Chapter 8 Government Regulation of the Economy

1. Chapter 8Government Regulation of the Economy

2. Political Ideology PartyRole of Govt. Size of Govt. Democrats To help people who need it Large Republicans Provide opportunities for people Small to help themselves

3. Political Ideology Large Government = > $$$$$$$$$$$$ = > Regulation and Taxes Small Government = < $$$$ = < Regulation and Taxes

4. Need a Job? Currently > 18 million Americans working for government - that’s more than the population of all northwest states combined (Idaho, Montana, North Dakota, Oregon, South Dakota, Utah, Washington, Wyoming, and Nevada) Federal govt. is largest owner of buildings in US - >500,000 Growth of government = growth of lawyers! America has more lawyers than the rest of the industrialized world combined!

5. Liberal (i.e. Left)Conservative (i.e. Right) Abortion: Social Spending: Defense Spending: Death Penalty: Government Size: World Peace: Same-sex Marriage: ANWR Drilling: Kyoto Treaty: Crime: Doctor-Assisted Suicide: Minimum Wage: Social Security: Health Care: W.W.(they).D.

6. Liberal (i.e. Left)Conservative (i.e. Right) Abortion: Pro-choice Pro-life Social Spending: Defense Spending: Death Penalty: Government Size: World Peace: Same-sex Marriage: ANWR Drilling: Kyoto Treaty: Crime: Doctor-Assisted Suicide: Minimum Wage: Social Security: Health Care: W.W.(they).D.

7. Liberal (i.e. Left)Conservative (i.e. Right) Abortion: Pro-choice Pro-life Social Spending: Increase Decrease or maintain Defense Spending: Death Penalty: Government Size: World Peace: Same-sex Marriage: ANWR Drilling: Kyoto Treaty: Crime: Doctor-Assisted Suicide: Minimum Wage: Social Security: Health Care: W.W.(they).D.

8. Liberal (i.e. Left)Conservative (i.e. Right) Abortion: Pro-choice Pro-life Social Spending: Increase Decrease or maintain Defense Spending: Decrease or maintain  Increase Death Penalty: Government Size: World Peace: Same-sex Marriage: ANWR Drilling: Kyoto Treaty: Crime: Doctor-Assisted Suicide: Minimum Wage: Social Security: Health Care: W.W.(they).D.

9. Liberal (i.e. Left)Conservative (i.e. Right) Abortion: Pro-choice Pro-life Social Spending: Increase Decrease or maintain Defense Spending: Decrease or maintain  Increase Death Penalty: Ban Maintain Government Size: World Peace: Same-sex Marriage: ANWR Drilling: Kyoto Treaty: Crime: Doctor-Assisted Suicide: Minimum Wage: Social Security: Health Care: W.W.(they).D.

10. Liberal (i.e. Left)Conservative (i.e. Right) Abortion: Pro-choice Pro-life Social Spending: Increase Decrease or maintain Defense Spending: Decrease or maintain  Increase Death Penalty: Ban Maintain Government Size: Increase/more socialistic Reduce/ more capitalistic World Peace: Same-sex Marriage: ANWR Drilling: Kyoto Treaty: Crime: Doctor-Assisted Suicide: Minimum Wage: Social Security: Health Care: W.W.(they).D.

11. Liberal (i.e. Left)Conservative (i.e. Right) Abortion: Pro-choice Pro-life Social Spending: Increase Decrease or maintain Defense Spending: Decrease or maintain  Increase Death Penalty: Ban Maintain Government Size: Increase/more socialistic Reduce/ more capitalistic World Peace: Negotiate Unilateral pre-emptive action Same-sex Marriage: ANWR Drilling: Kyoto Treaty: Crime: Doctor-Assisted Suicide: Minimum Wage: Social Security: Health Care: W.W.(they).D.

