Economic Regulation and Subsidies

The role of the state

Mercantilism

• State policies in support of industry

• State supported monopolies

• accumulation of gold and silver

• absence of free trade - colonial exploitation

• favored by large merchants and monopolies

Adam Smith and The Wealth of Nations

• Laissez-faire - state should leave business alone

• limited functions of the state

• classic capitalism

The Early American Experience - funding not regulation

• use of public funds to purchase western lands

• railroads

  • state charters

  • eminent domain powers

  • land grants

  • state purchase of stocks and bonds

• state construction of turnpikes

• state capital for canals

State intervention in the market

• Tariffs - protect domestic industry from foreign competition

• Interstate Commerce Act - 1887 - rate regulation in reaction to railroad monopolies

  • favored by populists and progressives

    • "reasonable and just charges"

  • Elkins Act - 1903 - schedules and rates

  • Hepburn Act - 1906 - extended authority

  • Transportation Act of 1920 - increased profits for industry

• Antitrust

  • Sherman Anti-trust Act of 1890 - restraint of trade, monopolies illegal

  • Clayton Act of 1914 - specific illegal activities

Roosevelt and the Great Depression

• National Recovery Act

• National Labor Relations Act

• Social Security Act

Impact of New Deal policies

• limited role of market in distribution of wealth and power

• changed relationship of labor and capital

• government role in promoting economic stability

• reduced competition, provided guaranteed returns

• integration of economic associations into policy making

• government supervised self-regulation

National Industrial Recovery Act - NRA (1933-1935)

• delegated authority to self-regulating code authorities

  • output goals, prices, and wages

• industry groups established codes of fair conduct to promote high prices

• plagued by corporate self-interest

• failed in attempt to establish corporatist ethic

National Labor Relations Act - 1935

• NLRB - enforcement powers of NLRA

• right of workers to elect exclusive representatives

• prohibited unfair labor practices

  • labor spies

  • strike breakers

  • fear of reprisal for joining union

  • firing union workers

Fair Labor Standards Act - 1938

• 40 hour work week

• minimum wage for most workers (excluded farm and domestic)

World Wars

• government rationing of food and other scarce resources

• direct intervention in economy - quotas

A New Awareness - Public Health and Safety - the environmental and consumer movements

• Occupational Safety and Health Act - 1970

• Environmental Protection Agency - 1971

• Consumer Product Safety Commission - 1973

Regulation or Incentives

• Direct regulation - rules to prohibit or require action

  • enforced by sanction

  • uniform in application

• market incentives - material inducements

  • fees or subsidies

Economic and Social Regulation

• economic regulation intends to affect price, allocation, market entry and exit

• social regulation intends to affect specific production or product attributes - health and safety

Economic Subsidies

Direct Subsidies

• cash payments - price supports

• training and education

• research funds

• loans and loan guarantees

Indirect subsidies

• tax credits and deductions

• tariffs

• regulation - quotas, minimum wage

Justification (?)

• market failure

• national defense

• promote new industry

• equity

• how do you spell "pork"

Subsidies to the auto industry

• Direct - Chrysler - 1.5 billion in loan guarantees

• Indirect - voluntary quotas - MITI

• Direct and indirect - Alabama and Mercedes Benz - $300,000,000

U.S. Farm Subsidies - 1992

In millions

Feed Grains                             9,738
Wheat                                   2,510
Cotton                                  1,443
Dairy                                     232
Rice                                      715
Peanuts                                    41

(Source: Statistical Abstract of the United States: 1993, table 1110)

Middle Income Tax Subsidies - 1994

In millions

Mortgage interest deduction for home
     owners                                  48,145
Exclusion of employer contribution
     to health insurance                     63,225
Exclusion of tax on pension plans            70,475
Limited tax on Social Security               19,025              
Deferred capital gains on house sale         14,620
Deduction of property tax on home            14,015
Deduction for charitable contributions       13,090
Deduction of State and local taxes           27,195

(Source: Statistical Abstract of the United States: 1993, table 515)

Free Trade

United States Exports and Imports by Country

1992

                              Exports   Imports   Balance

Canada                        90,562    98,497      -7,935
Japan                         47,764    97,181     -49,418
Mexico                        40,598    35,189       5,408

(Source: Statistical Abstract of the United States: 1993, table 1351)

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