Chapter 17- Domestic Policy

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Chapter 17- Domestic Policy

• (1). Outline the various economic theories
  proposed for managing the economy.
• (2). Contrast fiscal policy and monetary policy,
  and explain the key role of the Fed.
• (3). Assess Government's ability to manage the
  economy in view of the Lucas critique.
• (4). Discuss US distribution of income wealth
  and the role of supply-side economics.
• (5). Assess whether the US should pursue an
  industrial policy or remain a free market.
• (6). Describe the basic concepts categories of
  how the Government regulates business.
• (7). Describe the key government economic and
  social regulatory agencies their role..
• (8). Assess the effectiveness and projected
  impact of current environmental policy.
• (9). Describe the various concepts and categories
  of Social Welfare policy.
• (10). Contrast social insurance w/public
  assistance explain the role of means testing.
• (11). Outline Social Welfare Policy and assess
  impact of the Social Security Act of 1935.
• (12). Assess the current and future status of
  Social Security, Welfare, and Health Policy

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Managing the EconomyA Brief Historical Overview

• From Government Restraint to Government
  Intervention
• 1800 to early 1900s dominated by late 18th
  century economic theory
• Classical economicsgt lassez faire

An economic theory, dominant at the start of the
twentieth century, that argued that the federal
government's only role in the economy was to
ensure a stable supply of money.
Theory applied to Hoovers balanced budget as
solution to what major economic crisis?
3
Managing the EconomyA Brief Historical Overview
(2)

• Start of the Great Depressiongt 25 unemployment
• 1929 stock market crashgt
• Hoovervilles to protest lack of aggressive
  Federal action
• Public impatient with inability of Government to
  fix problem
• 1932 Presidential election gt landslide election
  of FDR
• First Hundred Days gt aggressive Federal action
  to fix
• New Deal programsgt Federal projects spending
• Objective spur economy to lifegt get America
  back to work
• Examine FDRs economic policy to spur economy

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FDRs Economic Policy

• Major economic events and actions of FDRs
  Presidency
• Became President in 1933
• During Great Depression the U.S. suffered 25
  unemployment
• Roosevelts Administration instituted the New
  Deal
• At first employed public works programs.
• Later used government spending to spur on the
  economy

What kind of Government economic policy uses
spending to spur ?
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Fiscal Policy
Using the federal government's control over taxes
and spending to influence the condition of the
national economy.
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Managing the Economy Fiscal Policy

• Fiscal Policy gt
• Government policy to Tax and Spend
• What economic theorist came up with this concept?
• John Maynard Keynes
• 20th century economic theorist
• Wrote General Theory of Employment, Interest,
  Money
• Less jobsgt less gt low consumptiongt low GDP

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Keynesian Economics

• Active government role in the Nations economy
• Create surplus deficit how?
• Through manipulation of the Budget
• Objective
• Stimulate or retard a Boom or Bust economy
• How achieved?gt
• Federal action tax (less in economy) or
• spend (put more in economy)
• Forever after associated with New Deal
  Democrats

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Keynesian Economics
An economic theory, based on the work of British
economist John Maynard Keynes, that contends that
the national government can manage the economy by
running budget surpluses and budget deficits.
GDP
A measure of a country's total economic output in
any given year.
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Application of Keynesian Economics

• During Recession
• Government should spend to raise demand thus
  spur economy
• Okay to run a budget deficit

• Overheated economy
• Government should cut spending to control
  inflation (How?)
• Raise taxes to take out of economy
• This will cut demand slow economy down

• Complication to above theory
• counter-cycle programs

• Automatic government programs kick in to
  counter downturn
• Food Stamps
• Public Assistance
• Unemployment compensation

Examine Recession cycle in greater detail
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Cycle of Recession
Because businesses cant sell goods, they fire
workers and produce less
Supply and demand for goods and services fall
Because people have less money, they buy less
Unemployment rises and the overall GDP falls
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Managing the Economy

• Besides Fiscal Policy (or Federal Tax Spending)
• Whats the other way to manage the economy?
• Controlling the Money Supply
• What economic theory advocates control of money
  supply?
• Monetary Theory
• Nations money supply is primary to economys
  health
• Therefore controlling the circulation of money in
  Nations economy will control inflation or spur
  economic growth
• Who controls the Nations money supply and how
  does it control it?

