1. 16 Economic Policy

2. Copyright © Houghton Mifflin Company. All rights reserved.16 - 2 Figure 16.4: Tax Burdens in Nineteen Democratic Nations Source: Statistical Abstract of the United States, 1998, 841.

3. Copyright © Houghton Mifflin Company. All rights reserved.16 - 3 Economics and Voters Economic indicators of importance to voters 1.Economic health of the nation 2.The amount and kinds of government spending 3.The level and distribution of taxes Majoritarian political issues... Inflation, Unemployment, Economic growth... And the imperfect economic theories that control clumsy government tools controlled by divided political authorities (that ultimately lead the public to blame the President) 1.Monetarism (Friedman): increase money supply equal with growth, let market control 2.Keynesianism (Keynes): health of economy dependent on what fraction of incomes people save or spend a.When demand is too low, government should pump money into economy through deficit spending b.When demand is too high, government should take money out through taxes or cutting expenditures 3.Planning (Galbraith, Reich): free market is too undependable to ensure economic activity; therefore, gov’t planning a.Wage-price controls (Galbraith) b.Industrial policy- government directs industrial investments (Reich) 4.Supply-side tax cuts (Laffer, Roberts): a.Lower taxes create investment; tax revenue made up on back end b.All 4 ideololically driven. Reaganomics a combination supply side/monetarism/budget-cutting; inconsistent Interest group and client politics, and the “budget” 1.When economic ill health occurs in some locations and not others, leads to tariffs, loopholes, incentives, etc. 2.Government spending is only theoretically determined by the budget; Pres/Congress struggle w/client politics 3.General shape of federal tax legislation is determined by majoritarian politics, but specific provisions: client

4. Copyright © Houghton Mifflin Company. All rights reserved.16 - 4 The Budget Process The Major Players... (what should be funded, what should be cut, who pays) The Executive Branch 1.The Council of Economic Advisors: promarket views of professional economists, usu. ideologically sympathetic 2.The Office of Management and Budget: prepares federal budget in line with pres. program. Tries nonpartisan 3.The Secretary of the Treasury: generally expected to represent the finance community’s point of view The Federal Reserve Branch 1. Theoretically independent, but appointment power affects. Members serve 14 year terms Congress 1.Must approve all taxes and almost all expenditures 2.Pre-1974, budget was what decentralized committees spent money on 3.Now, each house imposes a budget resolution with a ceiling 4.Cutting spending difficult because 3/4ths of budget outlays are relatively uncontrollable. Cutting politically risky... And the Major Plays Cutting Taxes: payroll easier to swallow than local property American more concerned about balancing the budget than about cutting taxes Tax cuts exacerbate deficits 1.Reagan: votes to cut hard to get in Congress, but succeded through interest group “sweetners” 2.Tax brackets became indexed, avoiding bracket creep 3.Bush the Elder and Clinton raised taxes to balance the budget 4.Bush the Younger cut taxes; dems wanted to fund programs. Dems have sunset clause of 2010; Bush today? 5.All balanced budget talk seems moot, post-911.

5. Copyright © Houghton Mifflin Company. All rights reserved.16 - 5 Figure 16.5: Federal Taxes on Income, Top Percentage Rates Source: Updated from Congressional Quarterly Weekly Report (September 18, 1993), 2488.

6. Copyright © Houghton Mifflin Company. All rights reserved.16 - 6 Figure 16.2: History of the National Debt Source: Economic Reports of the President, various years.

7. Copyright © Houghton Mifflin Company. All rights reserved.16 - 7 Figure 16.3: When Will the Crunch Come? Projections of the Growth in Federal Spending Source: Congressional Budget Office, The Economic and Budget Outlook: An Update (July 1, 1999)

8. Copyright © Houghton Mifflin Company. All rights reserved.16 - 8 Figure 16.1: Bad Economic Guesses Source: National Journal (January 30, 1999), 251.