AP GOVERNMENT CHAPTER 19:
MAKING ECONOMIC AND REGULATORY POLICY
 The 1996 Telecommunications Act brought new competition into the
telephone industry by giving smaller companies such as Sprint and MCI
a chance to take on long-distance giants such as AT&T. It also created
thousands of new jobs in an industry that had shown little growth.
 The market, not the federal government, would decide where phone
companies would operate and what they could sell.
 One out of every ten jobs lost in the 2001-2002 economic downturn
was in telecommunications, with no end in sight to the downsizing.
 Telecommunications deregulation is just one of several types of
economic policy that affect the overall performance of the US
economy.
 Presidents and Congress influence the economy by spending money
and collecting taxes, both of which influence the behavior of
consumers.
 The goal of economic policy is to keep the economy on a steady
course.
MAKING PUBLIC POLICY
 The US government has been making public policy since 1789. The Bill
of Rights was clearly an early attempt at public policy.
 The first successes provided a foundation for other public policies.
 The Policy Making Process:
 PG. 476-Chart
 1. Problem Identification-what is the problem, who does it effect?
 2. Policy Formulation- What should be done? What alternatives?
 3. Policy Adoption-Who needs to act? Which branch of govt?
 4. Policy Implementation-How should the policy be carried out?
 5. Policy Evaluation- Is it working? Is it effective?
 The first public policies were as much a product of intense debate,
even conflict and compromise, as any policies of today.
 These policy makers clearly believed that the nation had to be more
than just the sum of the 13 individual states.
 Real policies were needed that answered the problems of the day.
 The absence of government activity does not necessarily mean that
government is without a policy in that area- for inaction is itself a
policy.
ECONOMIC POLICY
 The framers wanted a government strong enough to promote free
trade, protect patents and trademarks, and enforce contracts
between individuals and businesses.
 The framers did not concentrate economic policy in any branch.
Instead, they divided economic policy-making control between the
legislative and executive branches and between the House and the
Senate.
 Article I, Sec. 8 of the Constitution gives Congress the power to borrow,
coin, and print money yet requires that all bills for raising revenue
originate in the Ho use.
 Article II, Sec. 2 gives the president the power to appoint the officers of
government who would actually do the borrowing, coining, spending
and taxing, yet requires that all officers be confirmed by the Senate.
 Article I gives Congress the power to regulate commerce with foreign
nations, among the states, and with Native American tribes, while
Article II gives the president authority to negotiate the treaties and
enforce the laws.
 By creating a national government of limited powers and providing
constitutional guarantees to protect property from excessive
regulation, the framers succeeded in protecting capitalism.
 Part of the government’s role is to stay out of the way as individuals
and businesses create wealth through new ideas and hard work, but
also to promote the national welfare.
 Fiscal Policy- uses federal spending and taxation to stimulate or slow
the economy
 Monetary Policy- manipulates the supply of money that individuals and
businesses have in their hands to keep the economy from swinging
wildly from boom to bust.
 Normal Business Cycle 1. Expansion, in which the economy produces new jobs and growth
 2. Contraction, as the economy starts to slow down
 3. Recession, in which the economy reaches a trough of low growth
 4. Recovery, in which the economy rebounds
 Inflation- a rise in the general price level (and decrease in dollar value)
owing to an increase in the volume
FISCAL POLICY
 Congress and the president make fiscal policy by taxing, borrowing,
and spending money.
The Federal Budget
 Federal, state and local governments spend an amount equal to
about one-third of the income of all Americans.
 Annual spending by the national government accounts for some 23%
of the gross domestic product, or nearly one dollar out of every four
spent in the US economy.
 Federal government gets most of its funds from personal and
corporate income taxes. Other moneys come from borrowing, special
fees and fines, grants and gifts, and administrative and commercial
revenues.
 Tariffs- tax levied on imports to help protect a nation’s industries, labor,
or farmers from foreign competition. It can also be used to raise
additional revenue.
 Excise tax- consumer tax on a specific kind of merchandise, such as
tobacco.
 Raising money is only one objective of taxation.
 Regulation and more recently, promoting economic growth are other
objective.
 Progressive tax- a tax graduated so that people with higher incomes
pay a larger fraction of their income than people with lower incomes.
