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Chapter 17- Domestic Policy. (1). Outline the various economic theories proposed for managing the economy. (2). Contrast fiscal policy and monetary policy , and explain the key role of “ the Fed .” (3). Assess Government's ability to manage the economy in view of the Lucas critique .

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chapter 17 domestic policy
Chapter 17- Domestic Policy
  • (1).Outline the various economic theories proposed for managing the economy.
  • (2). Contrast fiscal policyand monetary policy, and explain the key role of “the Fed.”
  • (3). Assess Government's ability to manage the economy in view of the Lucas critique.
  • (4). Discuss US distribution of income & wealth and the role of supply-side economics.
  • (5). Assess whether the US should pursue an industrial policy or remain a free market.
  • (6). Describe the basic concepts & categories of how the Government regulates business.
  • (7). Describe the key government economicand social regulatory agencies & their role..
  • (8). Assess the effectiveness and projected impact of current environmental policy.
  • (9). Describe the various concepts and categories of Social Welfare policy.
  • (10). Contrast social insurancew/publicassistance & explain the role ofmeans testing.
  • (11). Outline Social Welfare Policy and assess impact of the Social Security Act of 1935.
  • (12). Assess the current and future status of Social Security, Welfare, and Health Policy
managing the economy a brief historical overview
Managing the EconomyA Brief Historical Overview
  • From Government Restraint to Government Intervention:
    • 1800 to early 1900s dominated by late 18th century economic theory:
      • Classical economics=> lassez faire*

An economic theory, dominant at the start of the twentieth century, that argued that the federal government's only role in the economy was to ensure a stable supply of money.

  • Theory applied to Hoover’s balanced budgetas solution to
  • what major economic crisis?
managing the economy a brief historical overview 2
Managing the EconomyA Brief Historical Overview (2)
  • Start of the Great Depression=> 25% unemployment
  • 1929 stock market crash=>
    • “Hoovervilles” to protest lack of aggressive Federal action
    • Public impatient with inability of Government to fix problem
  • 1932 Presidential election => landslide election ofFDR
    • First Hundred Days => aggressive Federal action to fix $$$
    • New Deal programs=> Federal projects & spending
    • Objective: spur economy to life=> get America back to work
  • Examine FDR’s economic policy to spur economy
fdr s economic policy
FDR’s Economic Policy
  • Major economic events and actions of FDR’s Presidency:
    • Became President in 1933
    • During Great Depression the U.S. suffered 25% unemployment
    • Roosevelt’s Administration instituted the New Deal
    • At first employed public works programs.
      • Later used government spending to spur on the economy

What kind of Government economic policy uses spending to spur $$$?

fiscal policy
Fiscal Policy

Using the federal government's control over taxes and spending to influence the condition of the national economy.

managing the economy fiscal policy
Managing the Economy: Fiscal Policy
  • Fiscal Policy =>
    • Government policy to Tax and Spend
    • What economic theorist came up with this concept?
  • John Maynard Keynes
    • 20th century economic theorist
    • Wrote: General Theory of Employment, Interest, & Money
    • Less jobs=> less $$$=> low consumption=> low GDP
keynesian economics
Keynesian Economics
  • Active government role in the Nation’s economy:
    • Createsurplus & deficit– how?
    • Through manipulation of the Budget
  • Objective:
    • Stimulate or retard a “Boom or Bust” economy
  • How achieved?=>
    • Federal action: tax (less $$ in economy) or…
    • spend (put more $$ in economy)
    • Forever after associated with “New Deal Democrats”

Keynesian Economics

An economic theory, based on the work of British economist John Maynard Keynes, that contends that the national government can manage the economy by running budget surpluses and budget deficits.


A measure of a country's total economic output in any given year.

application of keynesian economics
During Recession:*

Government should spend to raise demand & thus spur economy

Okay to run a budget deficit

Overheated economy:

Government should cut spending to controlinflation (How?)

