Chapter Study Outline


Government action makes the market economy possible. America’s huge free-market economy and its participation in an increasingly global economy depend heavily on government policies. Public policy is an officially expressed intention backed by a sanction (either a reward or a punishment). In that public policies are critically important to ordering the economy, political actors seek to manipulate and change those policies, but changes are infrequent and hard won.

  1. How Does Government Make a Market Economy Possible?
    How do governmental actions protect and promote a healthy economy? Why does the government get involved in the market?
    • By establishing law and order, government provides the minimal degree of predictability necessary for all social interaction, including economic activity.
    • By defining the rules of property, government protects the incentives individuals have to create, produce, and accumulate wealth. Once it has defined and protected property rights, the government also sets the conditions under which property can be transferred from one citizen to another.
    • Governments also enforce contracts to protect property rights.
    • Governments also set market standards by regulating and defining weights, measures, and definitions that facilitate exchanges on a mass level.
    • When the market fails to provide something that is nevertheless valuable to a society or community, the government may provide such public goods. Historically, government efforts to improve transportation have been particularly important to promoting economic development. Government policies also exist to ameliorate externalities (that is, to minimize or regulate the negative, sometimes unintended, consequences of market-oriented behavior).
    • Governments also create a labor force that is skilled and educated.
    • Finally, to avoid markets’ tendencies toward monopoly, government policies aim to promote and maintain market competition.


  2. Goals of Economic Policy
    What are the goals of economic policy? How does the government accomplish its multiple economic aims? What are the major schools of thought related to economic policy?
    • Government intervenes in the economy to protect the welfare and property of individuals and businesses by promoting stable markets. It does so, first, by maintaining law and order but also by regulating competition and providing public goods.
    • Governments also engage in economic policy in overall efforts to promote economic prosperity. Carefully tracking economic growth and related indicators, the government promotes investment by increasing business, investor, and consumer confidence and by supplying the tools necessary for successful commerce, including capital, research for innovation, and an adequate supply of labor.
    • The national government also promotes business development.
      • During the nineteenth century, government tariff policies and government investment in the railroads created and promoted markets throughout America; similar subsidies continue today for all manner of businesses, including agriculture.
      • In the twentieth and twenty-first centuries, the national government began to employ categorical grants-in-aid to promote behaviors that it deems desirable.


  3. Tools of Economic Policy
    How does the government accomplish its economic aims? What are the various tools and instruments the government uses to maintain and promote the market economy?
    • Monetary policies manipulate the growth of the entire economy by controlling the availability of money and credit; the autonomy of the Federal Reserve System allows it to stimulate or put a brake on the economy, particularly through the setting of interest rates. The Fed also controls the reserve requirement of banks and conducts open-market operations that affect the supply of money in the economy.
    • Fiscal policies include government’s taxing and spending powers and can similarly have broad effects on the macroeconomy.
      • Tax policies, central to the government’s fiscal policies, discriminate, hitting some people harder than others; progressive taxes require the wealthier segments of society to pay higher tax rates, whereas regressive taxes are those that fall disproportionately on those in lower income brackets.
    • The federal government’s power to spend is one of the most important tools of economic policy. The president and the Congress both play important roles shaping economic policy, although an increasing portion of federal spending is mandatory or “uncontrollable” spending that the government owes to citizens.
    • Subsidies and contracts are key tools used by the government to promote desirable behaviors in the marketplace.


  4. The Welfare System as Fiscal and Social Policy
    How do Social Security, Medicare, and welfare programs work in the United States? How do the politics surrounding these three social policies differ?
    • Government involvement in the relief of poverty was insignificant until the twentieth century because of Americans’ faith in individualism and a distinction Americans made between the “deserving” and “undeserving” poor. The traditional approach crumbled during the Great Depression when widespread poverty outstripped the capacity of private actors to provide sufficient relief. Franklin Roosevelt’s New Deal programs—most notably the Social Security Act—transformed government’s role in society and the public’s expectations thereof.
    • Social Security is a contributory program into which working Americans place a percentage of their wages and from which they receive cash benefits after retirement.
      • A system of forced savings, Social Security mildly redistributes wealth from higher- to lower-income people and significantly redistributes wealth from younger to older citizens.
      • An overwhelmingly popular program, Social Security has proven exceedingly difficult for politicians who wish to reform it; it is believed to be the untouchable “third rail” of American politics.
    • Established in 1965, Medicare is the biggest expansion in contributory social policy since the New Deal. It provides national health insurance for the elderly and the disabled. Recent reforms have attempted to control costs and have added prescription drug benefits. In 2010, the Obama administration expanded federal health care policy by expanding access to health insurance and requiring coverage.
    • Unlike Social Security and Medicare, welfare programs are noncontributory public assistance programs that are massively redistributive in their effects.
      • Welfare programs like Aid to Families with Dependent Children (AFDC), Medicaid, Supplemental Security Income, and food stamps tend to be controversial because those who receive benefits generally do not contribute to the program. The programs are means-tested for eligibility, and represent an entitlement under the law for those who qualify.
      • Given the political unpopularity of some welfare programs, reform efforts have been more successful in this area of social policy. In the 1990s, AFDC was replaced by Temporary Assistance for Needy Families (TANF), which aimed to reduce welfare caseloads, move recipients back to work, and give states more flexibility in administering welfare dollars.