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Chapter 18
Economic Policy
American Government
2006 Edition
(to accompany Comprehensive, Alternate, Texas, and Essentials Editions)
O’Connor and Sabato
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The Roots of Government:
Involvement in the Economy
 During the nation’s first century states bore
the responsibility of managing economic
affair.
 Nineteenth Century
 Government long role in economy
 Tax, tariff, public lands disposal, and public
works projects and the national bank
 But national regulatory programs were few and
restricted.
 State governments active in promoting and
regulating private economic activity.
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The Nineteenth Century
 After Civil War, U.S. experienced rapid
economic growth.
 Large scale manufacturing enterprises
 New problems arose
 Business cycle: fluctuations between expansion
and recession that is a part of modern capitalist
economics.
 During recessions people lose their jobs and
income, and the economy experiences a low or
even negative growth rate.
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The Nineteenth Century
 Laissez-faire economics
 A French term literally meaning “to allow to do, to
leave alone.” It is a hands-off governmental policy
that is based on the belief that governmental
involvement in the economy is wrong.
 Major reform
 Interstate Commerce Act 1887
 Sherman Antitrust Act 1890
 Establishment of the Department of Agriculture
(1862)
 Homestead Act
 Morrill Land Grant Act
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The Great Depression and the
New Deal
 During 1920s, conservative administrations
reduced the role of the government in
restricting private business activities.
 Great Depression
 Prices dropped, production declined,
unemployment rose
 Few believed there was much for the
government to do.
 Franklin D. Roosevelt called for a “New Deal”
 Interventionist State: Alternative to the laissezfaire state, the government takes an active role
in guiding and managing the private economy.
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Financial Reforms
 Bank holiday
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Only financially sound banks were permitted to reopen.
 New banking laws
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Glass-Steagall Act (1933)
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Securities Act (1933)
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Required the separation of commercial and investment banking
and set up of the FDIC
Required that prospective investors be given full and accurate
information about the stocks or securities being offered to
them.
Securities Exchange Act (1934)

Created the Securities and Exchange Commission authorized to
regulate the stock exchange and to reduce the number of
stocks bought on margin (on borrowed money).
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Agriculture
 Agricultural Adjustment Act (1933)
 Sought to boost farm income by restricting
agricultural production in order to being it into better
balance with demand.
 Supreme Court found it unconstitutional. Constitution
did not grant Congress the authority to regulate
commerce in Article 1.
 Replaced by the Soil Conservation and Domestic
Allotment Act.
 Did not work well.
 Congress passed a second AAA
 Provided subsidies to farmers to limit their crops.
 Protected farmers, but many thought it a wasteful
program.
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Labor
 National Labor Relations Act of 1935 (Wagner Act)
 Guaranteed worker’s rights to organize and bargain
collectively through unions of their own choosing
 National Labor Relations Board
 Created to carry out the act and to conduct elections
to determine which union, if any, employees wanted
to represent them.
 Fair Labor Standards Act (1938)
 Intended to protect the interests of low-paid workers,
the law set 25 cents per hour and 44 hours per week
as initial minimum standards.
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Growth in the Minimum Wage
Over Time
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Labor
Industry Regulations
 Federal Communications Commission (1934)
 Given extensive jurisdiction over the radio,
telephone, and telegraph industries.
 The Civil Aeronautics Board (1938)
 Put into place to regulate the commercial
aviation industry.
 Motor Carrier Act (1935)
 Put the trucking industry under the jurisdiction
of the Interstate Commerce Commission.
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The Social Regulation Era
 Economic regulation
 Governmental regulation of business
practices, industry rates, routes, or areas
serviced by particular industries.
 Social regulation
 Governmental regulation of the quality
and safety of products as well as the
conditions under which goods and
services are produced.
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The Social Regulation Era
 From the 1960s to the mid-1970s the
national government passed social
regulatory legislation on such topics as:
 Consumer protection
 Health and safety
 Environmental protection
 All based on commerce clause authority
 Set up new regulatory agencies to implement
the new regulations
 More industries affected by government.
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Why the surge of social
regulations?
 The late 1960s and early 1970s were a time of social
activism.
 The consumer and environmental movements were
at the peak of their influence.
 The public had become much more aware of the
dangers to health, safety, and the environment
associated with various modern products.
 Members of Congress saw the advocacy of social
regulation as a way to gain visibility and national
prominence.
 The presidents in office during most of this period
each gave support to the social regulation movement.
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Deregulation
 A reduction in market controls.
 In theory, deregulation would increase market
competition and lead to lower prices for consumers.
 Ford administration made deregulation a major
objective.
