Economic and Environmental Policy:
Contributing to Prosperity
Presentation by Eric Miller, Blinn College, Bryan, Texas.
Preamble, U.S. Constitution
We the people of the
United States, in order
to… insure domestic
tranquility…
Government as Regulator of the
Economy

Economy
 a system of production & consumption of goods & services

In The Wealth of Nations (1776), Adam Smith made all of the
following arguments for laissez-faire capitalism:
 The desire for profit is the invisible hand that guides a capitalist
system
 Private firms should be left alone to make their production and
distribution decisions
 Firms will try to use as few resources as possible in order to keep
their prices low
 Certain areas of the economy were better run by government
agencies

Karl Marx



the free-market system is exploitive of workers
wages are lower than the value they add to production
proposed a worker-controlled economy
Government as Regulator of the
Economy

In the relationship today between government and the
economy in the United States, the government has an
important role in regulating and maintaining the U.S.
economy.
 policies to promote efficiency & equity
 The federal government has assumed a permanent,
strong role in the economy, contributing to its stability and
efficiency, since the 1930s.
○

The Tennessee Valley Authority is an electricity industry owned by the United
States.
Efficiency
 requires that the output of goods and services is the
highest possible given the amount of input used to
produce them.
 Externalities
○ unpaid costs of production that are incurred by society.
Government as Regulator of the
Economy

Equity
 Fairness of the outcome of an economic transaction to
each party
○ The creation of the Food and Drug Administration and the
passage of the Securities and Exchange Act were intended to
promote equity in the economy.
 example: FDA ruling that a drug is dangerous to use and therefore cannot
be marketed
 Fair Labor Standards Act of 1938
○ established min. wages, max working hours, & constraints on the
use of child labor
 The Enron bankruptcy case of 2001:
○ evidence that the free-market has its limits
 under-regulation can result in harmful business practices
 some top executives engage in unethical practices
 workers are vulnerable to unscrupulous executives
Government as Protector of the
Environment

Environmentalism:
 National Parks
○ Dual use policy
 The national parks are subject to a dual use policy
- Preservation & recreation
- exploitation of the rich natural resources.
○ The first national park was created at Yellowstone in 1872.

Earth Day
○ initiated by Senator Gaylord Nelson (D- Wis.)

EPA
 The Superfund program is designed to provide funds for cleaning up badly
contaminated and polluted sites.
 Regulatory activity relating to the environment has actually meant that the
environment today is vastly more clean than it was during the 1960s.
Government as Protector of the
Environment
 Kyoto Agreement-greenhouse
emissions;
gas
 It was a multinational effort to reduce carbon
emissions.
 The United States is the largest single
producer of greenhouse emissions in the
world, on a per-capita basis.
 President George W. Bush rejected the
agreement.
 The burden of addressing the global warming
problem will fall unevenly on nations.
Government as Promoter of
Economic Interests

Government Benefits
 Promoting Business
○ low-interest loans and government-guaranteed
loans.
○ corporate tax breaks.
○ a national transportation system.
○ a national education system.
Government as Promoter of
Economic Interests

Promoting Labor
 National Labor Relations Act- 1935
○ workers were given the right to bargain collectively.

Over the past forty years, the burden of federal
taxation has shifted from corporations to
individuals.
Government as Promoter of
Economic Interests

Promoting Agriculture
 Homestead Act of 1862
 Farm programs to eliminate some farming risk
 Federal payments account for more than a fourth of
net agricultural income
 American farmers among the most heavily
subsidized in the world
 Crop subsidies
○ helps to stabilize farm income, which could fluctuate greatly
due to market and weather conditions
Government as Promoter of
Economic Interests

The Federal Trade Commission, Interstate Commerce Commission,
and Antitrust Division of the Justice Department are government
agencies that regulate business competition.

The Progressive Era of government regulation focused on stopping the
unfair business practices of the new monopolies, such as the railroads.

The era of “new social regulation,”


addressed issues such as the environment and worker safety
differed from the previous two eras of regulatory reform:
○
○
the aim was to regulate activities of firms of many types
not just those in a particular industry

The U.S. gov. has been substantially more supportive of business than
labor

Deregulation- advocates are concerned with efficiency

To reduce overregulation, in 1995 Congress enacted legislation that prohibits
administrators in some instances from issuing a regulation unless they can show
that its benefits outweigh its costs.
Fiscal Policy: Government as
Manager of Economy, I

Fiscal policy
 a mechanism which the gov. employs to influence the
economy
 based on taxing and spending ○ Deficit Spending
○ Economic Depression/Recession
 If the economic problem is low productivity and high
unemployment, the fiscal policy action on the demand side
would be to increase spending.
 John Maynard Keynes’s demand-side economic
theory:
○ an economic recession can be shortened through
government spending programs
 Franklin Roosevelt use of government policy as economic stimulus ushered in
the modern era of U.S. government fiscal policy.
Fiscal Policy: Government as
Manager of Economy, I
 Budget Deficit○ projected to continue for the next several years
 National Debt
○ About 15%of the annual federal budget is accounted for
by the interest paid on the national debt.
 Balanced Budget
○ 1998-reached for the first time in several decades
 Budget Surplus
○ disappeared after 2001
 economic downturn
 war on terror
 tax cut
Fiscal Policy: Government as
Manager of Economy, I

Taxing and Spending Policy (continued)
 Supply-Side Stimulation
○ Supply-side economics is based primarily on stimulation of the business (supply)
component.
 Reagan’s policies
○ stimulated the national economy
○ resulted in tax cuts for business & the wealthy
○ increased the national debt
 Capital-Gains Tax
 George W. Bush while in office were premised largely on supply-side
economics.
○
○
○
○
Involved the supply component of the supply-demand equation.
stressed the importance of tax cuts for businesses.
stressed the importance of tax cuts for the wealthy.
increased in the size of the national debt.
 Inflation
○ occurs when jobs are plentiful and people have extra money to spend

A fiscal policy solution to inflation would be to increase the tax rate.
Fiscal Policy: Government as
Manager of Economy, I

The Process and Politics of Fiscal Policy
 The Budgetary Process
○ OMB (Office of Management and Budget)
 assists the president in creating the annual budgetary
proposal to Congress
○ President and Congress
 Congress relies heavily on the CBO (Congressional
Budget Office)
 Partisan Differences
○ Republicans
 seek ways to protect or stimulate business activity
○ Democrats
 respond to high unemployment levels with increased
gov. spending
Monetary Policy: Government as
Manager of Economy, II

The Federal Reserve plays a large part in establishing monetary policy.
 Monetary policy includes all the following assumptions;
○
○
○
○
the money supply is the key to sustaining a healthy economy.
too little money in circulation contributes to a slowdown in consumer buying.
too little money in circulation contributes to a slowdown in production.
too much money in circulation contributes to inflation.
 Monetary policy differs from fiscal policy in that it can be
implemented more quickly than fiscal policy.

Federal Reserve System “The Fed” controls the money supply through the following actions;
○ Reserve Requirements
 can raise or lower the cash reserves the member banks must keep in the fed
○ Interest rates
 controls the money supply through the lowering or raising of interest rates
Monetary Policy: Government as
Manager of Economy, II

Federal Reserve System “The Fed” The Politics of the Fed
○ example of elitist policy at work
○ A major point of debate surrounding the Federal
Reserve’s role in economic policy is the Fed’s
political accountability
 Members of the Federal Reserve Board are appointed by
the president and are not subject to removal.
○ When the Fed was created in 1913, it had no role in
the management of the nation’s economy.