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The Federal Reserve

• An independent regulatory commission that
  Congress created in 1913 to oversee the nation's
  money supply.
• How does Federal Reserve control the money
  supply?
• Control of Nations money supply by The Fed
• Set the discount rate gt (i.e. short term
  interest rates)
• Buy or sell U.S. Treasury Securitiesgt (Savings
  Bonds)
• Change required reserve ratio
• Ratio of money Bank must hold in reserve cant
  loan
• Examine structure of the Federal Reservegt

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The Federal Reserve

• Four Key Parts
• 1. The Board of Governors
• 2. The Federal Open Market Committee
• 3. Twelve Regional Federal Reserve Banks
• 4. The commercial banks that are members of
  Federal Reserve System

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Federal Reserve System
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Government Management of the Economy

• Assessment
• Can the Government effectively manage the
  economy?
• Role impact of the Lucas critique
• Publics private corporations response to Gov.
  actions to counter its ill effects on their
  interests
• The new Keynesians (math models sticky wages)
• Debate disagreements centered around following
  
• How economy works proper Gov. policy to be
  applied
• Bottom Line
• No sure resolution on Gov. role (big or small
  role)

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Current Status of Economic Stewardship

• 12 economists with 13 conflicting opinions
• Applying Fiscal Monetary controlsgt
• Aim economic stability
• Impact on economy of Government management
  actions
• Gradual dampening of Boom Bust swings
• Recent trends since 1950
• Continuing disagreements over how to manage
  economy
• Distribution of Income Wealth
• Supply-side economics the trickle down effect
• Industrial Policy (as practiced in Japan)

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A Century of US Economic Growth
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Debate on Management of Economy

• Continuing disagreements over how to manage
  economy
• Growing gap Distribution of Income Wealth

2005
U.S. income distribution as a percentage of
income earned
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US Wealth Income Distribution
Wealth income, real estate, stocks, bonds, and
material goods.
Top 20 (1.8K)
Top 1 (2.3M)
Control 80 of all wealth in the United States
Control 40 of all wealth in United States
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Debate of Management of Economy (2)Supply Side
Economics the Trickle Down Effect
An economic theory that argues that if the
government cuts taxes, reduces spending, and
eliminates regulations, resources will be freed
up to fuel the economy to produce even more goods
and services.

• Another proposal to manage economy?

• Industrial Policy (as practiced in Japan)

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Industrial Policy
The government selects an industry that it thinks
can be a world leader and spur on the economy
Government Aid
R D Funds
Regulation Exemption
Tax Incentives
Any downside to this approach?
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Industrial Policy Challenge

• How accurate can government bureaucrats predict
  which particular industry or corporation will be
  the next up and coming winner?
• Past government track record efficiency in
  spending money dont inspire confidence
• What if investors in the market or future
  consumers disagree with the governments
  selection dont buy it or go another direction
  instead?

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Next Assignment

• Chapter 17b Domestic Policy
• Learning Objectives 6-12
• Luncheon Learngt class will start at 1250

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Regulating Business

• Regulatory policy
• Origins Interstate Commerce Act of 1887 (Box
  17-1)
• Purpose Control unfair monopolistic practices
  of who?
• Short versus Long Haul prices to market?
• Public attitude towards regulatory policygt
• Mixed many times conflicting why?
• Theory versus reality
• Theory Government should stay out of business
  versus?
• Reality Consumer protection small businesses
• Two major categories Regulatory policy?
• Economic regulation
• Social regulation

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Regulations
Economic Regulations

• Rules affecting business practices
• Seeks to ensure competition and prevent illegal
  monopolies

Social Regulations

• Rules that protect citizens from dangerous or
  unfair practices associated with how businesses
  produce products or with the products themselves.

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Objectives of Economic Regulation

• Government influences competitive practices of
  industry
• Promote competition (prevent monopolies-
  Microsoft)
• Stifle competition innovations in software
• Control firms entry into industry or control
  industrys prices
• When a Monopoly is necessary- examples?
• Role of Interstate Commerce Commission of 1889
  (RR)
• Disagreement in principle practice
• Impact of recent trends in deregulation
• Savings Loans (1980s)
• Airlines
• How has economic regulation evolved over US
  history?
• Evolved in three major phases

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Important Events in Economic RegulationPhase I

• Congress responds to farmers and small
  businesses complaints about major monopolies
  trusts
• 1887 establishes Interstates Commerce Commission
  (ICC)
• Commission with no real enforcement capability
• 1890 Sherman Antitrust Act (against monopolies)
• General statement of intent (still lacked teeth
  to enforce)
• 1914 Clayton Antitrust Act
• Fix above weakness- established enforcement
  mechanism
• 1914 Federal Trade Commission Act
• (Same as above)