Raise taxes to take $$ out of economy

This will cut demand & slow economy down

Application of Keynesian Economics
  • Complication to above theory:
  • counter-cycle programs
  • Automatic government programs “kick in” to counter downturn
    • Food Stamps
    • Public Assistance
    • Unemployment compensation

Examine Recessioncycle in greater detail*

cycle of recession
Cycle of Recession

Because businesses can’t sell goods, they fire workers and produce less

Supply and demand for goods and services fall

Because people have less money, they buy less

Unemployment rises and the overall GDP falls

managing the economy
Managing the Economy
  • Besides Fiscal Policy (or Federal Tax & Spending)
    • What’s the other way to manage the economy?
  • Controlling theMoney Supply
  • What economic theory advocates control of money supply?
  • Monetary Theory:
    • Nation’s money supply is primary to economy’s health
    • Therefore controlling the circulation of money in Nation’s economy will control inflation or spur economic growth
  • Who controls the Nation’s money supply and how does it control it?
the federal reserve
The Federal Reserve
  • An independent regulatory commission that Congress created in 1913 to oversee the nation's money supply.
  • How does Federal Reserve control the money supply?
  • Control of Nation’s money supply by “The Fed”
    • Set the discount rate => (i.e. short term interest rates)
    • Buy or sell U.S. Treasury Securities=> (Savings Bonds)
    • Change required reserve ratio
      • Ratio of money Bank must hold in reserve & can’t loan
  • Examine structure of the Federal Reserve=>
the federal reserve1
Four Key Parts:

1. TheBoard of Governors

2. The Federal Open Market Committee

3. Twelve Regional Federal Reserve Banks

4. The commercial banks that are members of Federal Reserve System*

The Federal Reserve
government management of the economy
Government Management of the Economy
  • Assessment:
    • Can the Government effectively manage the economy?
  • Role & impact of the Lucas critique
    • Public’s & private corporations’ response to Gov. actions to counter its ill effects on their $$ interests
  • The “new Keynesians” (math models & sticky wages)
  • Debate & disagreements centered around following:
    • How economy works & proper Gov. policy to be applied
  • Bottom Line:
    • No sure resolution on Gov. role (big or small role)
current status of economic stewardship
Current Status of Economic Stewardship
  • 12 economists with 13 conflicting opinions
  • Applying Fiscal & Monetarycontrols=>
    • Aim: economic stability
  • Impact on economy of Government management actions:
    • Gradual dampening of Boom & Bust swings*
    • Recent trends since 1950*
  • Continuing disagreements over how to manage economy:
    • Distribution of Income & Wealth
    • Supply-side economics & the “trickle down” effect
    • Industrial Policy (as practiced in Japan)
debate on management of economy
Debate on Management of Economy
  • Continuing disagreements over how to manage economy:
    • Growing gap: Distribution of Income & Wealth:


U.S. income distribution as a percentage of income earned

us wealth income distribution
US Wealth & Income Distribution

Wealth: income, real estate, stocks, bonds, and material goods.

Top 20% ($1.8K+)

Top 1% ($2.3M+)

Control 80% of all wealth in the United States

Control 40% of all wealth in United States

debate of management of economy 2 supply side economics the trickle down effect
Debate of Management of Economy (2)Supply Side Economics* & the “Trickle Down” Effect

An economic theory that argues that if the government cuts taxes, reduces spending, and eliminates regulations, resources will be freed up to fuel the economy to produce even more goods and services.

  • Another proposal to manage economy?
  • Industrial Policy* (as practiced in Japan)
industrial policy

The government selects an industry that it thinks can be a world leader and spur on the economy

Industrial Policy*

Government Aid

R & D Funds

Regulation Exemption

Tax Incentives

Any downside to this approach?

