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

v Managing the Economy

Ø 17-1a From Government Restraint to Gov. Intervention:

§ 1800s Classical economics=> lasses faire => to Hoover

§ Then 1929 events=> 1933=> FDR=> New Deal

Ø 17-1b Managing the Economy by Taxing and Spending:

§ Fiscal Policy

§ John Maynard Keynes =>

· General Theory of Employment, Interest, & Money

· Less jobs=> less $$$=> low consumption=> low GDP

· Keynesian Economics=> Gov. surplus & deficit

¨ Stimulate or retard (Boom or Bust) economy

¨ Tax or spend (associated with New Deal Democrats)

§ Complication to above: counter-cycle programs

Ø 17-1c Managing the Economy by Controlling $$$ Supply:

§ Monetary Theory

§ Federal Reserve System (slide)=> control $$$ supply:

· Discount rate (affecting credit card interest rates)

· Buy or sell Treasury Securities

· Setting Reserve Ratio

Ø 17-1d Can the Government Manage the Economy?

§ Role of the Lucas critique

§ The “new Keynesians” (math models & sticky wages)

§ Debate & disagreements:

· How economy works & proper Gov. policy applied

· No sure resolution on Gov. role (big or small role)

Ø 17-1e The Current Status of Economic Stewardship:

§ 12 economists with 13 conflicting opinions

§ Applying Fiscal & Monetary controls=> Aim: stability

· Gradual dampening of Boom & Bust swings (Fig 17-1)

§ Continuing disagreements over how to manage economy:

· Distribution of Income & Wealth

· Supply-side economics & the “trickle down” effect

· Industrial Policy (as practiced in Japan)

v Regulating Business

Ø Regulatory policy

§ Origins: Interstate Commerce Act of 1887 (Box 17-1)

§ Public attitude towards regulatory policy=>

· Mixed & many times conflicting

Ø 17-2a Basic Concepts and Categories:

§ Economic regulation

§ Social regulation

Ø 17-2b The Objectives of Economic Regulation:

§ Government influences competitive practices of industry

· Promote competition (prevent monopolies- Microsoft)

· Control firms entry into industry or control prices

¨ Interstate Commerce Commission of 1889

§ Disagreement in principle & practice (deregulation)

Ø 17-2c The Evolution of Economic Regulation:

§ 100+ years of regulation – First Phase:

§ Interstate Commerce Commission (1887)

§ Sherman Antitrust Act of 1890

§ The Clayton Antitrust Act of 1914 (fix above weakness)

§ Federal Trade Commission Act of 1914 (same as above)

§ Second Phase of $$$ regulation- 1930s:

· Significant expansion of Government role (New Deal)

¨ FCC (1934), SCC (1934), & CAB (1938)

· 1960s: Government estab. four areas $$$ reg policy:

¨ Antitrust

¨ Financial Institutions

¨ Transportation

¨ Communication

§ Third Phase 1970s=>present:

· Deregulation=> benefits & unintended consequences

Ø 17-2d Social Regulation:

§ Affecting conditions under which goods & svs produced

· See Table 17-1 (from 1930 => 1975)

§ Contrasted with economic regulation:

· Social regulations cut across industries (vice specific)

· Grounded in specific technical legislation

¨ (vice vague guidelines=> protect public interest)

Ø 17-2e Protecting Worker Safety and Health:

§ Occupational Safety and Health Act of 1970

· Created OSHA => regulate industry=> worker safety

· Posted regulations (see example in Text)

§ Problems & criticism=> detailed complicated regs

· Employers complaints (time & $$$ to comply)

· Labor Union & consumer advocates => support

§ Debate over proper role continues

Ø 17-2f Protecting the Environment:

§ Evolution of Environmental Policy (Silent Spring)

· 1960s => environmental activists movement

· Union Oil of California oil spill=> public outcry

· National Environmental Policy Act (1969)

¨ Environmental impact statement

· Nixon consolidates => EPA (1970)

¨ Vast array of laws & regs (see Table 17-2)

