chapter 18 economic policy pearson education, inc. © 2006 american government 2006 edition (to...
TRANSCRIPT
Chapter 18
Economic Policy
Pearson Education, Inc. © 2006
American Government2006 Edition(to accompany Comprehensive, Alternate, Texas, and Essentials Editions)
O’Connor and Sabato
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The Roots of Government: Involvement in the Economy During the nation’s first century states bore
the responsibility of managing economic affair.
Nineteenth Century Government long role in economy 1. What were the main areas in which the
government influenced Economic Policy? 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.
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The Nineteenth Century After Civil War, U.S. experienced rapid
economic growth. Large scale manufacturing enterprises New problems arose Business cycle: 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.
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The Nineteenth Century 2. What is Laissez-faire 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 A. Interstate Commerce Act 1887 B. Sherman Antitrust Act 1890 Establishment of the Department of Agriculture
(1862) C. Homestead Act D. Morrill Land Grant Act
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The Great Depression and the New Deal During 1920s, conservative administrations
reduced the role of the government in restricting private business activities.
3. What were the conditions during the 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” 4. What is an Interventionist State: Alternative
to the laissez-faire state, the government takes an active role in guiding and managing the private economy.
MONETARISM
Supply side economics Developed by Milton Friedman Inflation occurs due to too much
money chasing too few goods. Economy needs steady increase in
money supply equal to economic growth.
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Keynesianism
Demand Side economics John Maynard Keynes Economy’s health depends on savings
and spending by consumers Activist government If Demand decreases causes increase in
government spending If Demand increases causes increase in
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Planning
Wage controls Price controls John Kenneth Galbraith Wage / Price Spiral
If Price increases then wages increase causing Price to increase yielding inflation.
Requires extreme government regulation of the market
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Supply-side
Arthur Laffer and Paul Craig Roberts More planning with less government
interference 1. Cutting taxes to increase incentive to
save and invest 2. Investment = increase in jobs 3. Increase in Jobs = Increase in taxes at
the lower rates 4. Less cheating on tax returns
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Reganomics
Combination of monetarism / supply-side / domestic budget cutting
Reagan’s economic advisors 1. Reduce size of government 2. Stimulate growth 3. Increase military strength
Created large government deficits
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Effects of Reaganomics
1. Only slowed growth of domestic spending
2. increased military 3. controlled money supply 4. cut taxes 5. increased Social Security 6. decreased unemployment 7. increased business activityPearson Education, Inc. © 2006
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Financial Reforms Bank holiday
Only financially sound banks were permitted to reopen. New banking laws
A. Glass-Steagall Act (1933) Required the separation of commercial and investment banking
and set up of the FDIC B. Securities Act (1933)
Required that prospective investors be given full and accurate information about the stocks or securities being offered to them.
C. 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).
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Agriculture D. 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.
E. 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. Protected farmers, but many thought it a wasteful
program. E. What is a subsidy?
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Labor 5. National Labor Relations Act of 1935 (Wagner
Act) Guaranteed worker’s rights to organize and bargain
collectively through unions of their own choosing 6. 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.
7. 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.
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Growth in the Minimum Wage Over Time
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Labor
Industry Regulations 8. Federal Communications Commission (1934)
Given extensive jurisdiction over the radio, telephone, and telegraph industries.
9. The Civil Aeronautics Board (1938) Put into place to regulate the commercial
aviation industry. 10. Motor Carrier Act (1935)
Put the trucking industry under the jurisdiction of the Interstate Commerce Commission.
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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.
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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 Environmental protection
All based on commerce clause authority Set up new regulatory agencies to implement
the new regulations More industries affected by government.
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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. 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.
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11. What is Deregulation A reduction in market controls. In theory, deregulation would increase market
competition and lead to lower prices for consumers. Ford administration made deregulation a major
objective. Conservative Republican
Senator Ted Kennedy held hearings on airline deregulation.
Priority of the Carter Administration as well. Agricultural regulation still controversial.
2002 Bush signed into law a six-year agricultural bill with a price tag of $100 billion.
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Stabilizing the Economy Massive scale and persistence of the Great
Depression led to the 12. Employment Act of 1946
Committed the government to maintaining “maximum employment, production, and purchasing power”
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Stabilizing the Economy Economic stability
A situation in which there is economic growth, rising national income, high unemployment, and steadiness in the general level of prices.
13. What is Inflation? A rise in the general prices levels of an economy.
14. What is a Recession? A short-term decline in the economy that occurs
as investment sags, production falls off, and unemployment increases.
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Monetary Policy: Controlling the Money Supply 15. What is Monetary Policy?
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. 16. What is the job of the Federal Reserve
Board? A seven-member board that sets member banks’
reserve requirements, controls the discount rate, and makes other economic decisions.
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17. What are the five parts of the Federal Reserve System?
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Monetary Policy: Controlling the Money Supply 18. What are the Reserve requirements?
Governmental requirements that a portion of member banks’ deposits must be retained to back loans made.
19. What is the Discount rate? The rate of interest at which member banks can
borrow money from their regional Federal Reserve Bank.
20. What is the purpose of Open Market Operations? The buying and selling of government securities by
the Federal Reserve Bank in the securities market.
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The President and the FRB
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.
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21. What is 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.
Revenue Act of 1964 Reduced personal and corporate income tax rates
Tax cuts to stimulate the economy Reagan in 1981 and G.W. Bush in 2001 and 2003
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Sample Tax Savings Based on 2001 Rate Cuts
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22. What are 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
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The Budgetary Process 23. How does the Federal government
raises money for expenditures? individual income taxes social insurance retirement receipts corporate income taxes make up less than 10
percent of receipts 24. Most government spending goes toward?
National defense Human resources
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The Federal Budget Process
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Congress and the Budgetary Process
25. What was the 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.
Congress and the appropriations committees actually provide the funding needed to carry out programs. 26. What was the Budget and Impoundment Control
Act of 1974?
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The Budget Deficit and the Debt 1980s government finance
Large annual budget deficits and rapidly growing national debt.
27. What were causes of budget deficits? Result of recession, large tax cuts, increased defense
spending, spending on entitlements
28. What is the difference between yearly deficits add to total national debt?
Deficits are justified in times of recession to get the economy going; however, they are criticized if they are viewed as “structural” or built into the economy even in times of prosperity.
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TAXES
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Entitlements and Discretionary Spending, 1963-2007
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29. What actions are regulated by the Environmental Protection Agency?
Since the 1970s, Congress has enacted a large volume of pollution control legislation.
Brownfields Revitalization and Environmental Restoration Act of 2001
Clean Air Act Clean Water Act Safe Drinking Water Act
Toxic Substance Control Act Resource Conservation and
Recovery Act Comprehensive
Environmental Response, Compensation, and Liability Act
Federal Insecticide, Fungicide and Rodenticide Act
National Environmental Policy Act
Pollution Prevention ActEPA responsible for implementation
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30. What is 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