 Federal Receipts include:
 1. Individual Income taxes- account for 48% of the federal
government’s tax revenue.
 2. Corporate Income Taxes- accounts for just under 10% of the
national tax revenues.
 Payroll Receipts- payroll taxes are the second-largest and most
rapidly rising source of federal revenue, accounting for 33.2% of all
federal revenue. Most people pay in more SS taxes than income
taxes.
 Regressive tax- a tax whereby people with lower incomes pay a
higher fraction of their income than people with higher incomes.
 4. Excise Taxes- taxes on liquor, tobacco, gas, telephones, air travel,
and other “luxury” items accounts for 4% of federal revenue.
 5. Customs Duties & Tariffs- $20 billion in revenue each year.
 6. Borrowing- Since WWII, the government has regularly resorted to
borrowing money to finance itself.
 Deficit- the difference between the annual revenues raised and the
expenditures of government, including the interest on past borrowing.
 Debt- the accumulated total of federal deficits, minus surpluses, over
the years.
 Borrowing costs money. The federal government borrows from
investors who buy Treasury notes, Treasury bills, and US savings bonds.
These investors include individuals (foreign and domestic) US
government accounts, banks, and other investors.
Where the Money Goes?
 Most of the money is spent on benefit payments to individuals and
national defense.
 In absolute dollars spent in 2003, 49% of revenues went to required
benefit payments for individuals (like Social Security, Medicare, etc),
16% to national defense, 9% to interest on the national debt, 10% to
grant programs such as highways, medical research, and the
environment, and 19% to all other required operations and interest.
 CHART PG. 480
 GDP- Gross Domestic Product, the total output of all economic
activity in the nation, including goods and services.
 Entitlement- government programs, such as unemployment
insurance, disaster relief, disability, that provide benefits to all eligible,
or “entitled” participants-runs at 11% of the GDP.
 Many federal programs are open to all eligible citizens, much of the
federal budget is therefore “uncontrollable”
The Budget Process
 The federal government’s fiscal year begins on October 1st each year.
 Departmental budgets are detailed; they include estimates of
expected needs for personnel, supplies, office space, etc.
 Office of Management and Budget- OMB handles the next phase- the
budget examiners review each agency’s budget and reconcile it with
the president’s overall plans.
 OMB director gives the president a single, consolidated set of estimates
of both revenue and expenditures. This may take a year to work out.
 The president must submit the budget recommendations and
accompanying message to Congress between the first Monday in
January and the first Monday in February.
The Legislative Branch
 Congress must appropriate the funds and raise the taxes.
 Since all appropriations and tax proposals are subject to a presidential
veto- check and balance.
 When Congress acts on the budget, it does so by first approving the
overall budget resolution. Then the actual appropriation of funds is
detailed in 13 different bills, each of which is presented to the president
for approval.
 Budget and Impoundment Control Act of 1974- enhanced the role of
Congress in the budget process- it specifies that the president must
include proposed changes in tax laws, estimates of amounts of
revenue lost through existing preferential tax treatments, and fi e-year
estimates of the costs of new and continuing federal programs. It also
calls on the president to seek authorizing legislation for a program a
year before asking Congress to fund it.
 Congressional Budget Office- CBO- created in 1974, gave Congress its
own independent agency to prepare budget data and analyze
budgetary issues. By February 15 of each year. CBO furnishes its
analysis of the presidential recommendations to the House and Senate
budget committees and forecasts of the economy, as well as
monitoring the results of congressional action on individual
appropriations.
 The economic boom of the 1990s generated huge tax revenues and
helped achieve the first budget surplus in 30 years.
The Politics of Taxing and Spending
 Taxes raise funds for the government, but they also promote economic
growth and reward certain types of behavior, such as owning a home,
contributing to charities, etc.
 It is also an additional and important function of raising campaign
funds.
 Progressive Income Tax- seem better by some because it is relatively
easy to collect, hits hardest those who are most able to pay, and
hardly touches those at the bottom of the income ladder.
 Excise Tax- argues by some to be the fairest because they are paid by
people who spend money for luxury goods and thus obviously have
money to spare. They are more expensive to collect than income
taxes.
 Excise taxes face strong resistance from affected industries- tobacco
especially.
