Download Chpt. 15

Chapter 15
Economic and Environmental Policy: Contributing to Prosperity
Learning Objectives
Having read the chapter, the students should be able to do each of the following:
1. Describe the role of the government as a regulator, including the theoretical basis of the
free-market economy and its proscribed level of government intervention.
2. Explain how the government encourages competition in the economy while
simultaneously ensuring equity by maintaining the fairness of transactions and managing
the indirect costs to the public.
3. Trace the development of environmental policy at the federal level, and explain the
difference between the older model of conservationism and the newer model of
environmentalism.
4. Explore the debate about global warming and the economic factors that complicate
attempted solutions.
5. Discuss the precise ways that government promotes the interests of business, labor, and
agriculture.
6. Discuss fiscal policy as a means of maintaining a stable economy, and distinguish
between supply-side and demand-side policy.
7. Explain monetary policy as a means of maintaining a stable economy and describe how
the Federal Reserve influences the economy.
8. Describe the nature and purpose of the Federal Reserve, its tools for implementing
monetary policy, and the nature of influences on its decision-making.
Chapter Outline
I.
II.
III.
Government as Regulator of the Economy
A. Efficiency through Government Intervention
1. Promoting Competition
2. Making Business Pay for Indirect Costs
3. Deregulation and Underregulation
B. Equity through Government Intervention
C. The Politics of Regulatory Policy
Government as Protector of the Environment
A. Conservationism: The Older Wave
B. Environmentalism: The Newer Wave
1. Environmental Protection
2. Global Warming and Energy Policy
Government as Promoter of Economic Interests
A. Promoting Business
B. Promoting Labor
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C. Promoting Agriculture
IV. Fiscal Policy as an Economic Tool
A. Demand-Side Policy
B. Supply-Side Policy
C. Fiscal Policy: Practical and Political Limits
V. Monetary Policy as an Economic Tool
A. The Fed
B. The Fed and Control of Inflation
C. The Politics of the Fed
Focus and Main Points
This chapter examines economic and environmental policy. As was discussed in Chapter 1,
public policy is a decision by government to follow a course of action designed to produce a
particular result (see “The Public Policy Process”). In this vein, economic policy aims to promote
and regulate economic interests and, through fiscal and monetary actions, to foster economic
growth and stability. The main ideas presented in this chapter are these:

Through regulation, the U.S. government imposes restraints on business activity for the
purpose of promoting economic efficiency and equity.

Through regulatory and conservation policies, the U.S. government seeks to protect and
preserve the environment from the actions of business firms and consumers.

Through promotion, the U.S. government helps private interests achieve their economic
goals. Business in particular benefits from the government’s promotional efforts,
including, for example, tax breaks and loans.

Through its taxing and spending decisions (fiscal policy), the U.S. government seeks to
generate a level of economic supply and demand that will maintain economic prosperity.

