Domestic Policy • (1). Outline the various economic theories proposed for managing the economy. • (2).
Download ReportTranscript Domestic Policy • (1). Outline the various economic theories proposed for managing the economy. • (2).
Slide 1
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 2
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 3
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 4
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 5
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 6
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 7
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 8
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 9
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 10
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 11
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 12
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 13
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 14
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 15
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 16
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 18
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 19
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 20
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 21
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 22
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 23
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 24
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 25
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 26
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 27
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 28
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 29
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 30
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 31
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 32
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 33
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 34
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 35
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 36
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 37
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 38
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 39
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 40
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 41
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 42
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 43
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 44
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 45
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 46
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 47
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 48
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 49
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 50
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 51
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 52
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 53
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 54
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 55
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 56
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 57
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 58
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 59
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 60
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 2
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 3
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 4
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 5
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 6
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 7
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 8
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 9
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 10
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 11
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 12
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 13
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 14
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 15
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 16
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 18
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 19
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 20
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 21
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 22
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 23
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 24
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 25
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 26
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 27
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 28
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 29
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 30
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 31
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 32
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 33
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 34
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 35
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 36
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 37
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 38
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 39
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 40
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 41
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 42
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 43
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 44
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 45
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 46
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 47
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 48
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 49
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 50
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 51
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 52
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 53
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 54
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 55
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 56
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 57
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 58
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 59
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
1
Policy
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?
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 $$$
– New Deal programs=> Federal projects & spending
– Objective: spur economy to life=> get America back to work
• Examine FDR’s economic policy to spur economy
3
FDR’s Economic Policy
• Major economic events and actions of FDR’s Presidency:
•Became President in 1933
•During Great Depression the U.S. suffered 25% unemployment
•Roosevelt’s Administration instituted the New Deal
• At first employed public works programs.
• Later used government spending to spur on the economy
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
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 $$$=> low consumption=> low GDP
6
Keynesian Economics
• Active government role in the Nation’s economy:
– Create surplus & deficit – how?
– Through manipulation of the Budget
• Objective:
– Stimulate or retard a “Boom or Bust” economy
• How achieved?=>
– Federal action: tax (less $$ in economy) or…
– spend (put more $$ in economy)
– Forever after associated with “New Deal Democrats”
7
Keynesian
Economics
An economic theory, based on the
work of British economist John
Maynard Keynes, that contends that
the national government can manage
the economy by running budget
surpluses and budget deficits.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
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
10
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
11
control it?
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=>
12
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*
13
Federal Reserve System
14
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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60
Slide 60
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
1
Policy
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?
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
3
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
What kind of Government economic policy uses spending to
spur $$$?
4
Fiscal Policy
Using the federal
government's control
over taxes and spending
to influence the condition
of the national economy.
5
Managing the Economy: Fiscal Policy
• Fiscal Policy =>
– Government policy to Tax and Spend
– What economic theorist came up with this concept?
• John Maynard Keynes
– 20th century economic theorist
– Wrote: General Theory of Employment, Interest, &
Money
– Less jobs=> less $$$=> low consumption=> low GDP
6
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”
7
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.
GDP
A measure of a country's
total economic output in
any given year.
8
Application of Keynesian Economics
• During Recession:*
• Government should
•
spend to raise demand &
thus spur economy
Okay to run a budget
deficit
Complication to above theory:
counter-cycle programs
• Overheated economy:
• Government should cut
•
•
spending to control
inflation (How?)
Raise taxes to take $$ out
of economy
This will cut demand &
slow economy down
Automatic government programs “kick in” to counter downturn
Food Stamps
Public Assistance
Unemployment compensation
Examine Recession cycle in greater detail*
9
Cycle of Recession
Supply
and
demand
for goods
and
services
fall
Because businesses
can’t sell goods, they
fire workers and
produce less
Because
people
have less
money,
they buy
less
Unemployment
rises and the
overall GDP falls
10
Managing the Economy
• Besides Fiscal Policy (or Federal Tax & Spending)
•
•
– What’s the other way to manage the economy?
Controlling the Money Supply
What economic theory advocates control of money supply?
• Monetary Theory:
•
– Nation’s money supply is primary to economy’s
health
– Therefore controlling the circulation of money in
Nation’s economy will control inflation or spur
economic growth
Who controls the Nation’s money supply and how does it
11
control it?
The Federal Reserve
• An independent regulatory commission that Congress
created in 1913 to oversee the nation's money supply.
• How does Federal Reserve control the money supply?