 Sales tax- general tax on sales transactions, exempting some food and
medications. Many see it as unfair, since it taxes all persons, regardless
of their ability to pay, and poor persons pay a higher percentage of
their income in sales taxes for the goods and services they buy than
rich people do.
 Value-Added Tax- VAT, a tax on in creased value of a product at each
stage of production and distribution rather than just at the point of
sale.
Tax Expenditures
 Tax Expenditures- loss of tax revenue due to federal laws that provide
special tax incentives or benefits to individuals or businesses. They give
special tax incentives or benefits to individuals and businesses for
economic goals such as home ownership, retirement savings and
college education. These benefits total $400 billion each year, and
come from special exclusions, exemptions, or reductions from gross
income or from special credits.
 Tax expenditures are one means by which the national government
carries out its public policy objectives.
 Not all of these expenditures benefit all levels of society.
MONETARY POLICY
 Monetary policy is the second way the national government manages
the economy.
 Monetarism- the idea that prices, incomes and economic stability
reflect growth in the money sup ply. They contend that money supply
is the key factor affecting the economy’s performance and that
restrained yet steady growth in the money supply will encourage solid
economic growth but not inflation.
The Federal Reserve System
 Federal Reserve System- the “Fed” a system created by Congress in
1913 to establish banking practices and regulate currency in
circulation and the amount of credit available. It consists of 12
regional banks supervised by the Board of Governors.
 The Fed Board of Governors consists of a chair and 6 other members
who are appointed by the President with the consent of the Senate to
14-year terms with one member’s term expiring every two years
 The long terms are intended to insulate members from politics as much
as possible. They supervise 12 regional fed reserve banks, each
headed by a president and governed by a 9-member board of
directors chosen from the private banking business in that region.
 All members are professional economists or bankers, meet every 6-8
weeks to decide how much money will be allowed to enter the
economy, and manage foreign currency operation while regulating
banks.
 They do this by buying and selling government securities which can
encourage either lower or higher interest rates.
 Alan Greenspan- current Fed Chair- under his leadership he has
helped foster economic growth and is widely respected by world
financial leaders.
 The staff of the Federal Reserve System reports directly to the chair and
he is the one who appears before Congress and the country to explain
the policies of the Federal Reserve System.
Government and Economic Policy
 Laissez-Faire Economics- Some economists urged the government to
reduce spending, lower taxes, curb the power of labor and generally
leave business and the economy alone.
 Keynesian Economics- created by economist John Keynes,
recommended that when consumer spending and investment decline,
government spending and investing should increase. Government
should do the spending and investing during a recession because
private enterprise will not or cannot. This presents a political problem- it
is much easier to increase spending and government programs than it
is to curb them.
 Deficit spending became a habit in this country for 50 years.
PROMOTING ECONOMIC GROWTH
 Federal economic policy also involves efforts to promote economic
growth, often measured by the number of new jobs or businesses
created.
Promoting Business
 The Department of Commerce is the most visible business promoter
within the federal bureaucracy and is sometimes known as the nation’s
“Service center for business.”
 It serves as a spokesperson for business interests and is at the center of
government efforts to promote economic growth and encouraging
business research and development.
 It also encourages innovation through the protection of intellectual
property.
 PTO- Patent and Trademark Office issues more than 100,000 patents
each year to provide owners certain exclusive rights for 17 years over
their invention.
 The Department of Agriculture continues to provide ample support for
farmers, including federal subsidies for corn, barley, oats, wheat,
soybeans, cotton and rice which either guarantees farmers a minimum
price for their crops or pays a fee or not planting them. It also teaches
farm education and does research.
Promoting Trade
 Trade Deficit- an imbalance in international trade in which the value of
imports exceeds the value of exports. First one occurred in 1971.
 Many leaders claim that the trade deficit justifies the imposition of
trade sanctions.
 The problem, however, is not that the US is importing too much but that
it is exporting too little.
 Another question is whether or not US products are given fair treatment
by other nations.
 Some countries exploit the US advantage in technology by slavishly
copying our products and then selling them back to us or to other
countries at a profit.
 Dumping- selling products below their cost of manufacturing or below
their domestic price with the intention o driving other producers out of
the market and then raising prices to profitable levels.
