Economic and Domestic Policy
Should the Government Be
Involved And, If So, How Much?
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Beliefs about the proper level of government
involvement depend on beliefs about how the
economy works
Three key theories
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Laissez-faire capitalism
Keynesianism
Monetarism
Laissez-faire Capitalism
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Based on Adam Smith’s “invisible hand”
Market will work, just leave it alone
Advocates minimal government involvement
Focus is on overall productivity, not inequalities
Was popular pre-Great Depression
Regaining popularity since 1970s
Keynesianism
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Based on work of John Maynard Keynes
Gross inequalities in wealth reduce demand for
goods and hurt economy
Govt.: make sure middle class and working
poor have money to spend
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Cut income taxes to middle class and poor
Create jobs through public employment
Monetarism
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Key player: Milton Friedman
Government cannot act quickly enough to “fine-tune”
economy
Instead, should focus on stability in economy by
controlling the money supply to banks
Became popular in late 1970s
Practically, emphasis is on controlling interest rates
Gives the Chair of the Federal Reserve enormous
power
Ben Bernanke – Chair of the
Federal Reserve Chair
Comparison of the “Big Three”
Laissez-faire
Capitalism
Keynesianism Monetarism
Economic
Growth
Economic
Equality
Economic
Stability
Govt. Role Minimal
Major
Moderate
Govt.
“Tools”
Tax rates,
government
spending
Control money
and interest
rates
Primary
Concern
None
What Policies Can Govt. Use to
Control Economy?
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Monetary policies
Fiscal policies
Regulation
Subsidies and Contracting
Monetary Policies
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Set interest rates
Control banking regulations (affects how much
money banks have to “play with” and lend to
consumers)
Fiscal Policies
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Tax
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Tax rates determine how much money government
has and, conversely, how much money consumers
have to spend
Progressive v. Regressive tax schemes
Progressive taxes help redistribute wealth
Spend
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Can create jobs
Affect overall health of economy
Regulation
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Break up monopolies (antitrust policy)
Set minimum wages and work hour limits
Child labor laws
Safety and health requirements
Subsidies and Contracting
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Get people to do things they wouldn’t otherwise do by
offering benefits for the behavior
Subsidies
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Examples: NSF grants, crop subsidies, land grants to
“settlers” in 1800s
Contracts
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Examples: providing contracts to new industries to help them
develop, requiring firms who contract w/ govt. to engage in fair
employment practices
Social Welfare Policy
Income Support
Types of Social Welfare Programs
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Contributory (Social Insurance)
Noncontributory (Public Assistance)
Tax Expenditures
Contributory Programs
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Financed by taxes or contributions from current
or future recipients
Not necessarily “pure” insurance programs
Examples:
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Social security (old age and survivor benefits)
Medicare insurance
Unemployment compensation insurance
Social Security: Keynesian
Economic Policy in Action
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Original plan, the “Townsend Plan”
Social Security: Keynesian
Economic Policy in Action
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Original plan, the “Townsend Plan”
How is this Keynesian?
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Puts money in the pockets of the poor, makes them
spend it  creates demand for goods
Elderly (over 60) get the money for NOT working
more jobs for young people
Public Assistance Programs
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Eligibility based on need rather than contributions
(“means test”)
May involve cash payments or “in kind benefits”
Examples:
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Medicaid
Food stamps
Supplemental security income
HUD housing programs
Temporary Assistance to Needy Families (formerly Aid to
Families with Dependent Children)
TANF: Example of the Policy
Process
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Agenda Setting
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Clinton scores in 1992 – “end welfare as we know it”
1994 Republican “Contract with America”
Policy Deliberation
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Interest groups, Congress, economists, and media
debated alternatives
Polls consistently showed support for “reform”
TANF: Example of the Policy
Process
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Policy Enactment: AFDC  TANF
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Shifted control over program from federal to state
governments
Created work requirements for recipients
Limited benefit eligibility (5 years)
Teen parents must live w/ adults, not on their own
Required single mothers to disclose information
about fathers to receive full benefits
TANF: Example of the Policy
Process
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Policy Implementation
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States revised their welfare plans
Policy Output
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Many families no longer eligible for benefits
Reduction in those applying for benefits
TANF: Example of the Policy
Process
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Policy Outcomes
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Good: “Teen moms” living with parents seem to have higher
educational achievement
Good/bad: Number of enrollees declining, even during
economic downturn
Bad: Teenagers in recipient families (both parents now
working) less likely to finish school
Agenda-Setting
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Fine-tuning the program . . . How do we increase the good
outcomes, decrease the bad?
Tax Expenditure Programs
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The “Shadow Welfare State”
Tax breaks to encourage certain behaviors by
making them “cheaper”
Examples:
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Write-offs for employers’ contributions to health
insurance premiums and pension programs
Write-offs for interest paid on mortgages
Earned Income Tax Credits
Education Policy
A Quick and Dirty
Overview
Why Do We Have Public
Education?
Hint: The answer has
changed over the
years!
Public Education: Rationale
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States began creating public schools and
mandating attendance in early 1800s
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Rationale: equality of opportunity
Number of states w/ public ed increased
dramatically in late 1800s
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Rationale: inculcation of American values and civic
education
Public Education: Rationale
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Federal government got involved in the late
1950s
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Embarrassment over Sputnik
Focus originally on math and science
Rationale: collective benefits of educated populace
(specifically, economic benefits)
Federal Involvement in Public
Education
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1950 – 1980, federal government involved in
funding public education
Used money to dictate
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Focus of curriculum
Certain social policies (anti-discrimination, for
example)
Did not concern itself with issues of quality
Federal Involvement in Public
Education
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Reagan and Bush (I) administrations
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Began urging higher standards in schools
But suggestions were just that: suggestions . . .
Purely advisory
Bush (II) administration
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No Child Left Behind Act
Mandates standardized testing
Identifies “failing schools” and allows parents to
move their kids out of failing schools
Current Controversies and Issues
in Education Policy
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School funding
Discrimination in education
Students with disabilities
School Funding
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Frequently states fund with property tax –
means wealthy communities have better
schools
Robin Hood
Other alternatives??
Discrimination in Education
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Brown v. Board of Education
Title IX of Education Amendments of 1972
Students with disabilities (physical and
cognitive)
Students With Disabilities
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Individuals With Disabilities Education Act
(IDEA) – 1975
“Free Appropriate Public Education” (FAPE)
How much can schools afford to pay to provide
FAPE?
Also, re: No Child Left Behind, how do we
assess students with learning disabilities?