EconomicandEnvironmentalPolicy:ContributingtoProsperity

GovernmentasRegulatoroftheEconomy

An
economy
isasystemofproductionandconsumptionofgoodsandservicesthat
areallocatedthroughexchange

InTheWealthofNations,AdamSmithadvancedthedoctrineof
laissezfaire
economics
,whichholdsthatprivatefirmsshouldbefreetomaketheirown
productionanddistributiondecisions

Laissezfaircapitalismhadlimits

certainareasoftheeconomy,suchas
roadways,arenaturalmonopoliesandarebetterhandledbygovernmentthanby
privatefirms

ItwasnotuntiltheGreatDepressionthatthegovernmentassumedalarge
economicrole

Today,theUShaswhatisdescribedasa
mixedeconomy

althoughtheeconomy
operatesmainlythroughprivatetransactions,governmentplaysasubstantialrole

OnewaytheUSgovernmentparticipatesintheeconomyisthroughthe
regulation
ofprivatelyownedbusinesses

USfirmsarenotfreetoactastheypleasebutinsteadoperatewithinthelimitof
governmentregulation,whichisdesignedtopromoteeconomic
efficientandequity

EfficiencythroughGovernmentIntervention
Economicefficiency
resultswhentheoutput
ofgoodsandservicesis
thehighestpossible
giventheamountof
inputthatisusedto
produceit
PromotingCompetition
Tocompete,
lessefficient
producerswill
havetocuttheir
productioncostsorfacethelossofcustomerstolowerpriced
competitors
Marketsarenotalwayscompetitive

Ifaproducercanacquireamonopolyonaparticularproductorcan
successfullyconspirewithotherproducerstofixthepriceofthe
productatanartificiallyhighlevel,theproducerdoesnothavetobe
concernedwithefficiency

PricefixingwasprevalentintheUSinthelate19th

centurywhen
largetrustscametodominatemanyareasoftheeconomy,including
theoil,steel,railroad,andsugarindustries
Thegoalofsuchregulatoractivityistoimproveefficiencybyrestoring
marketcompetitionorbyplacingalimitonwhatmonopoliescancharge
forgoodsandservices
Governmentacceptanceofcorporategiantsalsoreflectstherealization
thatmarketcompetitionisnotlongersimplyanissueofdomesticfirms
MakingBusinessPayforIndirectCosts
Economicinefficienciesalsoresultwhenbusinessorconsumersfailto
payforfullcostsofresourcesusedinproduction
Economistslabeltheseunpaidcosts
externalities

TheCleanAirActof1963

WaterQualityActof1965
DeregulationandUnderregulation
Althoughgovernmentregulationisintendedtoincreaseeconomic
efficiency,itcanhavetheoppositeeffectifitunnecessarilyincreasesthe
costofdoingbusiness
Ifthegovernmentplacesexcessiveregulatoryburdensonfirms,they
wasteresourcesintheprocessofcomplying
Theresultofoverregulationishigherpricedgoodsthataremore
expensiveforconsumersandlesscompetitiveinthedomesticandglobal
markets
Amoreconcertedresponseis
deregulation
therescindingofregulation
alreadyinforceforthepurposeofimprovingefficiency

AirDeregulationAct
Deregulationcanbecarriedtoofar

Freedofregulatoryrestrictions,firmscanengageinrecklessor
unethicalpracticeoutofabeliefthattheycangetawaywithit
EquitythroughGovernmentIntervention
Economicequity
occurswhenaneconomictransactionisfairtoeachparty
Atransactioncanbeconsideredfairifeachpartyentersintoitfreelyand
ethically
TheProgressiveErawasmarkedbysomeequityefforts
FoodandDrugAdministration
TheNewDealearproducedanotherwaveofequitymeasures,including
financialregulation
SecuritiesandExchangeActof1934
TheNewDealalsoprovidedgreaterequityfororganizedlabor
FairLaborStandardsActof1938
Tenfederalagencieswereestablishedtoprotectconsumers,workers,andthe
publicfromharmfulbusinessactivity
ThePoliticsofRegulatoryPolicy
Economicregulationhascomeinwaves,aschangesinnationalconditions
havecreatedsocialawareness
ThefirstwavecameduringtheProgressiveEra,whenreformerssought
tostoptheunfairbusinesspracticesofthenewmonopolies,suchas
railroads
ThesecondwavecameduringtheGreatDepressionwhenreformers
soughttoregulatetroubledeconomicsectors,suchasbanking
AlthoughbusinessfirmsfoughttheProgressiveEraandNewDeal
reforms,theiroppositiondiminishedgraduallyastheyadaptedtothe
ideathatthenewregulatoryagencieswerechargedwithoverseeing
particularindustries,suchasbankingandpharmaceuticals
Thethirdwaveofregulatoryreform,inthe1960sand1970s,differed
formtheProgressiveandNewDealphasesinbothitsformanditspolitics

