Chapter 17- Domestic Policy : 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


Managing the EconomyA Brief Historical Overview : Managing the Economy A Brief Historical Overview From Government Restraint to Government Intervention: 1800 to early 1900s dominated by late 18th century economic theory: Classical economics=> 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 Hoover’s balanced budget as solution to what major economic crisis?


Managing the EconomyA Brief Historical Overview (2): Managing the Economy A Brief Historical Overview (2) Start of the Great Depression=> 25% unemployment 1929 stock market crash=> “Hoovervilles” to protest lack of aggressive Federal action Public impatient with inability of Government to fix problem 1932 Presidential election => landslide election of FDR First Hundred Days => aggressive Federal action to fix $$$ New Deal programs=> Federal projects & spending Objective: spur economy to life=> get America back to work Examine FDR’s economic policy to spur economy


FDR’s Economic Policy: Major economic events and actions of FDR’s Presidency: Became President in 1933 During Great Depression the U.S. suffered 25% unemployment Roosevelt’s Administration instituted the New Deal At first employed public works programs. Later used government spending to spur on the economy FDR’s Economic Policy What kind of Government economic policy uses spending to spur $$$?


Fiscal Policy: Using the federal government's control over taxes and spending to influence the condition of the national economy. Fiscal Policy


Managing the Economy: Fiscal Policy : Managing the Economy: Fiscal Policy Fiscal Policy => 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 jobs=> less $$$=> low consumption=> low GDP


Keynesian Economics: Keynesian Economics Active government role in the Nation’s economy: Create surplus & deficit – how? Through manipulation of the Budget Objective: Stimulate or retard a “Boom or Bust” economy How achieved?=> Federal action: tax (less $$ in economy) or… spend (put more $$ in economy) Forever after associated with “New Deal Democrats”


Slide8: 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. A measure of a country's total economic output in any given year. GDP Keynesian Economics


Application of Keynesian Economics: 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*


Cycle of Recession: Supply and demand for goods and services fall Because businesses can’t sell goods, they fire workers and produce less Because people have less money, they buy less Unemployment rises and the overall GDP falls Cycle of Recession


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


The Federal Reserve: 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 Nation’s money supply by “The Fed” Set the discount rate => (i.e. short term interest rates) Buy or sell U.S. Treasury Securities=> (Savings Bonds) Change required reserve ratio Ratio of money Bank must hold in reserve & can’t loan Examine structure of the Federal Reserve=>


The Federal Reserve: 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*


Federal Reserve System: Federal Reserve System


Government Management of the Economy : Government Management of the Economy Assessment: Can the Government effectively manage the economy? Role & impact of the Lucas critique Public’s & 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)


Current Status of Economic Stewardship : Current Status of Economic Stewardship 12 economists with 13 conflicting opinions Applying Fiscal & Monetary controls=> 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)


A Century of US Economic Growth: A Century of US Economic Growth


Debate on Management of Economy: Debate on Management of Economy Continuing disagreements over how to manage economy: Growing gap: Distribution of Income & Wealth: U.S. income distribution as a percentage of income earned 2005


US Wealth & Income Distribution: Wealth: income, real estate, stocks, bonds, and material goods. Top 1% ($2.3M+) Control 40% of all wealth in United States Top 20% ($1.8K+) Control 80% of all wealth in the United States US Wealth & Income Distribution


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. Debate of Management of Economy (2) Supply Side Economics* & the “Trickle Down” Effect Another proposal to manage economy? Industrial Policy* (as practiced in Japan)


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


Industrial Policy Challenge: 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 don’t inspire confidence What if investors in the market or future consumers disagree with the government’s selection & don’t buy it or go another direction instead?


Next Assignment: Next Assignment Chapter 17b: Domestic Policy Learning Objectives 6-12 Luncheon Learn=> class will start at 12:50


Regulating Business: 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 policy=> 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


Regulations: Rules affecting business practices Seeks to ensure competition and prevent illegal monopolies Economic Regulations* Social Regulations* Rules that protect citizens from dangerous or unfair practices associated with how businesses produce products or with the products themselves. Regulations


Objectives of Economic Regulation : 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 industry’s 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*


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) Important Events in Economic Regulation Phase I


Events in Economic RegulationPhase II: Events in Economic Regulation Phase II More regulation following events leading to Depression 1934 Federal Communications Commission (FCC) 1934 Securities and Exchange Commission (SCC) 1938 Civil Aviation Board (CAB) 1960s=> 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)


Events in Economic RegulationPhase III: Events in Economic Regulation Phase III Economic Regulation=> 1970s through present: Deregulation=> 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)