§ Political conflicts of Environmental Protection

· Winners & losers (benefits vs. costs)

· Other factors:

¨ Diffused benefits with specific costs to few

¨ Benefits often hard to measure

¨ Measuring extent of environmental problem hard

¨ Costs rise as standard of quality rises

§ Future Directions for Environmental Policy

· Conflicting guidance=> Democrats vs. GOP

· Options for government actions:

¨ Command & control

¨ Market incentives

¨ Pollution prevention

§ Debate & great conflict over policy to continue

v Promoting Social Welfare

Ø Federal government runs broad range of programs

§ Several specifically designed to promote social welfare

Ø 17-3a Basic Concepts and Categories:

§ Social Welfare Policy=>

· Fed programs=> goods &svs to improve quality of life

§ Social insurance programs & qualifications

§ Public assistance => means tested programs

§ Social welfare strategies:

· Alleviative

· Preventative

· Curative

§ Different types of Social Welfare Policies (Table 17-3)

Ø 17-3b The Evolution of Social Welfare Policy:

§ Welfare as private sector & local responsibility

· First half of our Nation’s history

§ Federal government initial involvement: deserving poor

· 1880s thru 1910s => disabled & elderly Veterans

§ State government also expanded selective benefits

· Both target “deserving poor” groups only

§ Nationalizing Social Welfare:

· Social Security Act of 1935 & government’s role:

¨ Social insurance programs (elderly & unemployed)

Ø Created as old age & survivors program

Ø 1956: Congress adds Disability Insurance

Ø grown from 222K in 1940 => 46.4M by 2002

§ & from $32M to $454 Billion in pay out(2002)

Ø FICA & COLA (discussed in chapter 16)

¨ Public assistance programs (elderly, blind, & poor)

Ø Administration left to states for many years

Ø 1972: Congress standardized benefits & eligibility

§ Supplemental Security Income (SSI)

§ Cost grew: $495M in 1940 to 32.2B in 2001

Ø 1960s: ADC => AFDC (controversial from start)

§ 1996: AFDC replaced by TANF

Ø 1960s: LBJ’s War on Poverty

§ Number of additional program created (slide)

§ Economic Opportunity Act of 1964

· Job Corps & Head Start (curative strategy

§ Food Stamp program

§ Many War on Poverty programs phased out (?)

· Activists poor challenged established power

§ Rising costs of Health Care (Table 17-4):

· Medicare (Part A & B)

· Medicaid

Ø 17-3c The Current Status of Social Welfare Policy:

§ Social welfare Policies of other Industrial Democracies

§ Social Welfare vs. other types of government spending

§ Spending on different types of Social Welfare programs

· (contrast of programs & $$$ trends: see Table 17-5)

§ Measuring success of Social Welfare Programs

Ø 17-3d The Future of Social Welfare Policy:

§ Social Security – two debate questions

· On whom should government spend $$$?

· Is Social Security headed for insolvency?

¨ (and what should we do about it if it is?)

§ Welfare Policy – the uneasy balance

· The safety net versus the free ride (Box 17-2)

· 1996 Welfare Reform law:

¨ Abolished AFDC => striking a proper balance?

¨ Impact of the economic recession on unemployed?

Ø Trying to make ends meet at the margin

§ Health Policy => cost & access

· How to stem costs & who should have access

Ø 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.

Ø Economic regulation: Laws and governmental rules that affect the competitive practices of private business.

Ø Environmental impact statement: A document federal agencies must issue that analyzes the environmental impact of any significant actions they plan to take.

Ø Federal Reserve System: An independent regulatory commission that Congress created in 1913 to oversee the nation’s money supply.

Ø Fiscal policy: Using the federal government’s control over taxes and spending to influence the condition of the national economy.

Ø Food Stamp program: A public assistance program established in 1964 that provides stamps (or coupons) to low-income people to buy food.

Ø Gross domestic product (GDP): A measure of a country’s total economic output in any given year.

Ø 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.

Ø 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.

Ø 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.

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