Sean Hu

AP US Government and Politics

Due: March 15, 2016
I.

Chapter 15 Outline
Government as Regulator of the Economy
i.
An economy is a system of production and consumption of
goods and services that are allocated through exchange
ii.
Laissez-faire economics which holds that private firms
should be free to make their own production and distribution
decision was first brought up by Adam Smith in his book The
Wealth of Nations
iii.
One way the US government participates in the economy is
through the regulation of privately owned businesses
B. Efficiency through Government Intervention
i.
Economic efficiency results when the output of goods and
services is the highest possible given the amount of input
that is used to produce it
ii.
Adam smith and other classical economists argued that the
free market is the optimal means of achieving efficiency
because it promotes competition
1. This would demand ever-expanding improvements
iii.
Externalities are prices of companies products that do not
reflect the cost to society (unpaid costs)
1. For example, industries near bodies of water may
create severe water pollution that could ruin the
ecology
iv.
Until the 1960s, the federal government did not require
firms to pay costs
v.
Deregulation is the rescinding of regulations already in force
for the purpose of improving efficiency
1. This is most scene under Republican
presidency/congress (economically) such as during
Reagans era
vi.
Deregulation can be carried to far as firms can engage in
reckless or unethical practices; caused 2008 mortgage crisis
C. Equity through Government Intervention
i.
Economic equity occurs when an economic transaction is
fair to each party and theyre only considered fair if each
party enters into it freely and ethically
ii.
Progressive Era was marked by some equity efforts including
the creation of the FDA by Roosevelt
D. The Politics of Regulatory Policy
i.
Economic Regulation comes in waves and changes under
national conditions that have created social awareness
ii.
The first wave came during the Progressive Era when
reformers sought to stop unfair business practices against
the working class
iii.
The second wave came during the Great Depression when
reformers sought to regulate troubled economic sectors

II.

III.

such as banking
iv.
The third wave came in the 1960s and 70s and differed from
the past two in that it has been called the new social
regulation because of the broad social goals it addressed:
environmental protection, consumer protection, and worker
safety
Government as Protector of the Environment
A. Conservationism: The Older Wave
i.
Previously conservationism essentially seeks to keep the
American ecosystems in the West as free of human
intervention as possible
ii.
The case in point is Alaskas Arctic National Wildlife Refuge
which is home to numerous species, including caribou and
moose, however, it also contains substantial oil and natural
gas reserves
iii.
Conservationism is more than an issue of protecting
natures unspoiled beauty and is involved in the protection
of species that cannot survive outside their habitats
B. Environmentalism: The Newer Wave
i.
The year 1970 also marked the creation of the
Environmental Protection Agency (EPA) which was issuing
new regulations at such a rapid pace that business firms had
difficulty implementing them
ii.
Corporations eventually found an ally in President Ford who
claimed that business regulation was costing hundreds of
billions
iii.
Environmental regulation has led to dramatic improvements
in air and water quality
iv.
No other issue has received more attention than global
warming but addressing the issue is difficult given the selfinterests of many Congress members that create legislation
Government as Promoter of Economic Interests
A. Promoting Business
i.
Business firms are not opposed to government regulation as
such; they object only to regulatory policies that harm their
interest
ii.
However, governmental intervention is necessary for the
protection of private property and a fair exchange system
iii.
Loans and tax breaks are other ways that government
promotes business interests
B. Promoting Labor
i.
Laissez-faire thinking dominated governments approach to
labor well into the 20th-century and union activity was held
by the courts to be illegal because it interfered with the
rights of business
ii.
In spite of improvements, federal governments support of
labor does not extend further than their support for business
C. Promoting Agriculture
i.
Some of the largest subsidies have gone to agriculture in

IV.

V.

the United States

1. They provide billions of dollars of assistance
annually to farmers, large and small, accounting
more than 20% of net agricultural income
ii.
Farm subsidies have traditionally been strong supporters of
Congress especially from rural-state senators and
representatives
Fiscal Policy as an Economic Tool
A. Demand-Side Policy
i.
Originates from the economic theories of John Maynard
Keynes noting that employers tend to cut their production
and workforce when the economy begins to weaken
ii.
Economic depression is an exceptionally steep and
sustained decline in the economy
iii.
Economic recession is one with a less-severe downturn but
government spending should also be increased, just by
lesser amount
iv.
Demand-side economics emphasizes the consumer
demand component of the supply-demand equation by
increasing governmental spending and placing additional
money in the consumers hands
1. This is by nature a short-term remedy
v.
Budget deficit is when government spends more in a year
than it receives in tax and other revenues
vi.
National debt is the total cumulative amount the federal
government owes to its creditors
B. Supply-side policy
i.
Supply-side economics emphasizes the business component
of the supply-demand equation
ii.
The cornerstone was Reagan whose response to the
economic downturn was such
iii.
He turned to tax cuts as a means of stimulating business
activity
iv.
Democrats typically advocated progressive or graduated,
personal income tax; differing from regressive taxes where
lower-income individuals pay higher rates
Monetary Policy as an Economic Tool
i.
Monetary policy is based on adjustments in the amount of
money in circulation; they contend that money supply is the
key to sustaining a healthy economy
B. The Fed
i.
Because interest rates are controlled by the Federal
Reserve, they have an extra important role for monetarists
ii.
It has become more of the instrument through which
monetary policy is applied; they decide how much money to
add or subtract from economy
iii.
Lowering or raising the interest rates that member banks
pay when they borrow money from the Federal Reserve is
another method to affect the money supply

C. The Fed and Control of Inflation

i.
Inflation is an increase in the average level of prices of
goods and services