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Events in Economic RegulationPhase II

• More regulation following events leading to
  Depression
• 1934 Federal Communications Commission (FCC)
• 1934 Securities and Exchange Commission (SCC)
• 1938 Civil Aviation Board (CAB)
• 1960sgt Federal Government established four key
  areas of economic regulatory policy
• Antitrust- Prevent monopolies encourage
  competition (Microsoft suit)
• Financial Institutions- Savings Loans/SEC/Enron
  debacle
• Transportation- Air/Ground/Rail
• Communication- FCC (Radio TV)

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Events in Economic RegulationPhase III

• Economic Regulationgt 1970s through present
• Deregulationgt benefits unintended consequences
  
• Mixed bag- sometimes good sometimes bad
• Deregulation is good for consumer when
• Competition rises prices fall
• Telecoms, Computers, Airlines
• Deregulation can be very bad for the public when
• Corporate greed leads to poor service risky
  business decisions
• Airline services to passengers
• Savings Loan default (tax payers pick up tab)
• Stock Market price manipulation fraudulent
  accounting (Enron)

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Social Regulation

• Social Regulation focus on conditions under
  whichgt
• Goods services are produced
• When contrasted with economic regulation
• Social regulations cut across industries
• (vice focus on a specific industry)
• Regulations grounded in specific technical
  legislation
• Very specific detailed
• vice vague general guidelines of economic
  regulations
• Aim protect public interest
• Principal Federal Agencies established to
  administer
• Social regulation from 1930 through 1975 (See
  Table 17-1)

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Social Regulation Agencies
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Protecting Worker Safety and Health

• Occupational Safety and Health Act of 1970
• Created OSHA gt regulate industrygt worker safety
• Problems criticism
• Too detailed complicated regulations
• Employers complaints (time to comply)
• Labor Union consumer advocates gt support
• Posted regulations (see example p.623)
• Debate OSHAs over proper role continues
• Debate centered around costs versus benefits

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OSHA Regulations
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Protecting the Environment

• Evolution of Environmental Policy (Silent Spring)
• 1960s gt environmental activists movement
• Union Oil of California oil spill off Santa
  Barbaragt
• VIP public outcry (who owns homes off West
  Coast?)
• National Environmental Policy Act (1969)
• Requirement for Environmental impact statement
• Required for all government agencies
• Later exploited by environmental activists
• (Endangered Species Act)
• Nixon consolidates various agencies into EPA
  (1970)
• Vast array of laws regulations ensued (Table
  17-2)
• (It was the early 70s after all)

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EPA Responsibilities
So what areas exactly does the EPA regulate?
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Protecting the Environment

• The Environmental Protection Agency regulates
• Air Quality
• Water Quality
• Disposal of Hazardous Waste
• Chemicals
• Noise Levels

Any problem with Government regulations to
protect the environment?
37
Political Conflict Who is effected
President
Congress
Public
Environmental Policy impact
Republicans
Democrats
regulations
Why?
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Environmental Policy Conflict Its Impact

• Political conflicts of Environmental Protection
• Environmental policies creates Winners losers
• Due to those affected by benefits vs. costs
• Somebody has to pay for it
• Other related factors
• Diffused benefits (to Public) with specific costs
  to a few (Industry)
• Benefits often hard to measure
• Measuring extent of environmental problem very
  difficult
• Costs rise significantly for each incremental
  improvements at the margin

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Future Directions

• Future Directions for Environmental Policy
• Conflicting guidancegt to the EPA
• Democrats (want more regulation) vs.
• GOP (who want less regulation)
• Options for how government protects environment
• Three different methods
• 1. Command control
• 2. Market incentives
• 3. Pollution prevention

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Differing Options to Protect EnvironmentA
Comparison
Market Incentives Pollution Prevention
Command and Control

• Agencies draft regulations
• Agencies dictate enforcement mechanisms

• Establish allowable pollution levels
• Issue permits to pollute
• Recipients can trade and sell permits

Debate great conflict over environmental policy
to continue
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Social Welfare Policy
What is Social Welfare Policy?
Government programs that provide goods and
services to citizens to improve the quality of
their lives.
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Promoting Social Welfare

• Federal government runs broad range of programs
• Several specifically designed to promote social
  welfare
• Basic Concepts and Categories of Social Welfare
  Policy
• Fed programsgt
• goods services to improve Publics quality of
  life
• What are the two major categories of Social
  Welfare?
• Social Insurance programs qualifications
• You pay in to the programgt you qualify
  (example?)
• Public Assistance gt means tested programs

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Social welfare strategies

• What are the three social welfare strategies?
• 1. Alleviative
• (food stamps Meals on Wheels)
• 2. Preventative
• (Unemployment Compensation Social Security)
• 3. Curative
• (Head Start job training)

If given an example, can you ID the proper
strategy?!
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Social Welfare Programs
What are the different types of Social Welfare
Programs?

