Economic and Environmental Policy

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Eli Troen

Chapter 15
Economic and Environmental Policy

The Public Policy Process – Government action in the economic sector.
There are six stages of this process:
Emergence of Issues
 Problem Recognition – stage where society finally acknowledges the issues and
conditions as problems.
- It can happen suddenly (9/11), BUT it normally takes time to occur (Racism).
 Problem Transformation – stage where the policy problem become true political issues.
- Leadership is essential, as many issues need the extra “umph” to enter the limelight.
- Interests don’t publicize issues, as they often keep it secret to get what they want (Iron
triangle).
- Politicians and the Media especially can focus the public’s attention on issues.
Resolution of Issues
 Policy Formation – the stage where solutions are devised for the problems.
- Specialists often formulate policy (and are more likely to get it adopted than nonspecialists), but Politicians also draft policy, as they know what will get through.
 Policy Adoption – Stage where a policy or program is adopted.
- The division of powers makes it difficult to enact policy, and it needs a lot of support.
- John Kingdon believes that policy breakthroughs occur only when the many stages of the
policy process converge.
 Policy Implementation – the stage where the adopted policy is put in place.
- This stage relies heavily on the bureaucrats and judges, who administer and apply the
law, respectively. They also take the blame.
 Policy Evaluation – the final stage where the effectiveness of the policy is examined.
- Did it work as intended? How is it being administered?
- This is a substantial part of the process (GAO, OMB)
These stages can be reversed in order, but the stages remain distinct.
Government as Regulator of the Economy
Economy – a system of production and consumption of goods and services that are allocated
through exchange among producers and consumers.

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Adam Smith’s The Wealth of Nations espouses laissez-faire doctrine, meaning that
owners of businesses should make their own production and distribution choices without
government intervention. “The Invisible Hand”
When there is demand, producers will make the demanded good, and consumers will buy
it, and vice versa.
He acknowledges that the government should regulate natural monopolies like railways.
Karl Marx’s Das Kapital argues that the free market exploits the workers by paying a
wage below what should be deserved.
He proposed a collective economy where the workers own the means of production.
The Soviet Model collapsed, proving this was inefficient.

Free-Market systems are very prevalent in the world BUT they do have lots of government
regulations. The roles vary in each economy (Welfare, Socialized Economies)
The US’s Economy is a “mixed system” that has both private and public controls. This includes
welfare services. It is more free-market than the partially socialized Scandinavian countries.
- The US Government still regulates private business, meaning that there are restrictions.
Efficiency Through Government Intervention
Efficiency – Firms should fulfill as many of society’s needs as possible while using as few of its
resources as possible.
Greater Output = Greater Efficiency
Smith and other Classical Economists believed that the free-market was the ultimate way to
achieve efficiency, BUT the assumption that the market always determine prices is flawed.
- Desire for profit may lead producers to seek a monopoly (that doesn’t have to worry
about efficiency or competition).
In the late 19th Century, economic restraints were prevalent due to the amount of monopolization
(oil, railroads, sugar). The First step towards regulation was the Interstate Commerce Act, which
regulated the railroad monopolies.
Nowadays, the FTC, FDA, and Antitrust Division (among others) regulate the economy to
preserve market incentives for all.
Economic inefficiencies can also result in businesses, called externalities. These are burdens that
society pays when firms do not pay the full costs of production. Pollution is an example.
Government overregularization can also be an issue, making firms buy expensive equipment and
the like. It can also be expensive for the government to implement (the Safe Drinking Water Act).
- This leads to government reform and cost-benefit analysis of programs.

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In response to regulatory excess, the government might err on the side of deregularization, the
rescinding of excessive government regulations for the purpose of improving economic
efficiency.
- If carried too far, this would result in underregularization, which can harm businesses and
lead to the exploitation of consumers and even the government.
Equity Through Government Intervention
Very Prominent in the 1960s and 70s
Equity – the situation in which the outcome of an economic transaction is fair to each party.
- This is judged by outcomes, meaning whether each party enters freely and is at no known
disadvantage.
The FDA, the Securities and Exchange Act, and the Fair Labor Standards Act (among others) are
examples of equitable regularization by the government.
The Politics of Regulatory Policy
Regulation comes in waves, like during the Progressive Era or during the Great Depression.
- The 60s and 70s reform wave was the are of “new social regulation” because they goals
included environmental protection, consumer protection, and worker safety.
The EPA and other similar agencies have no specific clientele, so no one firm or industry can so
easily influence policy in the agency.
Government as Protector of the Environment
One of the most sweeping changes of public opinion has been about environmental protection
since the 1960s.
- Rachel Carson’s The Silent Spring was essential to launching the environmental
movement, revealing the harmful chemicals in pesticides.
Conservationism: The Older Wave
Though government environmental policy concerning pollution is relatively new, the
government has been involved in conservation ever since President Theodore Roosevelt and the
establishment of the National Park System.
- The national parks are subject to “dual use” policy where they are preserves and
recreational areas yet still can be used for natural resources.
One regulation, the Endangered Species Act, has called into question such protections, as many
industries were reliant on the habitats of certain protected animals.
- After legal battles, some concessions were made, allowing work to be done in a regulated
manner.