• Control of Nation’s money supply by “The Fed”
– Set the discount rate => (i.e. short term interest rates)
– Buy or sell U.S. Treasury Securities=> (Savings Bonds)
– Change required reserve ratio
• Ratio of money Bank must hold in reserve & can’t loan
• Examine structure of the Federal Reserve=>
12
The Federal Reserve
• Four Key Parts:
1. The Board of Governors
2. The Federal Open Market Committee
3. Twelve Regional Federal Reserve Banks
4. The commercial banks that are
members of Federal Reserve System*
13
Federal Reserve System
14
Government Management of the Economy
• Assessment:
•
•
•
– Can the Government effectively manage the economy?
Role & impact of the Lucas critique
– Public’s & private corporations’ response to Gov.
actions to counter its ill effects on their $$ 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)
15
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)
16
A Century of US Economic Growth
17
Debate on Management of Economy
• Continuing disagreements over how to manage
economy:
– Growing gap: Distribution of Income & Wealth:
50
45
40
35
30
25
20
15
10
5
0
Richest 20%
Poorest 20%
1980
1998
2005
U.S. income distribution as a percentage of income earned
18
US Wealth & Income Distribution
Wealth: income, real
estate, stocks, bonds,
and material goods.
Top 1% ($2.3M+)
Top 20% ($1.8K+)
Control 40% of all
wealth in United States
Control 80% of all
wealth in the
United States
19
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.
•Another proposal to manage economy?
•Industrial Policy* (as practiced in Japan)
20
Industrial Policy*
The government selects an
industry that it thinks can
be a world leader and spur
on the economy
Government Aid
Tax
Incentives
R&D
Funds
Regulation
Exemption
Any downside to this approach?
21
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?
22
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
23
Regulations
Economic Regulations*
• Rules affecting business practices
• Seeks to ensure competition and
prevent illegal monopolies
Social Regulations*
• Rules that protect citizens from dangerous
or unfair practices associated with how
businesses produce products or with the
products themselves.
24
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*
25
Important Events in Economic Regulation
Phase 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)
26
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)
27
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
28
(Enron)
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)*
29
Social Regulation Agencies
Agency
Year
Food and Drug Administration
1930
National Labor Relations Board
1935
Equal Employment Opportunity
Commission
1964
Environmental Protection Agency
1970
Occupational Safety and Health Admin.
1970
National Highway and Traffic Safety
1970
Consumer Product Safety Agency
1972
Nuclear Regulatory Commission
1975
30
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
31
OSHA Regulations
32
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)
33
EPA Responsibilities
So what areas exactly does the EPA regulate?
34
Protecting the Environment
The Environmental Protection Agency regulates:
•Air Quality
•Water Quality
•Disposal of Hazardous Waste
•Chemicals
•Noise Levels
Any problem* with Government regulations to protect the environment?
35
Political Conflict & Who is effected
President
Congress
Public
Environmental
Policy impact
regulations
Republicans
Democrats
Why?
36
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
37
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
38
Differing Options to Protect Environment
A 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
Debate & great conflict over environmental policy to continue
39
Social Welfare Policy
What is Social Welfare Policy?
Government programs that
provide goods and services
to citizens to improve the
quality of their lives.
40
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
41
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?!
42
Social Welfare Programs
What are the different types of Social Welfare Programs?
•
•
•
•
•
•
Income maintenance programs
Nutrition programs
Health programs
Housing programs
Education programs
Social services programs
See Table 17-3 for specific associated programs by type
43
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?*
44
Impact of Great Depression & the New Deal
Social Security Act of 1935*
• 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
45
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)
46
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)
47
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
48
Health Care
• Two major categories of Health Care?
Medicare*
(versus)
Medicaid**
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
**A public assistance
program that provides publicly
subsidized health care to
low-income Americans.
(Means Tested)
(Entitlement)
49
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
50
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
51
2. Social Welfare vs. other types of spending
52
3. Spending on different types of Social Welfare
Distribution of Social Welfare Expenditures Across Programs
Year Social
Insurance
Public
Aid
Health/ Veteran’s Education Housing
Medical Programs
Other
1970 49.5% 14.3%
18.8%
10.8%
0.6%
1.3%
0.1%
2000 42.0% 10.5%
41.8%
2.5%
1.1%
3.0%
0.2%
53
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
54
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
55
Social Security
Options to address problem?
Increase taxes, reduce benefits, restrict eligibility
56
Major concerns with Health Care system
• Access and Cost
Impact of Baby Bommers
Who pays the costs of the uninsured?
57
Domestic Policy- 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.
58
Domestic Policy- 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.
59
Domestic Policy- 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 lowincome 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.
60