industrial policy challenge
Industrial Policy Challenge
  • How accurate can government bureaucrats predict which particular industry or corporation will be the next up and coming winner?
    • Past government track record & efficiency in spending money don’t inspire confidence
  • What if investors in the market or future consumers disagree with the government’s selection & don’t buy it or go another direction instead?
next assignment
Next Assignment
  • Chapter 17b: Domestic Policy
    • Learning Objectives 6-12
  • Luncheon Learn=> class will start at 12:50
regulating business
Regulating Business
  • Regulatory policy
    • Origins: Interstate Commerce Act of 1887 (Box 17-1)
      • Purpose: Control unfair & monopolistic practices of who?
        • “Short” versus “Long Haul” prices to market?
  • Public attitude towards regulatory policy=>
    • Mixed & many times conflicting – why?
      • Theory versus reality
        • Theory: Government should stay out of business versus?
        • Reality: Consumer protection & small businesses
  • Two major categories Regulatory policy?
    • Economic regulation
    • Social regulation

Economic Regulations*

  • Rules affecting business practices
  • Seeks to ensure competition and prevent illegal monopolies

Social Regulations*

  • Rules that protect citizens from dangerous or unfair practices associated with how businesses produce products or with the products themselves.
objectives of economic regulation
Objectives of Economic Regulation
  • Government influences competitive practices of industry
    • Promote competition (prevent monopolies- Microsoft)
      • Stifle competition & innovations in software
    • Control firms’ entry into industry or control industry’s prices
      • When a Monopoly is necessary- examples?
      • Role of Interstate Commerce Commission of 1889(RR)
  • Disagreement in principle & practice
    • Impact of recent trends in deregulation
      • Savings & Loans (1980s)
      • Airlines
  • How has economic regulation evolved over US history?
    • Evolved in three major phases*
important events in economic regulation phase i
Important Events in Economic RegulationPhase I
  • Congress responds to farmers’ and small businesses’ complaints about major monopolies & trusts
    • 1887 establishesInterstates Commerce Commission (ICC)
      • Commission with no real enforcement capability
    • 1890Sherman Antitrust Act (against monopolies)
      • General statement of intent (still lacked teeth to enforce)
    • 1914Clayton Antitrust Act
      • Fix above weakness- established enforcement mechanism
    • 1914 Federal Trade Commission Act
      • (Same as above)
events in economic regulation phase ii
Events in Economic RegulationPhase II
  • More regulation following events leading to Depression
    • 1934 Federal Communications Commission (FCC)
    • 1934 Securities and Exchange Commission (SCC)
    • 1938 Civil Aviation Board (CAB)
  • 1960s=> Federal Government established four key areas of economic regulatory policy:
    • Antitrust-Prevent monopolies & encourage competition (Microsoft suit)
    • Financial Institutions-Savings & Loans/SEC/Enron debacle
    • Transportation- Air/Ground/Rail
    • Communication- FCC(Radio & TV)
events in economic regulation phase iii
Events in Economic RegulationPhase III
  • Economic Regulation=> 1970s through present:
    • Deregulation=> benefits & unintended consequences
    • Mixed bag- sometimes good & sometimes bad:
  • Deregulation is good for consumer when:
    • Competition rises & prices fall
      • Telecoms, Computers, Airlines
  • Deregulation can be very bad for the public when:
    • Corporate greed leads to poor service & risky business decisions
      • Airline services to passengers
      • Savings & Loan default (tax payers pick up tab)
      • Stock Market price manipulation & fraudulent accounting (Enron)
social regulation
Social Regulation
  • Social Regulationfocus on conditionsunder which=>
    • Goods & services are produced
  • When contrasted witheconomic regulation:
    • Social regulationscut across industries
      • (vice focus on a specific industry)
    • Regulations grounded in specific technical legislation
      • Very specific & detailed
      • vice vague & general guidelines of economic regulations
      • Aim: protect public interest
  • Principal Federal Agencies established to administer:
    • Social regulation from 1930 through 1975 (See Table 17-1)*
protecting worker safety and health
Protecting Worker Safety and Health
  • Occupational Safety and Health Act of 1970
    • Created OSHA=> regulate industry=> worker safety
  • Problems & criticism
    • Too detailed & complicated regulations
    • Employers complaints (time & $$$ to comply)
  • Labor Union & consumer advocates => support
    • Posted regulations (see example p.623)
  • Debate OSHA’s over proper role continues
    • Debate centered around costs versus benefits
protecting the environment
Protecting the Environment
  • Evolution of Environmental Policy (Silent Spring)
    • 1960s => environmental activists movement
    • Union Oil of California oil spill off Santa Barbara=>
      • VIP & public outcry (who owns homes off West Coast?)
  • National Environmental Policy Act (1969):
    • Requirement for Environmental impact statement
    • Required for all government agencies
    • Later exploited by environmental activists
      • (Endangered Species Act)
  • Nixon consolidates various agencies intoEPA (1970)
    • Vast array of laws & regulations ensued (Table 17-2)*
      • (It was the early 70s after all)
epa responsibilities
EPA Responsibilities