Through its money supply decisions (monetary policy), the U.S. government—through the
Federal Reserve System (“the Fed”)—seeks to maintain a level of inflation consistent
with sustained, controllable economic growth.
Chapter Summary
Although private enterprise is the main force in the American economic system, the federal
government plays a significant role through its policies to regulate, promote, and stimulate the
economy.
Regulatory policy is designed to achieve efficiency and equity, which require the government to
intervene, for example, to maintain competitive trade practices (an efficiency goal) and to protect
vulnerable parties in economic transactions (an equity goal). Many of the regulatory decisions of
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the federal government, particularly those of older agencies (such as the Food and Drug
Administration), are made largely in the context of group politics. Business lobbies have an
especially strong influence on the regulatory policies that affect them. In general, newer
regulatory agencies (such as the Environmental Protection Agency) have policy responsibilities
that are broader in scope and apply to a larger number of firms than those of the older agencies.
As a result, the policy decisions of the newer agencies are more often made in the context of
party politics. Republican administrations are less vigorous in their regulation of business than
are Democratic administrations.
Business is the major beneficiary of the federal government’s efforts to promote economic
interests. A large number of these programs, including those that provide loans and research
grants, are designed to assist business firms, which are also protected from failure through
measures such as tariffs and favorable tax laws. Labor, for its part, obtains government
assistance through laws covering areas such as worker safety, the minimum wage, and collective
bargaining. Yet America’s individualistic culture tends to put labor at a disadvantage, keeping it
less powerful than business in its dealings with the government. Agriculture is another economic
sector that depends substantially on government’s help, particularly in the form of income
stabilization programs such as crop subsidies.
The U.S. government pursues policies that are designed to protect and conserve the environment.
A few decades ago, the environment was not a policy priority. Today, there are many programs
in this area, and the public has become an active participant in efforts to conserve resources and
prevent exploitation of the environment. The continuing challenge is to find a proper balance
among the nation’s natural environment, its economic growth, and its energy needs.
Through its fiscal and monetary policies, Washington attempts to maintain a strong and stable
economy—one characterized by high productivity, high employment, and low inflation. Fiscal
policy is based on government decisions in regard to spending and taxing, which are aimed at
either stimulating a weak economy or dampening an overheated (inflationary) economy. Fiscal
policy is worked out through Congress and the president and consequently is responsive to
political pressures. However, because it is difficult to raise taxes or cut programs, the
government’s ability to apply fiscal policy as an economic remedy is somewhat limited.
Monetary policy is based on the money supply and works through the Federal Reserve System,
which is headed by a board whose members hold office for fixed terms and operates through the
work of its twelve regional Federal Reserve banks. The Fed, as the Federal Reserve is commonly
called, has become the primary instrument for managing the economy. It can affect the amount
of money circulating in the economy by raising or lowering the interest rate that banks are
charged for borrowing from the Fed, by raising or lowering the percent of their funds (reserve
rate) that member banks are required to keep on hand, and by buying and selling securities.
Major Concepts
economy
A system for the exchange of goods and services between the producers of those goods and
services and the consumers of them.
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laissez-faire economics
A classic economic philosophy holding that owners of business should be allowed to make
their own production and distribution decisions without government regulation or control.
regulation
A term that refers to government restrictions on the economic practices of private firms.
economic efficiency
An economic principle holding that firms should fulfill as many of society’s needs as
possible while using as few of its resources as possible. The greater the output (production)
for a given input (for example, an hour of labor), the more efficient the process.
externalities
Burdens that society incurs when firms fail to pay the full costs of production. An example of
an externality is the pollution that results when corporations dump industrial wastes into
lakes and rivers.
deregulation
The rescinding of excessive government regulations for the purpose of improving economic
efficiency.
economic equity
The situation in which the outcome of an economic transaction is fair to each party. An
outcome can usually be considered fair if each party enters into a transaction freely and is not
unknowingly at a disadvantage.
fiscal policy
A tool of economic management by which government can attempt to maintain a stable
economy through its taxing and spending policies.
economic depression
A very severe and sustained economic downturn. Depressions are rare in the United States;
the last one was in the 1930s.
economic recession
A moderate but sustained downturn in the economy. Recessions are part of the economy’s
normal cycle of ups and downs.
demand-side economics
A form of fiscal policy that emphasizes “demand” (consumer spending). Government can use
increased spending or tax cuts to place more money in consumers’ hands and thereby
increase demand.
budget deficit
The situation when the government’s expenditures exceed its tax and other revenues.
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national debt
The total cumulative amount that the U.S. government owes to creditors.
balanced budget
The situation when the government’s tax and other revenues for the year are roughly equal to
its expenditures.
budget surplus
The situation when the government’s tax and other revenues exceed its expenditures.
supply-side economics
A form of fiscal policy that emphasizes “supply” (production). An example of supply-side
economics is a tax cut for business.
capital-gains tax
The tax that individuals pay on money gained from the sale of a capital asset, such as
property or stocks.
progressive (graduated) personal income tax
A tax on personal income in which the tax rate increases as income increases; in other words,
the tax rate is higher for higher income levels.
monetary policy
A tool of economic management based on manipulation of the amount of money in
circulation.
inflation
A general increase in the average level of prices of goods and services.
Lecture Outline
This lecture outline closely follows the text in its organization. The instructor can use this outline
as a lecture aid.
This chapter focuses on the economic role of the government, focusing on its promotion and
regulation of economic interests and its fiscal and monetary policies, which affect economic
growth.
Unlike the country at the time of the Great Depression, stabilizing and stimulating
government programs existed in 2008 when the housing market collapsed and Lehman
Brothers, one of the nation’s oldest and largest commercial banks, filed for bankruptcy.
The crisis was severe, but government programs were in place to protect depositors’ savings,
and within a year the U.S. economy had stabilized and was growing again. In the modern
era, government is a participant and vital player in the national economy, regulating
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business activity and actively using fiscal and monetary policy to maintain a prosperous
general economy.
I. Government as Regulator of the Economy
The United States has a mixed economy. While it is based on private enterprise, the economy
is subject to government intervention and regulation motivated by two primary factors:
efficiency and equity. Efficiency requires firms to fulfill as many of society’s needs as
possible while using the least amount of its resources. Equity requires that the outcome of an
economic transaction be fair to all parties.

Laissez-faire economics holds that private firms should be free to make their own
production and distribution decisions. This model prevailed most completely in the U.S.
during the nineteenth century.

Markets are not always competitive. Government intervention occurs in part to prevent
monopolistic practices affecting price levels, a major area of regulation.

Government can also promote efficiency by making business pay for indirect costs (such
as environmental pollution) associated with production.

Over-regulation may result in inefficiencies (wasted resources), making deregulation
desirable in some instances.

Government can promote equity through regulations that protect workers (e.g., safety
regulations) and consumers (e.g., pure food laws).

