Substantial government programs were in place to stabilize
and stimulate the U.S. economy, not in place during the Great Depression
The chapter's main points:
The U.S. government regulates and restrains inefficient/unfair business activity
The U.S. government seeks to protect the environment through regulation of business
The U.S. government assists private interests to achieve their economic goals
Through taxing and spending decisions, the government seeks to maintain a level of supply and demand that will keep the economy prosperous
Through the "Fed," the government seeks to maintain a healthy level of inflation
Government as Regulator of the Economy
Section Introduction
An economy: "a system of production and consumption of goods and services, which are allocated through exchange"
Adam Smith's The Wealth of Nations (1776)
Laissez-faire doctrine (leave individuals and firms alone)
"Invisible hand" (desire for profit) will guide supply and demand
Government: better at running roadways, post office, some financial rules
Karl Marx's Das Kapital (1867)
Producers exploited workers needed a collective economy
Workers owning means of production would operate in people's interests
All economies today are "mixed" combining both private and public control
U.S. leans toward private; China is collective; Europe in-between;
U.S. does regulate privately owned businesses
U.S. firms are not free to act as they please
Regulation tries to promote efficiency or equity
Efficiency Through Government Intervention
Preventing Restraint of Trade
The assumption that the market always determines price is
flawed
Producers can gain monopoly in order to maximize profit; regulation then needed
Government can intervene to prevent restraint of trade and restore competition
Past attempts:
Interstate Commerce Commission (ICC)
Sherman Antitrust
Clayton Act
Federal Trade Commission (FTC)
AT&T's monopoly of long distance was broken up in 1984
But government does tolerate business concentrations
Corporate takeovers, mergers common
Government tolerates conglomerates because of high capital costs and/or foreign competition in some industries
Government has fined big corporations that restrained trade
Air carriers and price fixing in 1993
Four million claims by travelers received rebates
Making Business Pay for Indirect Costs
Unpaid costs are termed "externalities" and society must pay them
Government regulations involving pollution and EPA efforts
Curbing Overregulation
Firms waste resources in complying, higher prices
result
Critics complain about the high cost of compliance
Costs can be efficient if they achieve benefits
But regulations can produce costs with little or no benefits
In 1995 Congress required cost/benefit studies for some regulations
Deregulation
Rescinding regulations in
order to improve efficiency
1977 Airline Deregulation Act (lower fares, less profit for airlines)
The free market principle has its limits
The Enron scandal demonstrates that the issue of business
regulation is a complex one
Equity Through Government Intervention
A transaction is equitable when it is fair to both parties
FDA in 1907
The Securities and Exchange Act of 1934
The Fair Labor Standards Act of 1938
From 1965 to1977, ten new federal agencies
The Politics of Regulatory Policy
The Reforms of the Progressive and New Deal Eras
The Progressive Era: reformers sought to break the
power of the trusts by placing constraints on unfair business practices
The New Deal Era: reformers sought to stimulate
economic recovery through regulatory policies that were designed as much to save
business as to restrain it
The Era of New Social Regulation
The third wave of regulatory reform, in the 1960s and the
1970s, differed from the Progressive and New Deal phases in both its practices
and its politics
Most of the regulatory agencies established during the
third wave have broader policy mandates than those created earlier
Newer agencies have broader reach
Government as Protector of the Environment
Section Introduction
Concern for environment has grown rapidly in last few decades
Carson's The Silent Spring (1962) highlighted dangers of pesticides
In mid-1960s, government took first steps against pollution
Conservationism: The Older Wave
Government has been involved in land conservation for over a century
First national park created at Yellowstone in 1872
Today, national park system visited by over 100 million people annually
Environmentalism: The Newer Wave
1970 a big year for the environment
Environmental regulation has worked; levels of water and air pollution are lower today than they were in 1960s
President Ford supported industries wanting less
environmental regulation
Environmental regulation has had a dramatic effect on air
and water quality
The impact of environmental policy has not eliminated the
conflict surrounding it
Government as Promoter of Economic Interests
Promoting Business
Tax breaks
Firms get tax credits for capital investments and tax deductions for capital
depreciation
Result: tax burden has shifted from corporations to individuals
Individual taxpayers carry the heavier burden by ratio of
4 to 1
The most significant contribution that government makes to
business is the traditional services it provides
Promoting Labor
Laissez-faire thinking dominated government's approach to
labor well into the twentieth century
The 1930s brought significant changes
The key legislation was the National Labor Relations Act
of 1935
The government has also aided labor over the years by
legislating minimum hours, maximum wages, unemployment benefits, safe working
conditions, etc.