So what areas exactly does the EPA regulate?

protecting the environment1
Protecting the Environment
  • The Environmental Protection Agency regulates:
    • Air Quality
    • Water Quality
    • Disposal of Hazardous Waste
    • Chemicals
    • Noise Levels

Any problem* with Government regulations to protect the environment?

political conflict who is effected
Political Conflict & Who is effected





Policy impact





environmental policy conflict its impact
Environmental Policy Conflict & Its Impact
  • Political conflicts of Environmental Protection
    • Environmental policies creates: Winners & losers
    • Due to those affected by benefits vs. costs
    • Somebody has to pay for it
  • Other related factors:
    • Diffused benefits (to Public) with specific costs to a few (Industry)
    • Benefits often hard to measure
    • Measuring extent of environmental problem very difficult
    • Costs rise significantly for each incremental improvements at the margin
future directions
Future Directions
  • Future Directions for Environmental Policy
    • Conflicting guidance=> to the EPA
    • Democrats (want more regulation) vs.
    • GOP (who want less regulation)
  • Options for how government protects environment
    • Three different methods:
    • 1. Command & control*
    • 2. Market incentives
    • 3. Pollution prevention
differing options to protect environment a comparison
Differing Options to Protect EnvironmentA Comparison:

Market Incentives &

Pollution Prevention

Command and Control

  • Agencies draft regulations
  • Agencies dictate enforcement mechanisms
  • Establish allowable pollution levels
  • Issue permits to pollute
  • Recipients can trade and sell permits

Debate & great conflict over environmental policy to continue

social welfare policy
SocialWelfare Policy

What isSocial Welfare Policy?

Government programs that provide goods and servicesto citizens to improve the quality of their lives.

promoting social welfare
PromotingSocial Welfare
  • Federal government runs broad range of programs
    • Several specifically designed to promote social welfare
  • Basic Concepts and Categories of Social Welfare Policy
    • Fed programs=>
      • goods & services to improve Public’s quality of life
  • What are the two major categories ofSocial Welfare?
    • Social Insuranceprograms & qualifications
      • You pay in to the program=> you qualify (example?)
    • Public Assistance => means tested programs
social welfare strategies
Social welfare strategies
  • What are the three social welfare strategies?
    • 1. Alleviative
      • (food stamps & “Meals on Wheels”)
    • 2. Preventative
      • (Unemployment Compensation & Social Security)
    • 3. Curative
      • (“Head Start” & job training)

If given an example, can you ID the proper strategy?!

social welfare programs
Income maintenance programs

Nutrition programs


Housing programs

Education programs

Social services programs

Social Welfare Programs

What are the different types of Social Welfare Programs?

See Table 17-3 for specific associated programs by type

the evolution of social welfare policy
The Evolution of Social Welfare Policy
  • Welfare as private sector & local responsibility
    • True for first half of our Nation’s history
  • Federal government initial involvement: “deserving poor”
    • 1880s thru 1910s =>
      • Focused on disabled & elderly Veterans
  • State government also expanded selective benefits
    • Addressed needs of other poor citizens
    • Both Federal & State governments target “deserving poor” only
  • Then what major event caused both to reconsider who should take lead in addressing needs of its citizens? *
    • What major legislation was enacted as a result?*
impact of great depression the new deal
Impact of Great Depression & the New Deal