12. Liberal (i.e. Left)Conservative (i.e. Right) Abortion: Pro-choice Pro-life Social Spending: Increase Decrease or maintain Defense Spending: Decrease or maintain  Increase Death Penalty: Ban Maintain Government Size: Increase/more socialistic Reduce/ more capitalistic World Peace: Negotiate Unilateral pre-emptive action Same-sex Marriage: Legalize Illegal ANWR Drilling: Kyoto Treaty: Crime: Doctor-Assisted Suicide: Minimum Wage: Social Security: Health Care: W.W.(they).D.

13. Liberal (i.e. Left)Conservative (i.e. Right) Abortion: Pro-choice Pro-life Social Spending: Increase Decrease or maintain Defense Spending: Decrease or maintain  Increase Death Penalty: Ban Maintain Government Size: Increase/more socialistic Reduce/ more capitalistic World Peace: Negotiate Unilateral pre-emptive action Same-sex Marriage: Legalize Illegal ANWR Drilling: No Yes Kyoto Treaty: Crime: Doctor-Assisted Suicide: Minimum Wage: Social Security: Health Care: W.W.(they).D.

14. Liberal (i.e. Left)Conservative (i.e. Right) Abortion: Pro-choice Pro-life Social Spending: Increase Decrease or maintain Defense Spending: Decrease or maintain  Increase Death Penalty: Ban Maintain Government Size: Increase/more socialistic Reduce/ more capitalistic World Peace: Negotiate Unilateral pre-emptive action Same-sex Marriage: Legalize Illegal ANWR Drilling: No Yes Kyoto Treaty: Sign Don't sign Crime: Doctor-Assisted Suicide: Minimum Wage: Social Security: Health Care: W.W.(they).D.

15. Liberal (i.e. Left)Conservative (i.e. Right) Abortion: Pro-choice Pro-life Social Spending: Increase Decrease or maintain Defense Spending: Decrease or maintain  Increase Death Penalty: Ban Maintain Government Size: Increase/more socialistic Reduce/ more capitalistic World Peace: Negotiate Unilateral pre-emptive action Same-sex Marriage: Legalize Illegal ANWR Drilling: No Yes Kyoto Treaty: Sign Don't sign Crime: rights of the accused/rehab rights of the victim/punishment Doctor-Assisted Suicide: Minimum Wage: Social Security: Health Care: W.W.(they).D.

16. Liberal (i.e. Left)Conservative (i.e. Right) Abortion: Pro-choice Pro-life Social Spending: Increase Decrease or maintain Defense Spending: Decrease or maintain  Increase Death Penalty: Ban Maintain Government Size: Increase/more socialistic Reduce/ more capitalistic World Peace: Negotiate Unilateral pre-emptive action Same-sex Marriage: Legalize Illegal ANWR Drilling: No Yes Kyoto Treaty: Sign Don't sign Crime: rights of the accused/rehab rights of the victim/punishment Doctor-Assisted Suicide: Allow Prevent Minimum Wage: Social Security: Health Care: W.W.(they).D.

17. Liberal (i.e. Left)Conservative (i.e. Right) Abortion: Pro-choice Pro-life Social Spending: Increase Decrease or maintain Defense Spending: Decrease or maintain  Increase Death Penalty: Ban Maintain Government Size: Increase/more socialistic Reduce/ more capitalistic World Peace: Negotiate Unilateral pre-emptive action Same-sex Marriage: Legalize Illegal ANWR Drilling: No Yes Kyoto Treaty: Sign Don't sign Crime: rights of the accused/rehab rights of the victim/punishment Doctor-Assisted Suicide: Allow Prevent Minimum Wage: Increase Lower/Eliminate Social Security: Health Care: W.W.(they).D.

18. Liberal (i.e. Left)Conservative (i.e. Right) Abortion: Pro-choice Pro-life Social Spending: Increase Decrease or maintain Defense Spending: Decrease or maintain  Increase Death Penalty: Ban Maintain Government Size: Increase/more socialistic Reduce/ more capitalistic World Peace: Negotiate Unilateral pre-emptive action Same-sex Marriage: Legalize Illegal ANWR Drilling: No Yes Kyoto Treaty: Sign Don't sign Crime: rights of the accused/rehab rights of the victim/punishment Doctor-Assisted Suicide: Allow Prevent Minimum Wage: Increase Lower/Eliminate Social Security: Increase age of eligibility Privatize Health Care: W.W.(they).D.