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Conservative Republican
 Senator Ted Kennedy held hearings on airline
deregulation.
 Priority of the Carter Administration as well.
 Agricultural regulation still controversial.

2002 Bush signed into law a six-year agricultural bill with a
price tag of $100 billion.
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Stabilizing the Economy
 Massive scale and persistence of the Great
Depression led to the
 Employment Act of 1946
 Committed the government to maintaining
“maximum employment, production, and
purchasing power”
 Keynes
 Argued that deficit spending by a government
could supplement the total or aggregate demand
for good and services.
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Stabilizing the Economy
 Economic stability
 A situation in which there is economic growth,
rising national income, high unemployment, and
steadiness in the general level of prices.
 Inflation
 A rise in the general prices levels of an economy.
 Recession
 A short-term decline in the economy that occurs
as investment sags, production falls off, and
unemployment increases.
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Monetary Policy: Controlling the
Money Supply
 Monetary Policy
 A form of government regulation in which the
nation’s money supply and interest rates are
controlled.
 Money
 A system of exchange for goods and services
that includes currency, coins and bank deposits.
 Federal Reserve Board
 A seven-member board that sets member
banks’ reserve requirements, controls the
discount rate, and makes other economic
decisions.
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How the
Fed
Controls
the
American
Economy
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Monetary Policy: Controlling the
Money Supply
 Reserve requirements
 Governmental requirements that a portion of member
banks’ deposits must be retained to back loans made.
 Discount rate
 The rate of interest at which member banks can
borrow money from their regional Federal Reserve
Bank.
 Open Market Operations
 The buying and selling of government securities by
the Federal Reserve Bank in the securities market.
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The President and the FRB
 President shares responsibility for
fiscal policy with Congress
 Congress authorizes the FRB to make
monetary policy
 But there are many formal and
informal contacts between the White
House and the FRB.
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Fiscal Policy: Taxing and
Spending
 Federal government policies on taxes, spending,
and debt management
 Intended to promote the nation’s macroeconomic
goals, particularly with respect to employment,
price stability, and growth.
 Revenue Act of 1964
 Reduced personal and corporate income tax rates
 Tax cuts to stimulate the economy
 Reagan in 1981 and G.W. Bush in 2001 and 2003
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Sample Tax Savings Based on
2001 Rate Cuts
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The Effects of Globalization
 International economy
 Increased competition benefits consumers
 Expands the market for American products
 Labor unions are strongest critics of free trade
 Stress need to restrict “dumping”
 Fair trade rather than free trade
 Analysis suggests that globalization further
segments the market into winners and losers
 Losers tend to be smaller businesses and
workers
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The Budgetary Process
 Federal government raises money from
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individual income taxes
social insurance
retirement receipts
corporate income taxes make up less than 10
percent of receipts
 Most government spending goes toward
 National defense
 Human resources
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The Federal Budget Process
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Congress and the Budgetary
Process
 Budget and Accounting Act of 1921
 Gave the president authority to prepare an annual
budget and submit it to Congress
 Staff agency now called the Office of Management and
Budget was created to assist the president in this
process.
 President sends budget proposal to Congress in
January or February of each year.
 Congress and the appropriations committees actually
provide the funding needed to carry out programs.
 Budget and Impoundment Control Act of 1974
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The Budget Deficit and the Debt
 1980s government finance
 Large annual budget deficits and rapidly growing
national debt.
 Result of recession, large tax cuts, increased
defense spending, spending on entitlements
 Yearly deficits add to total debt
 Deficits are justified in times of recession to get
the economy going; however, they are criticized
if they are viewed as “structural” or built into the
economy even in times of prosperity.
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TAXES
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Entitlements and Discretionary
Spending, 1963-2007
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The Economic of Environmental
Regulation
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Since the 1970s, Congress
has enacted a large volume
of pollution control
legislation.
Brownfields Revitalization
and Environmental
Restoration Act of 2001
Clean Air Act
Clean Water Act
Safe Drinking Water Act
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EPA responsible for implementation
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Toxic Substance Control Act
Resource Conservation and
Recovery Act
Comprehensive
Environmental Response,
Compensation, and Liability
Act
Federal Insecticide,
Fungicide and Rodenticide
Act
National Environmental
Policy Act
Pollution Prevention Act
The Environmental Protection
Agency
 Nation’s largest regulatory agency
 Works with state agencies to enforce
environmental legislation.
 Three major eras of EPA’s political life
 1970s: organizational growth
 1980s: Reagan administration and hostility
toward EPA goals; budget cuts
 1983 onward: increase in budget and staff;
focus on balance between environmental
protection and economic costs
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