This chapter focuses on the economic role of the government, stressing its promotion and regulation of economic interests and its fiscal and monetary policies that affect economic growth. These are the main points made in the chapter:

Although private enterprise is the main force in the American economic system, the federal government plays a significant role through the policies it selects to regulate, promote, and stimulate the economy.

Regulatory policy is designed to achieve efficiency and equity, which require government to intervene, for example, to maintain competitive trade practices (an efficiency goal) and to protect vulnerable parties in economic transactions (an equity goal). Many of the regulatory decisions of the federal government, particularly those of older agencies, are made largely in the context of group politics; business lobbies have an especially strong influence on the regulatory policies that affect them. In general, newer regulatory agencies have policy responsibilities that are broader in scope and apply to a larger number of firms than those of the older agencies. As a result, the policy decisions of newer agencies are more often made in the context of party politics; Republican administrations are less vigorous in their regulation of business than are Democratic administrations.

The U.S. government has long been active in conservation, establishing the first national park in 1872. Concern about pollution arose in the 1960s, and the government responded has enacted numerous programs and regulations to respond to those concerns. Although debate continues about the scope of those efforts, the environment has definitely benefited—the nation’s air and water are significantly cleaner than they were in the 1960s. Environmental groups are among the nation’s most powerful interest groups.

Business is the major beneficiary of the federal government’s efforts to promote economic interests. Any number of programs, including those to provide loans and research grants, are designed to assist businesses, which are also protected from failure through such measures as tariffs and favorable tax laws. Labor, for its part, gets government assistance through laws concerning such matters as worker safety, the minimum wage, and collective bargaining; yet America’s individualistic culture tends to put labor at a disadvantage, keeping it less powerful than business in dealing with the government. Agriculture is another economic sector that depends substantially on government’s help, particularly in the form of income stabilization programs, such as those that provide subsidies and price supports.

Through its fiscal and monetary policies, the federal government attempts to maintain a strong and stable economy—one that is characterized by high productivity, high employment, and low inflation. Fiscal policy is based on government decisions in regard to spending and taxing, which are aimed at either stimulating a weak economy or dampening an overheated (inflationary) economy. Fiscal policy is worked out through Congress and the president and is consequently responsive to political pressures. However, because of the difficulty of either raising taxes or cutting programs, there are limits to the government’s ability to apply fiscal policy as an economic remedy. Monetary policy is based on the money supply and works through the federal Reserve System, which is headed by a board whose members hold office for fixed terms. The Fed is a relatively independent body, a fact that has given rise to questions as to whether it should have such a large role in national economic policy.