Thisthirdwavehasbeencalledtheeraofnewsocialregulation
becauseofthebroadgoalsitaddressesinthreepolicyareas:
environmentalprotection,consumerprotection,andworkersafety

TheEnvironmentalProtectionAgency(EPA)
BecauseneweragenciessuchastheEPAhaveabroadmandate,noone
firmorindustrycaneasilyinfluenceagencydecisions

Groupcompetitionalsoexistswithinnewregulatoryspheres
Mostoftheolderagencies,includingtheFCCandtheSEC,arerunbya

commissionwhosemembersarenominatedbythepresidentandservefixed
termsbutcannotberemovedbythepresidentduringtheirtermofoffice
Mostoftheneweragencies,includingEPA,areheadedbyasingledirectorwho
canberemovedfromofficeatthepresidentsdiscretion
Asaresult,theneweragenciestendtobemoreresponsivetothepresident
thantothefirmstheyregulate
GovernmentasProtectoroftheEnvironment

Conservationism:TheOlderWave
Althoughantipollutionpolicyisrelativelynew,thegovernmenthasbeen
involvedinlandconservationformorethanacentury
Thenationsparksandforestsaresubjecttoamultipleusepolicy
Conservationismorethananissueofprotectingnaturesunspoiledbeauty,it
alsoinvolvedtheprotectionofspeciesthatcannotsurviveoutsidetheir
naturalhabitat

Environmentalism:TheNewerWave
EnvironmentalProtection
EnvironmentalProtectionAgency
Withinafewmonths,theEPAwasissuingnewregulationsatsuchas
rapidpacethatbusinessfirmshaddifficultyimplementingthem
CorporationseventuallyfoundanallyinPresidentGeraldFord
Theeconomywasa
slump,andthecostsof
complyingwiththenew
regulationswereslowing
therecovery
Pollsindicatedeclining
publicsupportfor
regulatoryaction
Sincethen,
environmentalprotection
policyhasnotgreatly
expanded,norhasitgreatlycontracted
Environmentalregulationhasledtodramaticimprovementsinairand
waterquality
GlobalWarmingandEnergyPolicy
Noenvironmentalissuereceivesmoreattentionthanglobalwarming
Mostscientiststheorizethatthetemperatureriseisattributableto
emissionsfromcarbonbasedfuels
Greenhouseeffect
USisbehindmanywesterncountriesinenvironmentalprotection
policies
KyotoProtocol
Nosinglenationalcansolvetheproblemonitsown
GovernmentasPromoterofEconomicInterest

PromotingBusiness
Businessfirmsarenotopposedtogovernmentregulationassuch
Theyobjecttoregulatorypoliciesthatharmtheirinterests
Loansandtaxbreaksareotherwaysthatgovernmentpromotesbusiness
interests
Today,individualtaxpayerscarryasubstantiallyheavierburden.However,
someeconomistsdonotregardthechangeasparticularlysignificant,claiming

thathighercorporatetaxeswouldbepassedalongtoconsumersintheformof
higherpricesforgoodsandservices
Themostsignificantcontributionthatgovernmentmakestobusinessisinthe
traditionalservicesitprovides,suchaseducation,transportation,anddefense

PromotingLabor
Laissezfairethinkingdominatedgovernmentsapproachtolaborwellintothe
20th

century
Unionactivitywasheldbythecourtstobeillegalbecauseitinterferedwiththe
rightsofbusiness
Governmenthostilitytowardlaborincludedtheuseofpoliceandsoldiersto
breakupstrikes
TheGreatDepressionbroughtaboutachangeinlaborsposition
TheNationalLaborRelationsActof1935gaveworkerstherightto
bargaincollectivelyandprohibitedbusinessfromdisruptingunion
activitiesordiscriminatingagainstunionemployees
Minimumwageandmaximumworkhourguarantees
Unemploymentbenefits
Saferandmorehealthfulworkingconditions
Nondiscriminatoryhiringpractices

PromotingAgriculture
Governmentprogramstodayprovidebillionsofdollarsofassistanceannually
tofarmers,smalltolarge
Farmsubsidies
FiscalPolicyasanEconomicTool

Beforethe1930s,prevailingeconomictheoryheldthattheeconomywas
selfregulation,thatitwouldcorrectitselfafteradownturn;buttheeconomydid
notreturnaftertheGreatDepression

Thegovernmentseffortstomaintainathrivingeconomyoccurinpartythroughits
taxingandspendingdecisions,whichtogetherarereferredasits
fiscalpolicy