 World Trade Organization- WTO was created to form a trade
organization to negotiate free trade and lower tariffs and quotas and
other disadvantages faced when trading. It includes more than 130
countries and its membership accounts for 4/5 of the world’s trade.
 Labor unions and human rights activists argue that US trade policies
spur the creation of low-wage jobs abroad and encourage child labor,
pollution, and worker abuse.
NAFTA
 1992- US, Canada and Mexico signed the North American Free Trade
Agreement which formed the largest geographical free trade zone in
the world, even surpassing the European.
 NAFTA had a tremendous impact on the economies of all three
countries- Mexico is the US’ third most important trading partner and US
is Mexico’s most important trading partner.
 Mexican antipollution laws are significantly less stringent than those in
the US, and they work for lower wages, making Mexico attractive to
many US companies.
Removing Barriers to Trade
 Protectionism- erecting barriers to protect domestic industry.
 Trade deficits are symptomatic of more profound economic problems.
Most economists favor free trade and strongly dislike protectionism
because it prevents efficient use of resources and because consumers
pay much more for protected products than they otherwise would.
 Smoot-Hawley Tariff- highest general tariff US ever had- other nations
retaliated with high tariffs on American goods- demand fell, and the
depression intensified.
 Congress later gave the president the power to negotiate mutual tariff
reductions with other nations, subject to certain restrictions, and by the
early 1970s tariffs n industrial products had been substantially reduced.
 Free trade and globalization policies do not confer equal benefits on
everyone.
 US economic policy in the future will probably be a combination of
free trade and selective protectionism. Though protectionism shields
highly visible industries from competition at home or abroad, such
measures often constitute a kind of subsidy that protects one industry
at the expense of another- and always at high cost to American
consumers.
REGULATING THE ECONOMY
 The Constitution explicitly authorizes Congress to regulate commerce
among the states and with foreign nations.
 Federal government created a number of agencies to regulate the
conduct of citizens and commercial enterprises with an eye toward
promoting economic development in the 19th Century- like Patent
Office, Army Corps of Engineers, Copyright Office, et.c
 Additional regulations came into existence to break up monopolies
and to respond to discrimination in employment, to protect citizens
from raw sewage in river lead in paint and gasoline.
 Expenditures mandated by the federal regulations are estimated to
cost $200 billion annually for environmental, health, and safety rules
alone.
 In 1935 there were 4,000 pages of regulations in the Federal Register,
there are now about 70,000 pages of regulations.
 Regulations add as much as 33% to the cost of building an airplane
engine and as much as 95% to the price of a new vaccine. These
regulations produce important benefits in the form of lower airplane
noise, safer vaccines and cleaner air.
Regulation Defined
 Regulation- is the attempt by government to control the behavior of
corporations, other governments, or citizens through altering the
natural workings of the open market to achieve some goal.
 Even opponents of regulation recognize that the market dos not
always solve every problem.
Types of Regulation
 Economic- generally refers to government controls on the behavior of
businesses in the marketplace: the entry of individual firms in to
particular lines of business, the prices that firms may charge, the
standards of service they must offer. Ex: public utilities, transportation.
 ICC- Interstate Commerce Commission- created in 1887 to enforce
federal regulations.
 Social- refers to government attempts to correct a wide variety of side
effects, usually unintended, brought about by economic activity. They
are also the efforts of the government to ensure equal rights in
employment, education and housing.
 In economic terms, producers regulated by social regulation must now
pay for external costs that once were free, such as using rivers, landfills,
or the atmosphere for waste disposal. These costs are then passed
along to the consumer.
 Some goods subsequently become too costly and demand drops,
others become more popular and demand increases.
 The final goal of social regulation is the socially beneficial allocation of
resources.
 Congress has created two types of regulatory agencies: those within
the executive branch and those that have a degree of independence
from Congress and the president. Both serve at the pleasure of the
president.
Regulating Business
 Four major waves of regulatory legislation occurred in the 20th Centuryin the 1910s, in the 1930s, and in the late 1960s-1980s, in each case,
changing circumstances gave way to the legislation.
 The number one responsibility of government regulation in our free
market system is to maintain competition.
 Monopoly- domination of an industry by a single company
 Trusts- a monopoly that controls goods and services, often in
combinations that reduce competition.