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Environmentalism: The Newer Wave
Environmental Protection
The 1960s was the beginning of the environmental movement as we know it today. In 1970, the
first Earth Day was held, and that was very important in mobilizing public interest.
The EPA was created in 1970 and began issuing a multitude of regulations almost immediately.
- President Gerald Ford wasn’t too enamored of the EPA and claimed that the regulations
were costing too much annually. The economy was in a recession and the regulations
were an additional strain.
- Since the 70s, the EPA has neither grown nor shrunken (for all intents and purposes).
The EPA has helped to clean up smog (pollution fog) and has helped to reduce the amount of
waste discarded into bodies of water. Toxic waste emissions have been halved, food has been
made safer, and energy efficiency has increased.
- Toxic waste site cleanup has been much more arduous and slow. The Superfund program,
tasked with cleaning these sites, but due to company loopholes and buyouts, the
program’s goal is not close to being met.
Global Warming and Energy Policy
The issue of global warming/climate change (due to the “greenhouse effect”) has been receiving
a lot more attention due to the scientific community’s findings, and today, few politicians still
deny the problem.
- Results include melting of polar ice caps and rising sea levels, as well as temperatures.
The US is the leading source of carbon emissions, and though reducing emissions is the only
way to slow down climate change, the US errs on the side of pro-growth.
- The Kyoto Agreement aimed to place imbalanced and unfair restrictions of different
countries, and G. W. Bush chose not to participate in the agreement.
Many alternative energies exist (wind, nuclear, hydrogen fuel) but they are either too costly or
inefficient.
Due to Gasoline and Oil dependence, it is very difficult to make these environmental changes,
but polls indicate that a majority of Americans would accept a slower economy and some job
loss, in order to enact these regulations.
Government as a Promoter of Economic Interests
Promoting Business
Businesses aren’t opposed to pro-business regulations. The government can aid business by
providing loans and by giving tax breaks.
Over the last 40 years, the burden of federal taxation has shifted from the corporations to
individuals, a 5:1 ratio!

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The most significant contribution to business includes education, transportation, and defense
(through colleges and universities and other public-sector contributions).
Promoting Labor
Up until the 1930, Laissez-faire beliefs resulted in few rights for workers. There was an obvious
hostility towards labor.
- In 1935, this changed with the Labor Relations Act, which gave workers the right to
collective bargaining and prevented business discrimination against union employees.
- The government has also aided labor by enacting minimum wages and maximum work
hours, unemployment benefits, more safe working conditions, and nondiscriminatory
hiring practices.
Government support for labor is not nearly as extensive as support for Business.
Promoting Agriculture
Until the 20th Century, agriculture was the dominant business in America.
- The Homestead Act of 1862 gave government lands to settlers on the condition that the
land was farmed.
Today, farm programs that assist small farmers and larger agribusinesses cost the government
billions.
- Risks of farming are accounted for, like weather, world markets, and other factors.
When the government tried to deregulate farming by reducing subsidies and other programs, in
favor of a free-market approach, the result was a very depressed farm economy, and the
government quickly abandoned that approach.
Fiscal Policy: Government as Manager of the Economy
The Great Depression marked the shift from free-market economics to a more governmentinvolved economy.
Taxing and Spending Policy
Fiscal Policy – a tool of economic management by which government attempts to maintain a
stable economy through its taxing and spending policies.
- The annual budget is the basis for this policy. It allocates all of the expenditures and
identifies revenues.
John Maynard Keynes’ The General Theory of Employment, Interest, and Money says that severe
economic downturns can be shortened only by government spending.
- Such spending is called deficit spending, and it entails spending more than is received
from taxes.
- By stimulating the economy, consumers will buy more, then stimulating production and
therefore jobs.
- The level of response should be appropriate for the severity of the downturn.
Economic Depression - an exceptionally steep and sustained downturn in the economy.