Social Security Act of 1935*

  • Act established Federal programs providing goods & services to improve the lives of American citizens in two major areas:
  • 1. Provided Social Insurance programs for elderly and disabled
  • 2. EstablishedPublic Assistance programs to help blind, elderly, and dependent children
nationalizing social welfare a summary
Nationalizing Social Welfare– A Summary
  • Social Security Act of 1935
    • Significantly expanded Federalgovernment’s welfare role
  • Social insurance programs (elderly & unemployed)
    • Created as old age & survivors program
    • 1956: Congress adds Disability Insurance
  • Social Security has grown significantly over the years
    • Both in number of “entitled” and costs of administration
    • Beneficiariesgrew from222K in 1940 to 46.4 Million by 2003
    • Increased costs: $32M (1940) to $454 Billion in pay out in 2003
      • Cost increase due toinflation & COLAover 60 year span
      • FICA deductions have also increased (Chapter 16)
public assistance programs
Public Assistance Programs
  • Administration left to states =>
    • Care for elderly, poor, blind
  • 1972: Congress standardized benefits & eligibility
    • Supplemental Security Income (SSI)
    • Cost grew: from $495 Million in 1940 to 32.2Billion in 2001
  • 1960s: ADC => AFDC(controversial from start)
    • (1996: AFDC replaced by TANF )
  • 1964: LBJ’s War on Poverty
    • Number of additional program created
    • Economic Opportunity Act of 1964
    • Job Corps & Head Start (associated with what strategy?)
    • Food Stamp program(significantly grew over decades)
public assistance programs problems
Public Assistance Programs- problems
  • Many War on Poverty programs eventually phased out – why?
  • Activists poor challenged established power
    • Traditional establishments controlled distribution of Public Assistance (and resented this challenge to Power)
    • Political bias foralleviative/preventative& against curative programs
health care
Health Care
  • Two major categories of Health Care?




What’s the difference between the two?

*A social insurance program that provides basic hospital insurance and supplementary insurance for doctors' bills and other health care expenses for people over the age of 65 or older


**A public assistance program that provides publicly subsidized health care to

low-income Americans.

(Means Tested)

current status of social welfare policy
Current Status ofSocial Welfare Policy
  • Criteria used to measureSocial Welfare Policystatus:
    • 1. Social welfare Policies of other Industrial Democracies
    • 2. Social Welfare vs. other types of U.S. government spending
    • 3. Spending on different types of Social Welfare programs
    • 4. Objective measurements of success of Social Welfare Programs
1 policies of other industrial democracies a comparison
1. Policies of other Industrial DemocraciesA Comparison
  • Full Health care provided by other Industrial Democracies
  • US spends less on social welfare than Japan & Europe
    • US spends 30% of Budget vs. 40% of European budgets
    • Europeans receive greater amount of government services
    • Health care paid in full by government
  • American tradition of relying on private sector
    • Strong bias against big government & social medicine
3 spending on different types of social welfare
3. Spending on different types of Social Welfare

Distribution of Social Welfare Expenditures Across Programs

4 measuring success of social welfare
4. Measuring success of Social Welfare
  • Conservative position: complete failure
    • Traps poor in poverty cycle=> permanent underclass
  • Liberal position: work in progress
    • Needs moderate reform but still effective
  • Objective measures => reveals mixed success
    • Poverty has fallen since 1970 (from 13%)
    • 2000: fell to 11.3% poverty rate=> then back up to 12.5 in 2003
    • Nevertheless: major gap exists between two groups:
      • Old (10.2%) vs. children (17.6% in 2003) & growing
    • Infant mortality rate has fallen to 7 per 1000 births
  • Social effects on society also reveal some negatives:
    • Significant increase in divorce, single parent families, & crime
the future of social welfare policy
The Future ofSocial Welfare Policy
  • Social Security – two debated questions
    • 1. On whom should government spend $$$ (old or young?)
    • 2. Is Social Securityheaded for insolvency?*
      • (and what should we do about it if it is?)
  • Welfare Policy – the uneasy balance in conflict:
    • The safety netversus thefree ride
    • 1996 Welfare Reform law:
      • Abolished AFDC => TANF - striking a proper balance?
      • Concerns: Impact of the economic recession on unemployed?
      • Poor & unemployedtrying to make ends meet at the margin
  • Health Policy* => Two major concerns: cost & access
    • How to stem costs & who should have access
social security
Social Security

Options to address problem?

