Chapter 18: Economic Policy Origins of Government in the Economy

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Chapter 18: Economic Policy

  • Origins of Government in the Economy

  • Prior to the Civil War, the Federal Government narrowly interpreted its economic role

  • States were more active (i.e. internal improvements such as the Erie Canal, regulating education, building inspections, etc.)


  • Business cycle – boom and bust patterns led people to call on the government for help

  • Business owners supported laissez-faire

  • “invisible hand of supply and demand”

  • Adam Smith – Wealth of Nations

Early moves towards regulation of business

  • Department of Agriculture created 1862

  • Homestead Act, Morrell Land Grant Act, legislation programs to deal with agricultural issues

  • Munn v Illinois, Granger cases – government could regulate a private corporation in the public interest

  • Interstate Commerce Act of 1887

  • Regulated railroads

  • Created the Interstate Commerce Commission (ICC)

  • Required just and reasonable rates

  • Banned pools, rate discrimination, etc.

  • Sherman Anti-Trust Act of 1890

  • Prohibited practices that restrained trade

  • Prohibited monopolization and monopolies

Progressive Era

  • Consumer protection

  • Meat Inspection Act, Pure Food and Drug Act

  • Business and Bank regulation

  • Trust-busting Teddy Roosevelt

  • Federal Reserve Act 1913

  • Federal Trade Commission (FTC)

  • Clayton (Anti-Trust) Act of 1914

  • Exempted Unions from anti-trust legislation, allowing strikes, etc.

  • 16th Amendment – income tax

Depression and New Deal

  • Laissez-faire in the 1920s

  • Stock market speculation

  • Weak economy (high unemployment, low demand)

  • Depression – Unemployment more than ¼ of the working population

  • New Deal – creates an interventionist state – government actively guides and regulates the economy

New Deal Reforms

  • Financial

  • Banking: Glass-Stegall Act – FDIC

  • Stock Market: Securities Exchange Commission (SEC)

  • Agriculture

  • Agricultural Adjustment Act of 1933 (declared unconstitutional), but replaced with AAA of 1938

  • Taking crops out of production, establishing price supports/subsidies, and loans

  • Industry

  • Federal Communications Commission (FCC)

  • Civil Aeronautics Board

  • Motor Carrier Act – put the trucking industry under ICC

  • Etc.

Economic and Social Regulation

  • Economic Regulation

  • government regulation of business practices, industry rates, routes or areas serviced by particular industries

  • 1940s-1950s

  • Tailored to the conditions of particular industries

  • Social Regulation

  • Government regulation of the quality and safety of products as well as the conditions under which goods and services are produced

  • 1960s-1970s

  • Strives to protect and enhance the quality of life

Social Regulation

  • New Regulatory Agencies

  • Consumer Product Safety Commission

  • Occupational Safety and Health Administration (OSHA)

  • Environmental Protection Agency (EPA)

  • Etc.

  • Businesses were now subject to many regulations

  • Why?

  • Social Activism (i.e. Ralph Nader – Corvair)

  • Public consciousness

  • Members of Congress saw it as a way to gain visibility

  • Support from Presidents Johnson and Nixon


  • A reduction in market controls in favor of market based competition

  • Economic deregulation has been widely supported beginning with President Ford to the present

  • i.e. Airline industry – regulatory limits on new carriers erased so that there would be more competition

  • Mixed results – there are actually fewer airlines now!

  • Telecommunications industry – remember our media unit?

  • Agricultural deregulation

  • Bailouts have been necessary – natural disasters, etc.

  • Free trade/globalization calls for reduced subsidies

  • There has been continued support for SOCIAL REGULATION

Stabilizing the Economy

  • Goal: to avoid the extremes of inflation and recession/depression, thus promoting employment, price stability, and economic growth

  • How? By making adjustments in:

  • Monetary Policy – government regulation of interest rates and money supply – directed by the Federal Reserve Board

  • Fiscal Policy – federal government policies on taxes spending and debt management.

The Federal Reserve System

  • Created by the Federal Reserve Act of 1913

  • Structure:

  • Board of Governors (aka Federal Reserve Board, FRB, “the Fed”): 7 Governors plus a Chair (formerly Alan Greenspan, currently Ben Bernanke)

  • Federal Open Market Committee

  • Federal Reserve Banks (12)

  • Member Banks (3400)

  • The Fed is relatively independent of elected officials to avoid the pressure to take action to stay in office

  • Tools used:

  • Setting reserve requirements (i.e. whether banks need to keep $10 or $15 etc. in reserve for every $100 they lend)

  • Raising reserve requirements reduces the amount of money in circulation

  • Raising and lowering the federal funds rate (rate at which banks borrow from the Federal Reserve Banks)

  • Raising the rate makes it more expensive to borrow, thereby reducing the money supply, and vice versa

  • Conducting Open Market Operations, i.e. buying and selling government securities

  • When the Fed buys from member banks, it puts more money into circulation

Fiscal Policy: To tax and spend or not to tax and spend?

  • John Maynard Keynes – Keynesian Economics

  • Use of budget deficits and budget surpluses to achieve the optimal level of aggregate spending (consumer spending + private investment spending + government spending)

  • If too much spending inflation; thus the appropriate policy is to reduce government spending and develop a budget surplus

  • If too little spending recession/depression; thus the appropriate policy is to increase government spending, likely running a budget deficit

  • i.e. Great Depression

How to affect government spending:

  • Reducing/increasing spending

  • Reducing/increasing taxes

  • What approach is favored by

  • Liberals?

  • Conservatives?

  • Democrats?

  • Republicans?

  • Theories: Keynesian, Laissez-faire, Monetarist, “Trickle-down”


  • Free Trade Agreements – reduce quotas, tariffs, subsidies, and other barriers to unrestricted trade between countries.

  • What is the impact of globalization/free trade on

  • Big companies?

  • Stock market?

  • Environment?

  • Workers?

  • Developed world?

  • Developing world?

  • Education systems?

  • Government policy?

The Federal Budget

  • Fiscal year goes from 10/1 to 9/30, i.e. 10/1/07 – 9/30/08 is fiscal year 2008

  • The Office of Management and Budget (OMB) prepares the budget

  • President sets priorities

  • Agencies sent requests based on those priorities

  • OMB budget reflects Presidential priorities

  • Budget is sent to Congress in Jan/Feb

  • Budget is evaluated by the Congressional Budget Office (CBO)

  • The Appropriations Committee and its 13 sub-committees in each House determine final budget numbers

Budget issues

  • Mandatory vs. Discretionary spending

  • Pork

  • Public Debt (a result of many years of deficit spending)

  • Balanced budget

  • Tax increases/cuts

  • Federalism (mandates – funded and unfunded; categorical and block grants)

  • Military vs. domestic spending

Economics and Environment Regulation

  • A flurry of Congressional action to clean up the environment began in the 1970s

  • Clean Air Act of 1970 (modifies that of the 1960s), Clean Water Act of 1972, etc.

  • Environmental Protection Agency (EPA), an independent agency created in 1970, is responsible for implementation.

  • Research, rule-making, enforcement, identification and implementation of Superfund cleanup (i.e. Love Canal)

  • Four eras in EPA history:

  • Growth and Development 1970-1981

  • Early Reagan era – Reagan appointed leaders hostile to EPA goals, since he opposed strong pollution controls

  • 1983-2000 – Era during which balance between economic and environmental goals was sought

  • 2001 – Conflict between the administration’s pro-business/economic development policies and environmental preservation (i.e. ANWR)

  • Key issues: Hazardous and toxic waste, solid waste management, pollution, acid rain, climate change/global warming

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