• Income maintenance programs
• Nutrition programs
• Health programs
• Housing programs
• Education programs
• Social services programs

See Table 17-3 for specific associated programs
by type
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The Evolution of Social Welfare Policy

• Welfare as private sector local responsibility
• True for first half of our Nations history
• Federal government initial involvement
  deserving poor
• 1880s thru 1910s gt
• Focused on disabled elderly Veterans
• State government also expanded selective benefits
  
• Addressed needs of other poor citizens
• Both Federal State governments target
  deserving poor only
• Then what major event caused both to reconsider
  who should take lead in addressing needs of its
  citizens?
• What major legislation was enacted as a result?

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Impact of Great Depression the New Deal
Social Security Act of 1935

• Act established Federal programs providing goods
  services to improve the lives of American
  citizens in two major areas
• 1. Provided Social Insurance programs for elderly
  and disabled
• 2. Established Public Assistance programs to help
  blind, elderly, and dependent children

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Nationalizing Social Welfare A Summary

• Social Security Act of 1935
• Significantly expanded Federal governments
  welfare role
• Social insurance programs (elderly unemployed)
• Created as old age survivors program
• 1956 Congress adds Disability Insurance
• Social Security has grown significantly over the
  years
• Both in number of entitled and costs of
  administration
• Beneficiaries grew from 222K in 1940 to 46.4
  Million by 2003
• Increased costs 32M (1940) to 454 Billion in
  pay out in 2003
• Cost increase due to inflation COLA over 60
  year span
• FICA deductions have also increased (Chapter 16)

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Public Assistance Programs

• Administration left to states gt
• Care for elderly, poor, blind
• 1972 Congress standardized benefits
  eligibility
• Supplemental Security Income (SSI)
• Cost grew from 495 Million in 1940 to 32.2
  Billion in 2001
• 1960s ADC gt AFDC (controversial from start)
• (1996 AFDC replaced by TANF )
• 1964 LBJs War on Poverty
• Number of additional program created
• Economic Opportunity Act of 1964
• Job Corps Head Start (associated with what
  strategy?)
• Food Stamp program (significantly grew over
  decades)

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Public Assistance Programs- problems

• Many War on Poverty programs eventually phased
  out why?
• Activists poor challenged established power
• Traditional establishments controlled
  distribution of Public Assistance (and resented
  this challenge to Power)
• Political bias for alleviative/preventative
  against curative programs

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Health Care

• Two major categories of Health Care?

Medicaid
Medicare
(versus)
Whats the difference between the two?
A social insurance program that provides basic
hospital insurance and supplementary insurance
for doctors' bills and other health care expenses
for people over the age of 65 or
older (Entitlement)
A public assistance program that provides
publicly subsidized health care to low-income
Americans. (Means Tested)
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Current Status of Social Welfare Policy

• Criteria used to measure Social Welfare Policy
  status
• 1. Social welfare Policies of other Industrial
  Democracies
• 2. Social Welfare vs. other types of U.S.
  government spending
• 3. Spending on different types of Social Welfare
  programs
• 4. Objective measurements of success of Social
  Welfare Programs

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1. Policies of other Industrial DemocraciesA
Comparison

• Full Health care provided by other Industrial
  Democracies
• US spends less on social welfare than Japan
  Europe
• US spends 30 of Budget vs. 40 of European
  budgets
• Europeans receive greater amount of government
  services
• Health care paid in full by government
• American tradition of relying on private sector
• Strong bias against big government social
  medicine

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2. Social Welfare vs. other types of spending
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3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures
Across Programs

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4. Measuring success of Social Welfare

• Conservative position complete failure
• Traps poor in poverty cyclegt permanent
  underclass
• Liberal position work in progress
• Needs moderate reform but still effective
• Objective measures gt reveals mixed success
• Poverty has fallen since 1970 (from 13)
• 2000 fell to 11.3 poverty rategt then back up
  to 12.5 in 2003
• Nevertheless major gap exists between two
  groups
• Old (10.2) vs. children (17.6 in 2003)
  growing
• Infant mortality rate has fallen to 7 per 1000
  births
• Social effects on society also reveal some
  negatives
• Significant increase in divorce, single parent
  families, crime