Increase taxes, reduce benefits, restrict eligibility

major concerns with health care system
Major concerns with Health Care system
  • Access and Cost

Impact of Baby Bommers

Who pays the costs of the uninsured?

next class assignment
Next Class Assignment
  • Chapter 18a: Foreign Policy
    • Learning Objectives 1-5
  • Thanksgiving Holiday (Wednesday: no class)
  • Chapter 18b: Foreign Policy (following Monday)
    • Learning Objectives 6-10
  • Preparation for Course Review (Wednesday 11/30)
    • Also: RESEARCH PAPER IS DUE in Two Weeks!!!
chapter 17 key terms
Chapter 17- Key Terms
  • Counter-cyclical programs: Government programs that automatically increase spending when the economy slows down and unemployment rises, and decrease spending when the economy speeds up.
  • Economic regulation: Laws and governmental rules that affect the competitive practices of private business.
  • Environmental impact statement: A document federal agencies must issue that analyzes the environmental impact of any significant actions they plan to take.
  • Federal Reserve System: An independent regulatory commission that Congress created in 1913 to oversee the nation’s money supply.
  • Fiscal policy: Using the federal government’s control over taxes and spending to influence the condition of the national economy.
  • Food Stamp program: A public assistance program established in 1964 that provides stamps (or coupons) to low-income people to buy food.
  • Gross domestic product (GDP): A measure of a country’s total economic output in any given year.
  • Industrial policy: The policy of seeking to strengthen selected industries by targeting them for governmental aid rather than letting the forces of the free market determine their fates.
chapter 17 key terms 2
Chapter 17- Key Terms (2)
  • Keynesian economics: An economic theory, based on the work of British economist John Maynard Keynes, that contends that the national government can manage the economy by running budget surpluses and budget deficits.
  • Laissez faire: An economic theory, dominant at the start of the twentieth century, that argued that the federal government’s only role in the economy was to ensure a stable supply of money.
  • Lucas critique: An economic theory that contends that if people act rationally, then their reactions to changes in government policy will often negate the intent of those changes.
  • Means test: A requirement that people must fall below certain income and wealth requirements to qualify for government benefits.
  • Medicaid: A public assistance program that provides publicly subsidized health care to low-income Americans.
  • Medicare: A social insurance program that provides basic hospital insurance and supplementary insurance for doctors’ bills and other health care expenses for people over the age of 65.
  • Monetary theory: An economic theory that contends that a nation’s money supply, or the amount of money in circulation, is the primary if not sole determinant of the health of the national economy.
chapter 17 key terms 3
Chapter 17- Key Terms (3)
  • Public assistance: Government programs, such as Medicaid and food stamps, that are funded out of general tax revenues and that are designed to provide benefits only to low-income people.
  • Regulatory policy: Laws and government rules targeting private business for the purpose of (1) protecting consumers and other businesses from what the government deems unfair business practices; (2) protecting workers from unsafe or unhealthy working conditions; (3) protecting consumers from unsafe products; and (4) protecting a number of groups from discrimination.
  • Social insurance: Government programs such as Social Security and Medicare that require those who will receive benefits to make contributions (otherwise known as taxes) and that distribute those benefits without regard to the recipient’s level of income.
  • Social regulation: Laws and governmental rules designed to protect Americans from dangers or unfair practices associated with how private businesses produce their products as well as from dangers associated with the products themselves.
  • Social welfare policy: Government programs that provide goods and services to citizens for the purpose of improving the quality of their lives.
  • Supply-side economics: An economic theory that argues that if the government cuts taxes, reduces spending, and eliminates regulations, resources will be freed up to fuel the economy to produce even more goods and services.
  • Temporary Assistance for Needy Families (TANF):A public assistance program that provides government aid to low-income families with children for a limited amount of time.