ECONOMIC POLICY
Chapter 18
OConnor and Sabato
American Government:
Continuity and Change
ECONOMIC POLICY
In this chapter we will cover
The Roots of Government Participation in the Economy
Stabilizing the Economy
The Global Economy
The Economics of Regulating Environmental Activity
The Roots of Government Participation in the Economy
For the first 100 years
of our nation, most economic issues were controlled by the states, not the
national government.
The national
governments roles were limited to
public lands policies,
public works projects,
and the encouragement of
business through the use of taxes and tariffs.
The states were quite
active in promoting and regulating private business activities.
They built the Erie
Canal, roads, and railroads. States licensed, regulated, and inspected many
factories and businesses.
Industrialization
Following the Civil War,
the US moved from an agrarian to a manufacturing-based economy. As the US
industrialized, many large-scale factories were created.
This shift led to many
national economic problems.
Industrialization
National problems such as
fluctuations between periods of economic prosperity
and economic downturn
industrial accidents
disease outbreaks
labor conflict
unemployment and the exploitation of workers
were
too large and complex for state governments alone.
Laissez-Faire Doctrine
A
French term meaning to allow to do, to leave alone.
It
is a hands-off governmental policy that is based on the belief
that governmental regulation of the economy is wrong.
Essentially,
what businesses thought of as laissez-faire was an economic system and a set of
governmental policies that would be supportive of the amassing of profits.
The Progressive Era (1901-1917)
The
Progressive Movement was a middle-class reform movement designed to change the
political, economic, and social system of the United States.
In
general, Progressive reformers like Mother Jones wanted to rein in corporate
power and make it more responsive to society and the democratically elected
government.
The Great Depression / New Deal
The Great Depression (a
catastrophic worldwide economic downturn) began with a stock market collapse
and was followed by
by rising unemployment,
dropping prices,
falling production,
and financial panic.
President Hoover announced
that there was nothing wrong and the economy was fundamentally sound. Panic
ensued.
FDR called for and
Congress enacted a New Deal for Americans.
This legislation allowed for strong government participation in the
economy to relieve the nations economic distress.
The Post-World War II Era
As WWII came to an end,
many policymakers worried that the conversion from a wartime to a peacetime
economy might trigger yet another great depression.
With the passing of
the Employment Act and
the Taft-Hartley Act
the
US government became deeply involved in maintaining high levels of employment.
The Social Regulation Era
In the 1960s and 1970s
our government turned to social regulations.
Social regulations deal
with the quality and safety of products.
Agencies such as the
Consumer Product Safety
Commission,
Occupational Safety and
Health Administration,
Environmental Protection
Agency,
And the National
Transportation Safety Administration
were
created to protect consumers and citizens from a variety of threats.
Stabilizing the Economy
Since FDR and the Great
Depression, the government has taken a participatory approach to macroeconomic
problems.
The US government
primarily uses two instruments to effect the economy:
monetary policy
fiscal policy
Monetary Policy
Monetary
policy involves the regulation of the countrys money supply and interest
rates.
The
primary responsibility for monetary policy rests with the Federal Reserve
Board.
The
Federal Reserve System was created in 1913 and consists of:
the Federal Reserve Board
the Federal Open Market Committee
twelve Federal Reserve Banks
The Federal Reserve System
The Fed is made up of
seven members appointed by the president for fourteen-year, overlapping terms
with approval of the Senate.
The Fed has a number of tools
including:
manipulating the reserve requirement
changing the discount rate
open market operations the buying and selling of
securities
Fiscal Policy
Following the theories
of economist John Maynard Keynes, government spending has been used to offset a
decline in private spending and help maintain
levels of spending,
production,
and employment.
Fiscal policy involves
taxation and government spending policies to influence the overall operation of
the economy.
John Kennedy was the
first president to actively use fiscal policy. He deliberately ran a deficit in
order to fuel economic growth.
The Global Economy
While
we are moving into a truly global economy, industrialized trading blocks
regional free-trade areas have developed in
Asia
Europe
and North
America.
Free
trade and globalization have been beneficial to many Americans and to some
foreign economies but they are not supported by all.
For example,
labor unions have been highly critical of free trade initiatives.
Global Trade
Around
$5 trillion worth of trade crosses international borders each year.
Expectations
are that foreign direct investment flows for 2000 exceeded $1 trillion.
Only
twenty years ago that number stood at $60 billion and ten years ago at $210
billion.
The
global system of production is both deepening and broadening.
There
are now 63,000 transnational companies with about 700,000 affiliates.
Where are we Headed in Terms of Economic
Growth?
The Economics of Regulating Environmental Activity
Environmental policy has
many economic trade-offs.
If we want clean air we
must pay more for cars that have emission controls.
If we want clean rivers
and lakes we have to pay more for plastics and manufactured products because it
is more expensive to get rid of wastes in environmentally friendly ways.
We may decide that the
jobs of loggers are more important than the habitat of the spotted owl.