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The Future of Social Welfare Policy

• Social Security two debated questions
• 1. On whom should government spend (old or
  young?)
• 2. Is Social Security headed for insolvency?
• (and what should we do about it if it is?)
• Welfare Policy the uneasy balance in conflict
• The safety net versus the free ride
• 1996 Welfare Reform law
• Abolished AFDC gt TANF - striking a proper
  balance?
• Concerns Impact of the economic recession on
  unemployed?
• Poor unemployed trying to make ends meet at the
  margin
• Health Policy gt Two major concerns cost
  access
• How to stem costs who should have access

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Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict
eligibility
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Major concerns with Health Care system

• Access and Cost

Impact of Baby Bommers
Who pays the costs of the uninsured?
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Next Class Assignment

• Chapter 18a Foreign Policy
• Learning Objectives 1-5
• Thanksgiving Holiday (Wednesday no class)
• Chapter 18b Foreign Policy (following Monday)
• Learning Objectives 6-10
• Preparation for Course Review (Wednesday 11/30)
• Also RESEARCH PAPER IS DUE in Two Weeks!!!

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Chapter 17- Key Terms

• Counter-cyclical programs Government programs
  that automatically increase spending when the
  economy slows down and unemployment rises, and
  decrease spending when the economy speeds up.
• Economic regulation Laws and governmental rules
  that affect the competitive practices of private
  business.
• Environmental impact statement A document
  federal agencies must issue that analyzes the
  environmental impact of any significant actions
  they plan to take.
• Federal Reserve System An independent
  regulatory commission that Congress created in
  1913 to oversee the nations money supply.
• Fiscal policy Using the federal governments
  control over taxes and spending to influence the
  condition of the national economy.
• Food Stamp program A public assistance program
  established in 1964 that provides stamps (or
  coupons) to low-income people to buy food.
• Gross domestic product (GDP) A measure of a
  countrys total economic output in any given
  year.
• Industrial policy The policy of seeking to
  strengthen selected industries by targeting them
  for governmental aid rather than letting the
  forces of the free market determine their fates.

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Chapter 17- Key Terms (2)

• Keynesian economics An economic theory, based
  on the work of British economist John Maynard
  Keynes, that contends that the national
  government can manage the economy by running
  budget surpluses and budget deficits.
• Laissez faire An economic theory, dominant at
  the start of the twentieth century, that argued
  that the federal governments only role in the
  economy was to ensure a stable supply of money.
• Lucas critique An economic theory that contends
  that if people act rationally, then their
  reactions to changes in government policy will
  often negate the intent of those changes.
• Means test A requirement that people must fall
  below certain income and wealth requirements to
  qualify for government benefits.
• Medicaid A public assistance program that
  provides publicly subsidized health care to
  low-income Americans.
• Medicare A social insurance program that
  provides basic hospital insurance and
  supplementary insurance for doctors bills and
  other health care expenses for people over the
  age of 65.
• Monetary theory An economic theory that
  contends that a nations money supply, or the
  amount of money in circulation, is the primary if
  not sole determinant of the health of the
  national economy.

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Chapter 17- Key Terms (3)

• Public assistance Government programs, such as
  Medicaid and food stamps, that are funded out of
  general tax revenues and that are designed to
  provide benefits only to low-income people.
• Regulatory policy Laws and government rules
  targeting private business for the purpose of (1)
  protecting consumers and other businesses from
  what the government deems unfair business
  practices (2) protecting workers from unsafe or
  unhealthy working conditions (3) protecting
  consumers from unsafe products and (4)
  protecting a number of groups from
  discrimination.
• Social insurance Government programs such as
  Social Security and Medicare that require those
  who will receive benefits to make contributions
  (otherwise known as taxes) and that distribute
  those benefits without regard to the recipients
  level of income.
• Social regulation Laws and governmental rules
  designed to protect Americans from dangers or
  unfair practices associated with how private
  businesses produce their products as well as from
  dangers associated with the products themselves.
• Social welfare policy Government programs that
  provide goods and services to citizens for the
  purpose of improving the quality of their lives.
• Supply-side economics An economic theory that
  argues that if the government cuts taxes, reduces
  spending, and eliminates regulations, resources
  will be freed up to fuel the economy to produce
  even more goods and services.
• Temporary Assistance for Needy Families (TANF) A
  public assistance program that provides
  government aid to low-income families with
  children for a limited amount of time.