19. Liberal (i.e. Left)Conservative (i.e. Right) Abortion: Pro-choice Pro-life Social Spending: Increase Decrease or maintain Defense Spending: Decrease or maintain  Increase Death Penalty: Ban Maintain Government Size: Increase/more socialistic Reduce/ more capitalistic World Peace: Negotiate Unilateral pre-emptive action Same-sex Marriage: Legalize Illegal ANWR Drilling: No Yes Kyoto Treaty: Sign Don't sign Crime: rights of the accused/rehab rights of the victim/punishment Doctor-Assisted Suicide: Allow Prevent Minimum Wage: Increase Lower/Eliminate Social Security: Increase age of eligibility Privatize Health Care: government controlled De-regulate W.W.(they).D.

20. Growth of Government • Two ways government grows: • - Size (# employees, $$$) • Scope (intrusiveness in lives, depriving people the right to decide for themselves) • 1900 - 1986 - population of US >x3, size of govt. > x5! • Why does the growth of government in the US outpace the growth of the population it is designed to serve? • 5 Reasons . . .

21. 5 Reasons for Government Growth • Increase in population US - 300 million x1%/yr World - 6.5 billion Louisiana - 4.4 million Shreveport - 200,000

22. 5 Reasons for Government Growth • Increase in population • Increase in disadvantaged sub-groups, the heaviest users of government services (poor, elderly, uninsured, illiterate, sick) US Population Sub-Group

23. 5 Reasons for Government Growth • Increase in population • Increase in disadvantaged sub-groups • Changing Attitudes - Great Depression (1929 Stock Market crash until WWII), 1/3 lost jobs, due to absence of financial regulations leading to wild speculation in stocks. NEVER AGAIN!

24. 5 Reasons for Government Growth • Increase in population • Increase in disadvantaged sub-groups • Changing Attitudes • Citizen Expectations - Standard of Living, the meaning of “life in America” - people expect more Personal effort = “Real” improvement Non-personal effort (Transfer payments, govt. services, and subsidies) = “Nominal” improvement (in name only) - not sustainable and not appreciated - leads to dependency

25. 5 Reasons for Government Growth • Increase in population • Increase in disadvantaged sub-groups • Changing Attitudes • Citizen Expectations • National Emergencies - war, natural or economic disaster Government expands to accommodate but seldom shrinks back to pre-war size. Human tendency to preserve jobs.

26. What Americans Expect to Receive from Government Regulation Regulation of Economic Activity: rules and procedures that protect consumers (anti-fraud), preserve the environment (pollution, externalities), protect competition (benefits future producers), protect workers (FLSA) Examples: Food and Drug Administration (FDA) - regulates Food, Drugs, Medical Devices (pacemakers, contact lenses, hearing aids) Biologics, (vaccines, blood products) Animal Feed and Drugs, Cosmetics, Radiation-Emitting Products (cell phones, microwaves, industrial lasers) Consumer Product Safety Commission (CPSC)- protecting consumers and families from products that pose a fire, electrical, chemical, or mechanical hazard or can injure children. NO CONFLICT OF INTEREST!