The Progressive, New Deal, and New Social regulation eras represent different periods of
regulatory reform in terms of efficiency as well as equity.

Because newer agencies such as the EPA have a broad mandate, no one firm or industry
can easily influence agency decisions.
II. Government as Protector of the Environment
The publication in 1962 of Rachel Carson’s The Silent Spring helped launch the
environmental movement. It helped lead to the 1963 Clean Air Act and the 1965 Water
Quality Act, through which the federal government, for the first time in history, took steps to
protect the nation’s air, water, and ground from pollution.

Conservationism was the older wave of government involvement in land conservation.
This occurred when the national parks and forests were created.

The dual-use policy governs the parks and forests. They are natural preserves and
recreation areas, but they are also a rich source of natural resources for ranching, timber,
and mining interests. Thus, a conflict between these interests and conservationists arises.
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
Environmentalism is the new wave of government involvement emphasizing the need to
protect nature and natural resources. The Environmental Protection Agency was created
in 1970 and today administers environmental regulations.

Government environmental regulation has greatly reduced pollution levels. Current issues
involve how far the government should go to reduce pollution, especially when
regulations clash with economic interests. Today, environmental groups are among the
most powerful lobbies in the nation.

Global warming now receives the most attention among environmental issues. Because
measures to reduce it could directly restrict economic activity and would also affect
different nations differently, U.S. and global commitment to combating global warming
has yet to be achieved to any significant degree.
III. Government as Promoter of Economic Interests
The U.S. government makes important contributions to business, labor, and agriculture.

The most significant contribution that government makes to business is through its
traditional functions, such as education, transportation, defense, and currency. Business is
also supported directly through loans, subsidies, tax incentives, and other government
benefits.

Government assistance to labor is less substantial than its assistance to business, but labor
is protected by minimum wage, safety, and other government measures.

Government’s agricultural policy is designed to promote stable farm incomes and control
agricultural production; this approach is both complex and costly.
IV. Fiscal Policy as an Economic Tool
Government fiscal policy consists of taxing and spending decisions that are designed to
stimulate a depressed economy or dampen an overheated economy.

Demand-side (consumer) and supply-side (producer) economics are major types of fiscal
policy.

Demand-side policy emphasizes the consumer “demand” component of the supplydemand equation. When the economy is sluggish, the government, by increasing its
spending, places additional money in consumers’ hands.

A fiscal policy alternative to demand-side stimulation is supply-side economics, which
emphasizes the business (supply) component of the supply-demand equation.
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
Inflation is another major economic phenomenon that the federal government attempts to
mitigate. To fight inflation, the government applies policies exactly the opposite of those
used to fight an economic downturn.

Partisan politics plays an important role in determining fiscal policy. Approaches to fiscal
policy vary significantly in how costs and benefits are distributed among interests, and is
the source of disagreement between Republicans and Democrats. Democrats prefer
demand-side remedies, since government spending typically redistributes benefits to
lower-income categories. Republicans prefer supply-side remedies which provide
benefits such as tax cuts to higher-income groups.
V. Monetary Policy as an Economic Tool
Monetary policy is based on the manipulation of the amount of money in circulation.

Control of the money supply rests with the Federal Reserve (the Fed).

The Fed controls the money supply in two major ways: adjusting interest rates, and
raising or lowering the cash reserve that member banks are required to deposit with
regional Federal Reserve banks.

Two key questions are whether the Fed is representative and accountable. Whose interest
does the Fed serve? Should the Fed place its judgment ahead of that of elected officials?
Complementary Lecture Topics
Below are suggestions for lectures or lecture topics that will complement the text. In general,
these topics assume that students have read the chapter beforehand.

In recent years, U.S. firms have emphasized short-term profits and corporate takeovers,
while European and Japanese firms have been more intent on long-range product and
market developments. Should the U.S. government take the lead in orientating U.S. firms
toward a similar long-term outlook? What policies might achieve this result?

The annual federal budgetary process involves the president, Congress, bureaucratic
agencies, and special interests. What role does each actor play in the process? How is the
budget as a tool of fiscal policy affected by the interplay of these actors?

Monetary policy is established primarily through the Fed, which acts in the interests of
governmental branches as well as the interests of the larger society. Should the Fed
continue to set monetary policy or should elected officials take direct control? Why?
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Class Discussion Topics
1. Present to the class the relationship between the health of the economy and its affect on
voter preference in presidential elections. Examine this connection, exploring both its
logic and realism based on the global nature of the U.S. economy.
2. Remind the class that the president and Congress share responsibility for fiscal policy but
that monetary policy is controlled by the Federal Reserve Board. Discuss some possible
scenarios that affect the economy when the president and Congress are of different
political parties and the effect this has on the Federal Reserve Board’s power.
3. Talk about the relationship between U.S. environmental policies and global trade and
development. Discuss what role is appropriate for the U.S. to take in protecting the global
environment.
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