Social Regulation : Social Regulation Social Regulation focus on conditions under which=> 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)*


Social Regulation Agencies: Social Regulation Agencies


Protecting Worker Safety and Health : Protecting Worker Safety and Health Occupational Safety and Health Act of 1970 Created OSHA => regulate industry=> worker safety Problems & criticism Too detailed & complicated regulations Employers complaints (time & $$$ to comply) Labor Union & consumer advocates => support Posted regulations (see example p.623) Debate OSHA’s over proper role continues Debate centered around costs versus benefits


OSHA Regulations: OSHA Regulations


Protecting the Environment : Protecting the Environment Evolution of Environmental Policy (Silent Spring) 1960s => environmental activists movement Union Oil of California oil spill off Santa Barbara=> 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)


EPA Responsibilities: EPA Responsibilities So what areas exactly does the EPA regulate?


Protecting the Environment: The Environmental Protection Agency regulates: Air Quality Water Quality Disposal of Hazardous Waste Chemicals Noise Levels Protecting the Environment Any problem* with Government regulations to protect the environment?


Political Conflict & Who is effected: Congress President Environmental Policy impact Public Republicans Democrats Political Conflict & Who is effected Why? regulations


Environmental Policy Conflict & Its Impact: 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


Future Directions: Future Directions Future Directions for Environmental Policy Conflicting guidance=> 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


Differing Options to Protect EnvironmentA Comparison:: Command and Control Market Incentives & Pollution Prevention Agencies draft regulations Agencies dictate enforcement mechanisms Establish allowable pollution levels Issue permits to pollute Recipients can trade and sell permits Differing Options to Protect Environment A Comparison: Debate & great conflict over environmental policy to continue


Social Welfare Policy: Government programs that provide goods and services to citizens to improve the quality of their lives. Social Welfare Policy What is Social Welfare Policy?


Promoting Social Welfare: 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 programs=> goods & services to improve Public’s quality of life What are the two major categories of Social Welfare? Social Insurance programs & qualifications You pay in to the program=> you qualify (example?) Public Assistance => means tested programs


Social welfare strategies: 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?!


Social Welfare Programs: Social Welfare Programs Income maintenance programs Nutrition programs Health programs Housing programs Education programs Social services programs What are the different types of Social Welfare Programs? See Table 17-3 for specific associated programs by type


The Evolution of Social Welfare Policy : The Evolution of Social Welfare Policy Welfare as private sector & local responsibility True for first half of our Nation’s history Federal government initial involvement: “deserving poor” 1880s thru 1910s => 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?*


Impact of Great Depression & the New Deal: 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 Impact of Great Depression & the New Deal Social Security Act of 1935*


Nationalizing Social Welfare – A Summary: Nationalizing Social Welfare – A Summary Social Security Act of 1935 Significantly expanded Federal government’s 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)


Public Assistance Programs : Public Assistance Programs Administration left to states => 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 => AFDC (controversial from start) (1996: AFDC replaced by TANF ) 1964: LBJ’s 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)


Public Assistance Programs- problems: 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


Health Care: Health Care Two major categories of Health Care? Medicare* Medicaid** (versus) What’s 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)


Current Status of Social Welfare Policy : 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


1. Policies of other Industrial DemocraciesA Comparison: 1. Policies of other Industrial Democracies A 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


2. Social Welfare vs. other types of spending: 2. Social Welfare vs. other types of spending


3. Spending on different types of Social Welfare: 3. Spending on different types of Social Welfare Distribution of Social Welfare Expenditures Across Programs


4. Measuring success of Social Welfare: 4. Measuring success of Social Welfare Conservative position: complete failure Traps poor in poverty cycle=> permanent underclass Liberal position: work in progress Needs moderate reform but still effective Objective measures => reveals mixed success Poverty has fallen since 1970 (from 13%) 2000: fell to 11.3% poverty rate=> 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


The Future of Social Welfare Policy : 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 => 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* => Two major concerns: cost & access How to stem costs & who should have access


Social Security: Social Security Options to address problem? Increase taxes, reduce benefits, restrict eligibility


Major concerns with Health Care system: Major concerns with Health Care system Access and Cost Who pays the costs of the uninsured? Impact of Baby Bommers


Next Class Assignment: 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!!!


Chapter 17- Key Terms: 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 nation’s money supply. Fiscal policy: Using the federal government’s 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 country’s 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.


Chapter 17- Key Terms (2): 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 government’s 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 nation’s money supply, or the amount of money in circulation, is the primary if not sole determinant of the health of the national economy.


Chapter 17- Key Terms (3): 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 recipient’s 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.