27. Common Federal Agencies That Regulate The Economy VHA - Veterans Healthcare Administration- Provides services nationwide to veterans of all wars. SEC - Securities and Exchange Commission - Supervises the sale of stock in public corporations. SBA - Small Business Administration - Works to promote the creation of small businesses. FHA - Federal Housing Authority - Regulates and administers federal housing programs. OSHA - Occupational Health and Safety Administration - Enforces federal law promoting safe workplaces. NRC - Nuclear Regulatory Commission - Regulates nuclear power industries. NLRB - National Labor Relations Board - Supervises and enforces federal labor law. NASA - National Aeronautics and Space Administration - Implements the nation’s space program. FERC - Federal Energy Regulatory Commission - Enforces federal policies regarding energy producers. FDIC - Federal Deposit Insurance Corporation - Manages the federal bank insurance program. FCC - Federal Communications Commission - Enforces federal guidelines for the broadcasting industry. FAA - Federal Aviation Administration - Regulates commercial airline traffic. EEOC - Equal Employment Opportunity Commission - Enforces federal civil rights laws in employment. EPA - Environmental Protection Agency - Enforces federal environmental regulations. CPSC - Consumer Product Safety Commission -Tests the safety of consumer products. FDA - Food and Drug Administration - Test safety of food, drugs, cosmetics

28. What Americans Expect to Receive from Government Regulation Regulation of Economic Activity Public Goods (services) - to improve the quality of life, not provided by private businesses. Examples: public education, roads, police and fire protection, national parks, libraries, … etc. Privatization - allows government to provide public goods at a cheaper cost. Pros: ????? Cons: ?????

29. What Americans Expect to Receive from Government Regulation Regulation of Economic Activity Public Goods (services) - to improve the quality of life, not provided by private businesses. Examples: public education, roads, police and fire protection, national parks, libraries, … etc. Privatization - allows government to provide public goods at a cheaper cost. Pros: preserves public goods, cheap Cons: loss of accountability, inferior service

30. BUSINESSES What Americans Expect to Receive from Government Regulation Regulation of Economic Activity Public Goods Promote Economic Well Being: redistribution of tax revenue $ TAXES $ SUBSIDIES TRANSFER PAYMENTS INDIVIDUALS SUBSIDIES: Pros: needed products, cheaper, jobs Cons: hurt competition, lack of innovation ENTITLEMENT PROGRAMS Social Security, Medicare, Medicaid, VA Programs, unemployment compensation, foodstamps, agricultural price support programs

31. What Americans Expect to Receive from Government Regulation Regulation of Economic Activity Public Goods Promote Economic Well Being Stabilizing the Economy: from recession and inflation CONGRESS - FISCAL POLICY FEDERAL RESERVE- MONETARY (TAXES AND SPENDING) POLICY (PRIME LENDING RATE) WAGE AND PRICE CONTROLS

32. What Americans Expect to Receive from Government Regulation 4. Stabilizing the Economy: from recession and inflation CONGRESS - FISCAL POLICY (TAXING AND SPENDING)- When Congress raises taxes consumers and producers have less money to spend in the economy because they have to pay more in taxes. And the opposite effect is true. When Congress spends more on social programs that means consumers and producers don’t have to spend as much of their own money to receive the benefit of those services. And the opposite effect is true.

33. Large commercial banks loan it to smaller banks for a profit Small commercial banks loan it to consumers for a profit The Federal Reserve loans money to large commercial banks at the PLR LOAN (principle x PLR) LOAN (principle x rate) LOAN (principle x rate) F B $$$ $$$ $$$ B SMALL COMMERCIAL BANK LARGE COMMERCIAL BANK FEDERAL RESERVE What Americans Expect to Receive from Government Regulation 4. Stabilizing the Economy: from recession and inflation FEDERAL RESERVE- MONETARY POLICY (PRIME LENDING RATE - PLR) YOU

34. What Americans Expect to Receive from Government Regulation 4. Stabilizing the Economy: from recession and inflation US Pop. +3mil/yr

35. Normal Business Cycle - roughly parallels the increase in population (Expressed in GDP) Peak Trough GDP - Gross Domestic Product - the total monetary value of all G&S produced in US in 1 yr. 2006 GDP- $13-Trillion What Americans Expect to Receive from Government Regulation 4. Stabilizing the Economy: from recession and inflation US Pop. +3mil/yr 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter

36. Hyperinflation INFLATED BUSINESS CYCLE • Inflation: (lack of fear/uncertainty) • high prices - high wages - high employment • Consumers TOO willing to spend • much borrowing US Pop. +3mil/yr What Americans Expect to Receive from Government Regulation 4. Stabilizing the Economy: from recession and inflation

37. What Americans Expect to Receive from Government Regulation 4. Stabilizing the Economy: from recession and inflation Hyperinflation INFLATED BUSINESS CYCLE • Inflation: (lack of fear/uncertainty) • high prices - high wages - high employment • Consumers TOO willing to spend • much borrowing US Pop. +3mil/yr Fiscal Policy (Congress) -raises taxes - reduce social spending Monetary Policy (Federal Reserve) -raise Prime Lending Rate, increasing the “price” of borrowed money, thus discouraging borrowing and spending

38. What Americans Expect to Receive from Government Regulation 4. Stabilizing the Economy: from recession and inflation DEFLATED BUSINESS CYCLE • RECESSION: (fear or uncertainty in marketplace, 2 or more consecutive quarters of negative GDP growth) • -high unemployment - low wages - low prices • too LITTLE spending - low productivity • - little borrowing US Pop. +3mil/yr Depression

39. What Americans Expect to Receive from Government Regulation 4. Stabilizing the Economy: from recession and inflation DEFLATED BUSINESS CYCLE • RECESSION: (fear or uncertainty in marketplace, 2 or more consecutive quarters of negative GDP growth) • -high unemployment - low wages - low prices • too LITTLE spending - low productivity • - little borrowing US Pop. +3mil/yr • Fiscal Policy (Congress) • lower taxes • - raise social spending Monetary Policy (Federal Reserve) - lower the Prime Lending Rate, thus encouraging borrowing Depression

40. What Americans Expect to Receive from Government Regulation 4. Stabilizing the Economy: from recession and inflation • WAGE AND PRICE CONTROLS • Most drastic step government can take because direct violation of free market principles. Usually reserved for times of war or depression. • Laws to establish “Ceilings” (preventing prices from rising too high) and “Floors” to stop wages and prices from falling too low which market forces (Demand and Supply) would force them to do if the law didn’t stop it. • EXAMPLES: agricultural price supports during the Great Depression and the current Minimum Wage (FLSA)

41. How Voters Influence Economic Policy - Vote - for candidates who reflect shared economic beliefs about government regulation of the economy - Democrats vs Republicans

42. How Voters Influence Economic Policy • Vote - for candidates who reflect shared economic beliefs about government regulation of the economy - Democrats vs Republicans • Interest Groups - economic power used to hire lobbyists to influence legislators’ votes on bills affecting government regulation of the economy. • Fastest- growing and largest Interest Group in America?

43. How Voters Influence Economic Policy • Vote - for candidates who reflect shared economic beliefs about government regulation of the economy - Democrats vs Republicans • Interest Groups - economic power used to hire lobbyists to influence legislators’ votes on bills affecting government regulation of the economy. • Fastest- growing and largest Interest Group in America? • A.A.R.P. - American Association of Retired Persons

44. How Voters Influence Economic Policy • Vote - for candidates who reflect shared economic beliefs about government regulation of the economy - Democrats vs Republicans • Interest Groups - economic power used to hire lobbyists to influence legislators’ votes on bills affecting government regulation of the economy. • Fastest- growing and largest Interest Group in America? • A.A.R.P. - American Association of Retired Persons • (which Mr, Knox will all too soon be eligible to join!)

45. 5 Market Failures of Capitalism: Inadequate Business Competition Externalities Inability to Produce Public Goods Inadequate Knowledge of Market Conditions Immobility of the Factors of Production

46. 5 Market Failures of Capitalism: Inadequate Business Competition - Anti-trust legislation Externalities - government passes laws prohibiting Inability to Produce Public Goods - Government provides Inadequate Knowledge of Market Conditions - again laws and info Immobility of the Factors of Production - when the factors are harmed, the govt. helps out