index” is the sum of the unemployment and inflation rates
The Fed in Action
The “Misery Index” is the sum of the unemployment and inflation rates

20. Ideology and the Economy
Ideology plays large role in shaping policy choices
Democrats tend to want to reduce unemployment
Republicans tend to want to reduce inflation

21. Government and Economic Policy
Should the government stimulate the economy?
Laissez-faire economics
Theory that opposes governmental interference in economic affairs beyond what is necessary to protect life and property
Keynesian economics
Economic theory based on the principles of John Maynard Keynes stating that government spending should increase during business slumps and be curbed during booms
(AKA: Demand-Side Economics)

22. Supply-Side Tax Cuts
There is a need for less government interference in the market and lower taxes
Lower taxes would create incentives for investment
Greater economic productivity will then produce more tax revenue

23. Reaganomics
Combination of monetarism, supply-side tax cuts, and domestic budget cutting
Military spending increased sharply
Money supply controlled—cut inflation but allowed interest rates to rise

24. Reaganomics
Personal income taxes were cut, but Social Security taxes were increased
Large deficits were incurred, dramatically increasing size of national debt
Stimulated economy—unemployment decreased, business activity increased

25. The Fed and Democratic Ideals
In a democracy, is it wise to give unelected officials significant power over economic policy and other matters?
Federal Reserve Chairman Ben Bernanke

26. Promoting International Trade
GATT
An international trade organization that seeks to encourage free trade by lowering tariffs and other trade restrictions
World Trade Organization International organization derived from the General Agreement on Tariffs and Trade (GATT) that promotes free trade around the world
North American Free Trade Agreement (NAFTA) Agreement signed by the United States, Canada and Mexico in 1992 to form the largest free trade zone in the world

27. Promoting International Trade
World Trade Organization meetings have often touched off vehement protest from activists who believe that free trade represses poor nations

28. Regulating Business Antitrust Legislation Monopoly
Domination of the industry by a single company; also the company that dominates the industry
Antitrust Legislation
Sherman Antitrust Act (1890)
Clayton Act (1914)

29. Industrial Safety and Occupational Health
Regulating Labor
Federal regulations protect workers in the following areas, among others:
Public Contracts
Industrial Safety and Occupational Health
Wages and Hours
Child Labor

30. Other Types of Regulation
Regulating markets
Regulating and protecting the environment
Protecting the global environment

31. The Various Methods of Regulation

32. The Deregulation Movement
Transportation
Telecommunications
Telecommunications Act of 1996
The “V-chip” requirement
Regulation of internet content
In 1978 the Civil Aeronautics Board was abolished and aviation deregulated
Trucking and railroads have also been granted more freedom in recent decades

33. The Cost of Regulation Regulation disrupts the operation of the market
Regulation may discourage competition
Regulation may discourage technological development
Regulation increases costs to industry and consumers