 In 1890 Congress passed the Sherman Antitrust Act to protect
commerce from monopolies.
 Clayton Act- 1914- outlawed specific abuses such as charging different
prices to different buyers in order to destroy a weaker competitor,
granting rebates, making false statements about competitors’ and
their products.
 Interlocking Directorates- having an officer or director in one
corporation serve on the board of a competitor.
Regulating Labor
 Government regulation of business is essentially restrictive.
 Many labor laws do not touch labor directly; instead they regulate
relations with employers.
 Federal regulations protect workers in the following areas;
 1. Public contracts.
 2. Wages and hours.
 3. Child Labor
 4. Industrial safety and occupational health.
 During the first half of the 20th century, the struggle was for the right to
organize unions.
 1935 National Labor Relations Act- the federal government prohibited
5 types of anti-union employer action:
 1. Interfering with workers in their attempt to organize unions or
bargain collectively.
 2. Supporting company unions
 3. Discriminating against members of unions.
 4. Firing or otherwise victimizing an employee for having taken
action under the act.
 5. Refusing to bargain with union representatives.
 Outlawed closed s h op and permitted union shops
 Allowed labor injunction- a court order forbidding specific
individuals or groups to perform acts considered harmful to the
rights or property of an employer.
Regulating Markets
 SEC- Securities Exchange Commission, created in 1934- companies
that offer stock for sale to the public must tell the truth about their
businesses, which means full disclosure of all financial statements as
well as the stocks they are selling and the risks involved in investing.
 Anyone in he business of selling stocks, must treat investors fairly and
honestly putting investors’ interests first.
Regulating the Environment
 Air and water pollution vividly illustrates the regulatory dilemma. The
pursuit of a clean environment increases costs of products and causes
unemployment.
 The national government has taken on new responsibilities, primarily
because local governments failed to act.
 Environmental Impact Statements- a statement required by federal law
from all agencies for any project using federal funds to assess the
potential effect of the new construction or development on the
environment.
 1990-Clean Air Act- most expensive piece of environmental legislation
ever passes.
Regulating the Global Environment
 as globalization has expanded, so have the environmental challenges
and hazards associated with that growth.
 Kyoto protocol in 1997- a treaty requiring participating countries to
make substantial cuts in greenhouse gas emissions year by year until
2012.
THE DEREGULATION DILEMMA
 Deregulation- a policy promoting cutbacks in the amount of federal
regulation in specific areas of economic activity.
Deregulating Transportation
 No industry has undergone more extensive deregulation than the
transportation industry.
 1938- created the Civil Aeronautics Board to protect airlines from
unreasonable competition by controlling rates and fairs.
 Because there was no competition over price, consumers were forced
to pay high rates for services they may not have desired.
 1978- Congress passed the Airline Deregulation Act- CAB abolished,
airlines were free to set whatever fares their markets would bear. Many
rural and some medium-sized cities lost cities because carriers found it
more profitable to use their aircraft in busier markets. Airlines were
raising fares on routes over which they had monopolies in order to
subsidize lower fares on more competitive routes.
 It has resulted in generally lower fares, greater choice of routes and
fares in most markets and more efficient use of assets by the industry.
 Deregulation has strengthened the industry by forcing companies to
streamline their operations in order to survive in a competitive market.
Deregulating Telecommunications
 Telecommunications deregulation may have the greatest impact on
daily life, whether in the form of lower phone bills, easier access to the
internet, or better cellular technology.
 Telecommunication Act of 1996- one massive act that opened up
large areas of telecommunication to companies that once were
regulated both in the services they could provide and the prices they
could charge. The main objective of the new law was to increase
competition among companies.
 Restrictions were removed so that cable television and local and longdistance phone companies could effectively compete with one
another.
Evaluating Regulatory Policy
 There are concerns over the negative consequences of regulation.
 Regulations generally increase the cost of products and may hamper
some industries:
 Regulation distorts and disrupts the operation of the market.
 Regulation may discourage competition
 Regulation may discourage technological development
 Regulatory agencies are often “captured” by the industries they
regulate.
 Regulation increases costs to industry and consumers.
 Regulation has often been introduced without cost-benefit analysis.
 Regulatory agencies may lack qualified personnel.