The U.S. Government and the Economy

What powers does the U.S. Constitution grant the federal government with regard to the economy? • Article 1 of the U.S. Constitution gives Congress

the power to: • collect taxes; • provide for the general welfare; • borrow money; • regulate interstate and foreign commerce; • establish uniform bankruptcy laws; • coin money and regulate its value; • fix the standards of weights and measures; and • protect the writings and discoveries of authors

and inventors.

In our political and economic system the government plays a crucial role in protecting property rights. What are these rights? How does the government protect these rights?

• Property rights are the rights of those who own land, buildings, or other goods to use or dispose of their property as they choose.

• In the U.S., property rights are protected by the Constitution (see e.g. the Fourth and Fifth Amendments as well as different parts of Article I).

• The government uses the federal court system, its executive authority, and copyrights and patents to protect these rights.

Sometimes, though, the government has other priorities than protecting private property. One of these exceptions involves the use of eminent domain

This use of government power is very controversial

What is eminent domain?

•Eminent domain refers to the power of the government to take an individual’s property for public use if the owner is fairly compensated (under the Takings Clause of the 5th Amendment).

The key question is what public good is being served by taking someone’s private property. What are some reasons given? • Eminent domain is needed in order

to build a public road or highway. • It could be needed to build a school,

prison, hospital or other important public facility.

• It could be needed to build an airport.

• It could be needed for a power station or dam.

• It could help further economic redevelopment of a community.

A recent Supreme Court case, Kelo v. City of New London (2005), revisited this issue.

• In this case the government of a city in Connecticut was sued by some of its own residents (including Susette Kelo, a nurse) over the city’s use of eminent domain to seize land for economic redevelopment by a private landowner.

• The residents claimed this use of eminent domain was unconstitutional.

• In a 5-4 decision, the Supreme Court ruled in favor of the city.

Should the government have the right to seize private property for such uses?

The use of eminent domain is not so common as other government actions, however. Most individuals and firms experience the government’s power and influence in the form of regulations governing economic activity. Various federal regulatory agencies carry out these laws.

Regulatory agencies • A regulatory agency is a unit of

government created to set and enforce standards for a particular industry or area of economic activity

• The regulatory agencies don’t write the laws that tell them what to control and enforce (Congress does that) but these agencies do have the authority to draft rules and regulations that enable them to carry out Congress’s mandates.

• The extent to which the agencies do this has been subject to judicial scrutiny over time (even today).

What are some of the better-known regulatory agencies?

The FDA (The Food and Drug Administration)

• Founded in 1906, the FDA is now part of the U.S. Dept. of Health and Human Services (HHS)

• The FDA regulates drugs, medical devices, foods, cosmetics, veterinary products, tobacco, and other items.

• Employeeing almost 15,000 people, it has an annual budget of over $4 billion.

OSHA (Occupational Safety and Health Administration)

• Established in 1970, OSHA is responsible for establishing and enforcing “safe and healthful working conditions.”

• To achieve this goal, OSHA has issued various rules and regulations that businesses have to follow.

• OSHA is part of the Dept. of Labor

The Environmental Protection Agency (or EPA)

• The Environmental Protection Agency was also created in 1970.

• Its main role is, as the name suggests, to protect the environment.

• Its focus is on reducing or preventing air and water pollution

• Its enforcement powers include fines, sanctions and other penalties.

The Interstate Commerce Commission (ICC)

•The ICC is part of the Dept. of Labor •The ICC was established in 1877 to regulate railroads •In the 1930s the ICC started regulating the trucking industry also

The Securities and Exchange Commission (SEC)

• The SEC was created in 1934.

• Its role is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.”

• To this end, it requires companies to disclose meaningful financial and other information to current and prospective investors.

• It oversees securities firms, investment advisors, brokerage houses, and ratings agencies (e.g., Moody’s)

The Department of Justice and Antitrust Laws

• The Antitrust Division of the Department of Justice is responsible for preventing price fixing and other antitrust law violations.

• The goal of antitrust laws is to reduce or eliminate illegal monopolies, trusts and cartels.

• By doing this, markets can be more competitive

• In theory, consumers are the prime beneficiaries of antitrust laws

The FTC (The Federal Trade Commission)

• The Federal Trade Commission was created by an act of Congress in 1914.

• Its main function is to ensure fair trade practices and to protect consumers and businesses against fraud and deception.

• Another important function is to restrict if not eliminate anti-competitive business practices, including monopolies and trusts.

A special problem for the FTC and some other regulatory agencies: dealing with a natural monopoly

• A natural monopoly occurs when economies of scale make it more efficient to have just one producer or provider in a market; this firm would have a lower average total cost than a market with many competitors

• Examples: utility companies (water, electricity, gas), cable providers

• Task: retain the advantage of economies of scale but curb the inefficiency or possible abuses (predatory pricing, for instance) associated with a monopoly

• Options: public ownership or price regulation

Command and control policies

• A command and control policy is a policy approach that relies on rules and enforcement, rather than market incentives, to influence behavior.

• These policies have been used especially to combat pollution and protect the environment.

• An example of such policies would be air quality standards that must be met as a consequence of The Clean Air Act (1970); human health and safety, rather than costs, should be the main criterion.

Cap and trade policies • In contrast to a command and control

policy, a cap and trade policy is a policy that limits the amount of pollution a firm may legally emit each year but allows firms to trade with each other to obtain additional pollution permits.

• Cap and trade policies try to rely on market incentives to get businesses to change their behavior.

From time to time, deregulation has also been favored to deal with what are perceived to be inefficient sectors of the economy

• What is deregulation?

• Deregulation is the process of removing government restrictions on firms in order to promote competition or encourage economic industry.

• Deregulation has occurred with greater frequency at different times in the history of the U.S. One notable instance was the late 1970s, when the airline industry was significantly deregulated.

• Other sectors of the economy, such as financial services, energy and telecommunications industries, have also benefitted from deregulation since that time.

Economic mobility • Economic mobility refers to the

ability of people to their standard of living and improve their economic status.

• The level of economic mobility will vary from country to country.

• It is often measured in terms of generations.

• Obstacles to economic mobility include lack of educational opportunities as well as social barriers based on race, class or gender.

Income distribution • In any economy, income is

generally not distributed equally among people.

• In every country, some groups get a greater share of the national income than do other groups.

• There are many reasons (including some very legitimate ones) for this inequality.

• Some countries and regions of the world, however, experience greater income (in)equality than others.

Income distribution • As the map indicates, income is

also unevenly distributed by region in the U.S.

• Which cities, states and regions seem to have a higher income on average than other areas?

• Yes, urban clusters on both the the East and West coasts seem very affluent

Lorenz curve and the Gini ratio (or coefficient)

Lorenz Curves and the World

The Lorenz Curve, the U.S. and the Gini Coefficient

Income redistribution • Income redistribution is a policy

designed to reduce income inequality by taking money from the rich and distributing it to the poor.

• Some of this is done through progressive taxation and government transfer payments.

• This is a very controversial subject (see the picture to the right).