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American Government 4/e Thomas E. Patterson | |||||
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American Government 4/e Thomas E. Patterson | |||||
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CHAPTER OUTLINE
Introduction
1998 Asian crisis raised question: How would U.S. economy be affected?
America had government programs in place to stabilize the economy
Unlike the Great Depression, when no such programs existed
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
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
Measured in worker productivity—worker output for each hour on the job
Free market economics rests upon competition, not central planning (Soviet Union)
Preventing Restraint of Trade
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: ICC, Sherman Antitrust, Clayton Act, FTC ( created in 1914)
AT&T’s monopoly of long distance was broken up in 1984
But government does tolerate business concentrations
Corporate takeovers, mergers common (e.g., merger of
Time-Warner and Turner Broadcasting in 1996)
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 (worker safety)
But regulations can produce costs with little or no benefits
In 1995 Congress required cost/benefit studies for some regulations
EPA’s negotiated regulation processes—parties negotiate content in advance
Deregulation (rescind regulations in order to improve efficiency)
1977 Airline Deregulation Act (lower fares, less profit for airlines)
Deregulation has not been an "unqualified success"
S&L industry disaster is a prime example
Bailout plan will cost taxpayers more than $100 billion
Equity Through Government Intervention
A transaction is equitable when it is fair to both parties
FDA in 1907; New Deal protected bankers, investors, employees, workplace
From 1965 to1977, ten new federal agencies
Consumer Product Safety Commission
Unsafe products: DDT, cigarettes, the Corvair, phosphates, tires, etc.
Unleaded gas—major benefit in reduced lead content in children’s blood
The Politics of Regulatory Policy
The Reforms of the Progressive and New Deal Eras
Regulation applied to a particular industry, not to firms of all types
Industry gained influence with officials (FCC—networks)
Regulatory functions facilitated group access and influence
The Era of New Social Regulation (1960s and 1970s)
Social goals in environmental and consumer protection, worker safety
Regulatory agencies in this era have had broader policy mandates
EPA—can regulate any firm, not just a single industry
Restricts one firm or industry from easily influencing agency
Strong group competition exists (business and environment)
Newer agencies affected by partisanship;
GOP less supportive of regulatory activity
GOP in 1995 restricted scope of environmental regulation
Government as Protector of the Environment
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
Conservatism: 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 covers over 80 million acres visited by over
100 million people annually
Yet government follows "dual use" policy: public lands used for preservation/recreation but also by miners, foresters, and ranchers
These two uses often conflict (e.g., spotted owl controversy)
Conservation groups sometimes conflict with government (snail darter vs. TVA)
Groups employ sophisticated political strategies to lobby government
Their success has spawned the "wise use" movement
Other groups (e.g., Nature Conservancy) make private efforts
Environmentalism: The Newer Wave
1970—a big year for the environment
First Earth Day held
Environmental Protection Agency created
Environmental regulation has worked; levels of water and air pollution are lower
today than they were in 1960s
Still, debate continues over how far government regulation should go
Clinton administration standards for ozone particles
Some environmental problems—including solid waste disposal—harder to solve
Communities resist toxic waste disposal sites (NIMBY)
Various methods used to obtain compliance with regulations
Monitoring devices, reporting requirements, inspections, fines
Environmental groups are powerful lobbies
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 5 to 1
Loans and loan guarantees—$1.5 billion to Chrysler in loans in 1979
Many firms have received loans from federal, state, and local levels
Government provides services to business—colleges, defense contracts
Promoting Labor (historic hostility toward labor and unions)
National Labor Relations Act (1935)—right to bargain collectively, protected unions from discrimination:
Business must bargain with labor
NLRB—enforces compliance with labor law for both labor and business
Taft-Hartley Act of 1947—states would choose between union and open shop
Government has legislated minimum wages, unemployment benefits, safer work
Still, government’s assistance to labor is not as great as to business
America’s individualistic culture works against unions
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
Until 1930s, U.S. government followed free-market theory
Great Depression changed America’s attitude toward economic regulation
Taxing and Spending Policy
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 and the Deficit Problem
Demand-side economics stresses consumer "demand"
Size of national debt has diminished impact of fiscal policy
$5 trillion by 1996
Interest payments are huge—third largest item in federal budget
In 1998, U.S. government had balanced budget; the first since 1969
Means that national debt stopped increasing
Government now permanently spends at high levels ($4 billion a day)
Constant demand-side stimulus
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
Production would increase and more jobs would be created
Real income of poorest 20 percent of families dropped by 10 percent
Real income of richest 20 percent rose by 30 percent
Taxes for poorest 20 percent increased by 3 percent
Taxes for highest 20 percent decreased by 5 percent
Phillips: failure due to money at the top going into global financial markets
Supply side can encourage firms to expand production, thus creating jobs
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
President and Congress determine fiscal policy
The Budgetary Process
President, relying on OMB, proposes a federal budget
Agencies make requests to OMB
President submits proposal to Congress in January
Budget and Appropriations Committees do bulk of the work
"Budget resolution" used to establish framework for process
Most spending goes to programs that cannot realistically be eliminated
Budget goes into effect on Oct. 1 if passed by both houses; if not,
temporary funding is required
1995 squabble between president and Congress forced shutdown
Partisan Differences
Democrats initiate federal spending—help unemployed blue-collar workers
Republicans—more concerned about inflation, purchasing power of citizens
Inflation raises cost of doing business (higher interest rates)
Ford, Carter in 1976 attacked problem that was their party’s concern
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
Democrats prefer demand-side remedies; Republicans prefer supply-side
Monetary Policy: Government as Manager of Economy, II
Monetary policy manipulates of the amount of money in circulation
The "Fed"
Created in 1913; Federal Reserve System directed by board of seven governors—fourteen year terms
(Chair and vice-chair serve for four years)
Fed regulates six thousand banks in all (all national banks and some state banks)
Estimates how much money to add/subtract from economy
Controls money supply by:
(a) 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
(b) buying and selling securities on open market
(c) 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)
Fed chair Alan Greenspan highly influential
Questions about Fed’s role
Whose interests does it serve: the whole public or the banking sector?
Should an unelected body have so much power?
The Fed: example of elitist politics at work
Fed should use power sparingly
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