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Economic Recession - a less severe downturn.
Keynes stated that the government should spend a lot more during a depression and a little bit
more during a recession.
Demand-Side Stimulation
Demand-Side Economics - a form of fiscal policy that emphasizes “demand”. Government can
use increased spending or tax cuts to place more money in consumers’ hands and thereby
increase demand.
Increased spending is a tool for severe economic crises, BUT it should not be the only response.
- During the 90s, the US was in an economic downtown, but due to the budget deficit
(spending more than taking in) of past years, increasing spending would have only
increased the already large national debt, the total amount the US owes creditors.
- By the late 90s, the US had finally achieved a balanced budget, meaning that the
governments’ tax and revenues for the year were roughly equal to its expenditures.
- This led to a budget surplus, a time when the federal government received more in tax
and revenue than it spent. This was due to a surging Economy and unparalleled growth.
Now, the budget deficit has increased exponentially, due to wars and recession.
Every day, the government spends about $4 Billion Dollars, about the amount a business
contributes in a year.
Supply-Side Stimulation
Supply-Side Economics - a form of fiscal policy that emphasizes “supply”. An example of
supply-side economics is a tax cut for business.
- This theory was the cornerstone of President Reagan’s economic policy, “Reaganomics”.
- Supply-Side stimulates supply as opposed to consumer demand
As a result of this policy, the tax cuts that were given to businesses ended up resulting in extreme
overall losses, as the gains from the economic growth were dwarfed by the tax losses.
- The tax cuts only furthered the growing deficit.
President George W. Bush also employed this economic policy, additionally decreasing the
capital-gains tax, the tax that individuals pay on money gained from the sale of the capital asset,
such as property or stocks.
- Again, this only further served to increase the deficit, threatening to cancel out the
economic growth.
- The deficits were called “unsustainable” by Alan Greenspan, the Federal Reserve
Chairman.
Controlling Inflation
High unemployment and low productivity are the main problems that the government is set up to
fix. Another important one is inflation, the general increase in the average level of prices of
goods and services.

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To fight inflation, the government can cut spending or increase taxes, therefore reducing
spending and decreasing the amount of jobs.
The Process of Politics of Fiscal Policy
Fiscal Policy is decided yearly by the President and Congress through the budget.
The Budgetary Process
 The Executive Branch
- The Office of Management and Budget (OMB) uses the President’s directive to issue
guidelines for the executive agencies’ budgets.
- The agencies prepare budgets that are sent back to the OMB.
- The OMB reviews the proposals and then finalizes an overall budget for the President.
! The Agencies tend to want more money, BUT the OMB has to balance the requests with the
President’s plans. !
The OMB focuses on Discretionary Spending, which includes defense, foreign aid, education,
national parks, highways, etc.
- Though it is called “discretionary”, it is not really, because a President would not be able
to slash all defense spending or the like.
The President then works over the budget to align it with administration goals, and when it is
finished, the President sends it off to Congress.
 Congress
- Congress turns to the Congressional Budget Office (CBO), which is the congressional
equivalent of the OMB. The CBO overlooks the budget for any inaccuracies or mistakes.
- The House and Senate Budget committees draft a “budget resolution”, which is a
guideline for spending, and it allocates money between categories.
- The House Appropriations Committee then reviews the budget, reviewing each agency’s
request. The subcommittees can choose to increase or decrease the allocations.
- The Budget is then submitted for a full-house vote. If approved, the legislation is then
sent to the President for approval or veto.
- The budget then takes effect on October 1st, the begining of the government’s fiscal year.
Partisan Differences
Politics is a karge part of fiscal policy.
- The Democrats have worked to support low-income individuals and working class
Americans. They are sensitive to rising unemployment, and they often respond well to
recessions with increased government spending. This does lead to higher interest rates.
- Republicans try to avoid any additional spending, so as to not harm businesses in any
way.
Democrats favor a graduated/progressive personal income tax, where the tax rises with increased
income. Republicans prefer to keep the taxes low, contending that it supports investment and
economic growth.

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Monetary Policy: Government as Manager of the Economy, II
Monetary Policy – a tool of economic management, available to government, based on
manipulation of the amount of money in circulation.
Too much money in circulation = inflation

Too little money in circulation = slow economy

The Fed
The Federal Reserve System regulates all national banks, additionally deciding how much
money to add or remove from the economy (all while trying to prevent inflation/deflation).
- The Fed can increase or reduce the amount of money that banks are required to keep on
reserve. By increasing this rate, less money is in circulation.
- The Fed can increase or reduce interest rates, which affects borrowing and investment. A
lower interest rate results in a larger money supply.
Though Fiscal and Monetary policies can be debatable in effectiveness, Monetary Policy is much
quicker to be implemented than Fiscal Policy. Congress is often slow moving, BUT the Fed is
faster.
Republicans and Democrats differ over which tool to use: Taxing or Spending.
The Politics of the Fed
Though the power of the Fed in the economy is often overstated (it is only one part of the
whole), it is a vital component of US Economic Policy.
Questions arise: Whose interests does the Fed serve? Should an unelected body hold so much
power? etc.
- The Fed isn’t impartial, but it is typically more concerned with inflation and the money
supply than it is with politics.
- Though they aren’t elected (presidential appointments), each member can be easily
removed if the position is abused.
When the Fed was first created, it had no concept of Monetary Policy, BUT over the past
century, the Fed and the Government, too, have played a significant role in the US economy,
helping it to prosper and grow.
“Stagflation” – When inflation is high but the economy is depressed and low.
- This occurred during the 1970s.
Polls have shown how very few Americans truly understand the role of the government in the
economy.

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