DemandsidePolicy
Keynesclaimedthatadownturncouldbeshortenedonlyifthegovernment
compensatesfortheslowdowninprivatespendingbyincreasingitsspending
level
Keynesiantheoryholdsthatthelevelofthegovernmentsresponseshouldbe
commensuratewiththeseverityofthedownturn
Duringan
economicdepression
anexceptionallysteepandsustaineddecline
intheeconomythegovernmentshouldengageinmassivenewspending
programstospeedtherecovery
Duringan
economicrecession
,whichisalessseverdownturn,government
spendingshouldalsobeincreasedbutbyalesseramount
Keynesstheoryisbasedon
demandsideeconomics
Itemphasizestheconsumerdemandcomponentofthesupplydemand
equation
Althoughincreasedgovernmentspendingcanpromoteeconomicrecovery,it
isatoolthatneedstobeappliedwithdiscretion
Excessivespendingresultsina
budgetdeficit
inwhichthefederal
governmentspendsmoreinayearthanitreceivesintaxandother
revenues
Theshortfallincreasesthe
nationaldebt
,whichisthetotalcumulative
amountthefederalgovernmentowestoitscreditors
ItiswidelyagreedthattheUSfacesaloomingfiscalcrisisbecauseofa

combinationofhighspendingandlowtaxation
OnlyrarelyinrecentdecadeshastheUSgovernmenthada
balancedbudged
or
a
budgesurplus

SupplysidePolicy
DemandsidesituationhasbeenthepreferredpolicyofDemocraticlawmakers
Afiscalpolicyalternativetodemandsidestimulationis
supplyside
economics
,whichemphasizesthebusiness(supply)componentofthe
supplydemandequation
SupplysidetheoremwasacornerstoneofPresidentRonaldReagansresponse
totheeconomicdownturnthatbeganbeforehetookofficein1981
Encouragebusinessinvestmentwithresultingincreasesinemploymentand
income
SupplysidetheorywasalsothebasisofPresidentGeorgeW.Bushseconomic
initiatives,whichincludedreductionsinthepersonalincometaxandinthe
capitalgainstax
Democratstypicallyadvocateaprogressive,or
graduated,personalincometax
,
inwhichthetaxrateincreasessignificantlyasincomerises,thusshiftingmore
ofthetaxburdentowealthierindividuals
Aprogressivetaxdiffersfroma
regressivetax
,wherelowerincome
individualspayahigherrate
Aswithdemandsidestimulation,supplysidepolicyhasitcosts
Busharguedthathistaxcutwouldboosteconomicactivitytosuchan
extentthatgovernmentrevenuewouldactuallyincreases
Thelossinrevenuefromthetaxcutexceededthegaininrevenuefrom
heightenedeconomicactivity
Likedemandsidepolicy,supplysidepolicyisintenselypartisan
Republicanlawmakerstendtobalkatdemandsidemeasures
Democraticlawmakerstendtobalkatsupplysidemeasures

FiscalPolicy:Practicaland
PoliticalLimits
Demandsidestimulation
asaneconomictool
emergedintheerawhen
thefederalgovernment
hadarelativelysmalland
mostlybalancedbudget

itwasfeasiblefor
governmenttoboost
spendingduringan
economicdownturn
withoutgoingsodeeply
indebtastojeopardize
longertermeconomicgrowth
Supplysidestimulationhadasimilarearlyhistory
Today,however,theuseofeithertoolastheBushandObamapresidencies
illustrateproduceslargebudgetdeficitsthatcoulddampenlongterm
growth
MonetaryPolicyasanEconomicTool

Monetarypolicyisbasedonadjustmentsintheamountofmoneyincirculation

TheFed
Controloverthemoneysupply

WashingtonDC
AllmembersareappointedbythepresidentwiththeapprovaloftheSenate
Regulatestheactivitiesofallnationalbanksandthosestatebanksthatchose
tobecomemembersoftheFederalReserveSystem
TheFederalReservehasbeenthedepositorybankforfederalfundsandisthe
instrumentthroughwhichthefederalgovernmentborrowsmoney,pays
federalemployees,makespaymentonthenationaldebt,andtransfersfunds
betweenbanks
TheFeddecideshowmuchmoneytheywantinthemarket
Loweringorrisinginterestrates
TheFedandControlofInflation
Inflationisanincreaseintheaveragelevelofpricesofgoodsandservices
Quantitativeeasinginvolvesthebuyingoffinancialassetsstrictlyforthe
purposeofinjectingmoremoneyintotheeconomyandpayingthemthrough
thesimpleactofprintingmoremoney
ThePoliticsoftheFed
Comparedtofiscalpolicy,monetarypolicycanbeimplementedmorequickly
Changesinfiscalpolicyusuallytakesmothstoimplement
WhoseinterestshouldtheFedwields
Issueofitsaccountability