Promoting Agriculture
Farm programs provide assistance to small farmers and agribusinesses
Goal: to stabilize farmers' income
Price support programs used to help keep prices of farm products high; but 1996 law phases out nearly all price support policies
Fiscal Policy: Government as Manager of Economy, I
Section Introduction
Until 1930s, U.S. government followed free-market theory
Great Depression changed America's attitude toward economic regulation
Taxing and Spending Policy
Section Introduction
Fiscal policy: taxing and spending decisions to try to stabilize economy
The national budget is foundation of fiscal policy; is allocations of costs and benefits
Fiscal policy sees budget as "stimulating or dampening growth"
John Maynard Keynes increase government spending in depression
Keynes believed in government stimulating production/employment
Demand-Side Stimulation
Demand-side economics stresses consumer "demand"
When the economy is sluggish, the government can increase
spending to stimulate economy
Not a sensible response to every economic dip
In 1998 the U.S. government had a balanced budget
The importance of demand-side fiscal policy should be
measured not only by its effects during economic downturns
Supply-Side Stimulation
Stresses business or supply side of equation
Popular with Reagan tax breaks for business and wealthy individuals
Prosperity for wealthy would "trickle down" to less fortunate
The Reagan administration overestimated the stimulus
effect of its tax cuts policy
Despite this discouraging aspects, Reagan's supply-side
measures contributed to the economic growth in the mid-1980s and 1990s
Controlling Inflation
Increase in average level of prices of goods and
services
Inflation rose by less than 4 percent before late 1960s
Inflation reached postwar record rate of 13 percent in 1979
In recent years, inflation has moderated, so less concern
Government can reduce its spending or raise personal income taxes
The Process and Politics of Fiscal Policy
The Budgetary Process
President, relying on Office of Management and Budget (OMB), proposes a federal budget
From beginning to end, the process lasts a year and 1/2
About two-thirds of the budget involves mandatory
spending, the remaining third discretionary spending
The key congressional committees in the budgetary process
are the budget and appropriations committees
After House and Senate versions of budget are reconciled,
the budget goes to floor for vote
The budget then goes to president for signature
If signed the budget takes effect October 1st - the
starting date of the federal government's fiscal year
If no agreement has been reached by October 1st, then
temporary funding is required to keep government going
Partisan Differences
Democrats initiate federal spending help unemployed blue-collar workers
Republicans more concerned about inflation, purchasing power of citizens
Democrats like tax cuts that benefit working and lower middle class
Republicans prefer to keep taxes on wealthy at low level
GOP argues this encourages savings investment, economic growth
Contract With America cut in capital gains tax (boon for the rich?)
Clinton's 1993 tax increase/deficit reduction plan partisan divisions clear
Monetary Policy: Government as Manager of Economy, II
Section Introduction
Monetary policy manipulates of the amount of money in circulation
Monetarists such as Milton Friedman hold that the
control of the money supply is the key to sustaining a healthy economy:
Too much money in circulation contributes to inflation
because too many dollars are chasing too few goods
Too little money in circulation results in a slackening
economy and rising unemployment, because consumers lack the ready cash and
easy credit required to push spending levels up.
The Fed
Created in 1913
Federal Reserve System directed by
Board of seven governors five of
the members serve for fourteen year terms
Chair and vice-chair serve for four years
All of the members are appointed by the president
Fed regulates all national banks and some state banks
Estimates how much money to add/subtract from economy
Controls money supply by:
Lowering or raising the interest charged on money
borrowed by member banks from regional Federal Reserve bank;
Higher rates mean less money to lend
Lower rates encourages borrowing and spending due
to a greater supply of money
Buying and selling securities on open market
Raising or lowering cash reserve that member banks
must have on deposit with regional Federal Reserve banks
Increasing reserve rate takes money out of
circulation
Lowering rate allows banks more money for loans
The Politics of the Fed
Greater flexibility of monetary policy gives Fed significant power (although that power is sometimes exaggerated)
Questions about Fed's role:
Whose interests does it serve, the whole public or the banking sector?
