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Chapter 18
Economic Policy
American Government: Continuity and Change
9th Edition
to accompany Comprehensive, Alternate, Texas, and Essentials Editions
O’Connor and Sabato
Pearson Education, Inc. © 2008
The Roots of Government:
Involvement in the Economy
 Nation’s first century: states bore the
responsibility of managing economic affair
 Nineteenth Century
 National government has played role in economy
for a long time
 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
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
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
The Progressive Era
 Drew support from middle class
 Sought to reform political, economic, and
social systems of U.S
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Pure Food and Drug Act
Meat Inspection Act
The Federal Reserve Act
Federal Trade Commission Act
Clayton Act of 1914
 Expansion of federal government placed
strain on treasury
 16th Amendment: income tax
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
laissez-faire state, the government takes an
active role in guiding and managing the private
economy.
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)
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
Labor
 National Labor Relations Act of 1935 (Wagner Act)
 Guaranteed workers’ 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
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
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
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
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.
Deregulation
 A reduction in market controls in favor of market-based
competition
 In theory, deregulation would increase market
competition and lead to lower prices for consumers.
 Ford administration made deregulation a major objective
 Senator Ted Kennedy held hearings on airline
deregulation
 Priority of the Carter Administration as well
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Airline Deregulation Act of 1978
 Other areas
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Communications
Agriculture
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 price levels of an economy
 Recession
 A short-term decline in the economy that occurs
as investment sags, production falls off, and
unemployment increases
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 of Governors
 A seven-member board that sets member
banks’ reserve requirements, controls the
discount rate, and makes other economic
decisions
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
The FRB and the Executive and
Legislative Branches
 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
Fiscal Policy: Taxing and
Spending
 Fiscal policy:
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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
 Keynesian theory
 Discretionary fiscal policy: deliberate decisions by the
president and Congress to run budget surpluses or
deficits

John F. Kennedy first to apply fiscal policy theory
 Revenue Act of 1964
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Reduced personal and corporate income tax rates
 Tax cuts to stimulate the economy

Reagan in 1981 and G.W. Bush in 2001 and 2003
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.
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
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
Major Budget Conflicts
 1980s
 Conflict between Democrats in Congress who
favored more domestic spending and less
military spending versus
 President Reagan’s administration who favored
less domestic spending and more spending on
defense
 1990s
 Gingrich and the Republican Congress clashed
with Clinton over which programs to cut in order
to balance the budget.
Budget Initiatives of the G.W. Bush
Administration
 Economic Growth and Tax Relief
Reconciliation Act of 2001
 Lowered income tax rates
 Expanded deductions
 Rebates
 2003 economy stagnant; another
round of tax cuts
 Cost of war
 Budget deficit
The Budget Deficit and the Debt
 Federal budget deficit
 The amount by which federal expenditures
exceed federal revenues
 Gross domestic product (GDP)
 The total market value of all goods and services
produced in a country during a year
 Deficit reduction legislation
 Gramm-Rudman-Hollings Act of 1985
 Budget Enforcement Act of 1990
 Budget surplus 1998
 Budget deficit by 2003
The Economics of
Environmental Regulation
 Since the 1970s,
Congress has enacted a
large volume of pollution
control legislation.
 Clean Air Act
 Clean Water Act
 Toxic Substance Control
Act
 Resource Conservation
and Recovery Act
 Federal Insecticide,
Fungicide, and
Rodenticide Act
 Implementation of these
laws rests primarily with
the Environmental
Protection Agency.
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
Environmental Protection: Two
Examples
 Hazardous and Toxic Wastes
 Toxic Substance Control Act (1976)
 Resource Conservation and Recovery Act (1976)
 Comprehensive Environmental Response,
Compensation, and Liability Act (1980)
 Love Canal
 Atmospheric Pollution, Acid Rain, and Climate Change
 Global warming
 Regulation of carbon dioxide pollution: Bush
administration
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Clean Air Act and the Supreme Court
 2006 California begins to restrict carbon dioxide
emissions within its borders