Presentation by Eric Miller, Blinn College, Bryan, Texas.

CHAPTER 15Economic and Environmental Policy:

Contributing to Prosperity

Preamble, U.S. Constitution

We the people of the United States, in order to… insure domestic

tranquility…

Government as Regulator of the Economy

Economy a system of production & consumption of goods & services

In The Wealth of Nations (1776), Adam Smith made all of the following arguments for laissez-faire capitalism: The desire for profit is the invisible hand that guides a capitalist system Private firms should be left alone to make their production and

distribution decisions Firms will try to use as few resources as possible in order to keep their

prices low Certain areas of the economy were better run by government agencies

Karl Marx the free-market system is exploitive of workers wages are lower than the value they add to production proposed a worker-controlled economy

Government as Regulator of the Economy In the relationship today between government and the

economy in the United States, the government has an important role in regulating and maintaining the U.S. economy. policies to promote efficiency & equity The federal government has assumed a permanent, strong

role in the economy, contributing to its stability and efficiency, since the 1930s.○ The Tennessee Valley Authority is an electricity industry owned by the United States.

Efficiency requires that the output of goods and services is the highest

possible given the amount of input used to produce them. Externalities

○ unpaid costs of production that are incurred by society.

Government as Regulator of the Economy Equity

Fairness of the outcome of an economic transaction to each party○ The creation of the Food and Drug Administration and the passage of

the Securities and Exchange Act were intended to promote equity in the economy. example: FDA ruling that a drug is dangerous to use and therefore cannot be

marketed

Fair Labor Standards Act of 1938○ established min. wages, max working hours, & constraints on the use

of child labor

The Enron bankruptcy case of 2001:○ evidence that the free-market has its limits

under-regulation can result in harmful business practices some top executives engage in unethical practices workers are vulnerable to unscrupulous executives

Government as Protector of the Environment Environmentalism:

National Parks○ Dual use policy

The national parks are subject to a dual use policy - Preservation & recreation- exploitation of the rich natural resources.

○ The first national park was created at Yellowstone in 1872.

Earth Day○ initiated by Senator Gaylord Nelson (D- Wis.)

EPA The Superfund program is designed to provide funds for cleaning up badly

contaminated and polluted sites.

Regulatory activity relating to the environment has actually meant that the

environment today is vastly more clean than it was during the 1960s.

Government as Protector of the Environment Kyoto Agreement-greenhouse gas

emissions;It was a multinational effort to reduce carbon

emissions.The United States is the largest single

producer of greenhouse emissions in the world, on a per-capita basis.

President George W. Bush rejected the agreement.

The burden of addressing the global warming problem will fall unevenly on nations.

Average Temperature of the Earth’s Surface, 1850-2010

Government as Promoter of Economic Interests Government Benefits

Promoting Business○ low-interest loans and government-guaranteed

loans.○ corporate tax breaks.○ a national transportation system.○ a national education system.

Government as Promoter of Economic Interests Promoting Labor

National Labor Relations Act- 1935○ workers were given the right to bargain collectively.

Over the past forty years, the burden of federal taxation has shifted from corporations to individuals.

The Federal Budget Dollar, Fiscal Year 2011

Government as Promoter of Economic Interests Promoting Agriculture

Homestead Act of 1862Farm programs to eliminate some farming riskFederal payments account for more than a fourth of

net agricultural incomeAmerican farmers among the most heavily

subsidized in the world Crop subsidies

○ helps to stabilize farm income, which could fluctuate greatly due to market and weather conditions

Government as Promoter of Economic Interests The Federal Trade Commission, Interstate Commerce Commission, and

Antitrust Division of the Justice Department are government agencies that

regulate business competition.

The Progressive Era of government regulation focused on stopping the unfair

business practices of the new monopolies, such as the railroads.

The era of “new social regulation,” addressed issues such as the environment and worker safety differed from the previous two eras of regulatory reform:

○ the aim was to regulate activities of firms of many types○ not just those in a particular industry

The U.S. gov. has been substantially more supportive of business than labor

Deregulation- advocates are concerned with efficiency To reduce overregulation, in 1995 Congress enacted legislation that prohibits

administrators in some instances from issuing a regulation unless they can show that its

benefits outweigh its costs.

Fiscal Policy: Government as Manager of Economy, I Fiscal policy

a mechanism which the gov. employs to influence the economy

based on taxing and spending -○ Deficit Spending○ Economic Depression/Recession

If the economic problem is low productivity and high unemployment, the fiscal policy action on the demand side would be to increase spending.

John Maynard Keynes’s demand-side economic theory:○ an economic recession can be shortened through

government spending programs Franklin Roosevelt use of government policy as economic stimulus ushered in the

modern era of U.S. government fiscal policy.

Budget Deficit-○ projected to continue for the next several years

National Debt○ About 15%of the annual federal budget is accounted for

by the interest paid on the national debt.Balanced Budget

○ 1998-reached for the first time in several decadesBudget Surplus

○ disappeared after 2001economic downturnwar on terror tax cut

Fiscal Policy: Government as Manager of Economy, I

Fiscal Policy: Government as Manager of Economy, I Taxing and Spending Policy (continued)

Supply-Side Stimulation○ Supply-side economics is based primarily on stimulation of the business (supply)

component. Reagan’s policies

○ stimulated the national economy○ resulted in tax cuts for business & the wealthy○ increased the national debt

Capital-Gains Tax George W. Bush while in office were premised largely on supply-side economics.

○ Involved the supply component of the supply-demand equation.○ stressed the importance of tax cuts for businesses.○ stressed the importance of tax cuts for the wealthy. ○ increased in the size of the national debt.

Inflation○ occurs when jobs are plentiful and people have extra money to spend

A fiscal policy solution to inflation would be to increase the tax rate.

Fiscal Policy: Government as Manager of Economy, I The Process and Politics of Fiscal Policy

The Budgetary Process○ OMB (Office of Management and Budget)

assists the president in creating the annual budgetary proposal to Congress

○ President and CongressCongress relies heavily on the CBO (Congressional

Budget Office)Partisan Differences

○ Republicansseek ways to protect or stimulate business activity

○ Democrats respond to high unemployment levels with increased gov.

spending

Monetary Policy: Government as Manager of Economy, II

The Federal Reserve plays a large part in establishing monetary policy.Monetary policy includes all the following assumptions;

○ the money supply is the key to sustaining a healthy economy.○ too little money in circulation contributes to a slowdown in consumer buying.○ too little money in circulation contributes to a slowdown in production.○ too much money in circulation contributes to inflation.

Monetary policy differs from fiscal policy in that it can be implemented more quickly than fiscal policy.

Federal Reserve System “The Fed”- controls the money supply through the following actions;

○ Reserve Requirements can raise or lower the cash reserves the member banks must keep in the fed

○ Interest rates controls the money supply through the lowering or raising of interest rates

Monetary Policy: Government as Manager of Economy, II Federal Reserve System “The Fed”-

The Politics of the Fed○ example of elitist policy at work○ A major point of debate surrounding the Federal

Reserve’s role in economic policy is the Fed’s political accountabilityMembers of the Federal Reserve Board are appointed by

the president and are not subject to removal.

○ When the Fed was created in 1913, it had no role in the management of the nation’s economy.