1. Chapter Eighteen Economic Policy

2. Copyright © Houghton Mifflin Company. All rights reserved. 18-2 Theories of Economic Policy Taxes and spending are the major tools with which government implements policy. Policymakers rely on economic theories to explain how the market or capitalist economy works. An absence of government control over the economy is termed laissez faire.

3. Copyright © Houghton Mifflin Company. All rights reserved. 18-3 Theories of Economic Policy (Cont’d) Keynesian economic theory maintains that aggregate demand can be adjusted through a combination of fiscal and monetary policies. Monetarists question the political utility of Keynesian fiscal policies and favor reliance on monetary politics.

4. Copyright © Houghton Mifflin Company. All rights reserved. 18-4 Theories of Economic Policy (Cont’d) Supply-side economics represents a return to laissez-faire ideas of fewer government regulations and less taxation.

5. Copyright © Houghton Mifflin Company. All rights reserved. 18-5 Figure 18.1: Budget Deficits and Surpluses Over Time

6. Copyright © Houghton Mifflin Company. All rights reserved. 18-6 Public Policy and the Budget Since 1921, the president has been responsible for drafting and submitting the budget to Congress for approval. The budget states how much money government agencies will be allowed to spend on their programs, planned expenditures and receipts.

7. Copyright © Houghton Mifflin Company. All rights reserved. 18-7 Public Policy and the Budget (Cont’d) The preparation of the budget is supervised by the Office of Management and Budget (OMB). The budget must then be passed by Congress.

8. Copyright © Houghton Mifflin Company. All rights reserved. 18-8 Public Policy and the Budget (Cont’d) Attempted reforms to the budget process have included the Budget and Impoundment Control Act, Gramm- Rudman balanced budget act, the Budget Enforcement Act and finally the Balanced Budget Act.

9. Copyright © Houghton Mifflin Company. All rights reserved. 18-9 Tax Policies Tax policies are designed to provide a continuous flow of revenue without requiring new annual legislation. Nevertheless, tax policy is often adjusted to meet budgetary outlays, to make the tax burden more equitable, or to control the economy.

10. Copyright © Houghton Mifflin Company. All rights reserved. 18-10 Tax Policies (Cont’d) The tax burden has increased over time in the United States but is still low compared with the tax rate of major industrialized democratic nations.

11. Copyright © Houghton Mifflin Company. All rights reserved. 18-11 CWW 18.2: Tax Burdens in Thirty Countries

12. Copyright © Houghton Mifflin Company. All rights reserved. 18-12 Spending Policies Unlike tax policies, which usually do not vary greatly from year to year, government spending is subject to annual changes. Most federal spending has shifted to two major categories, payments to individuals and net interest payments.

13. Copyright © Houghton Mifflin Company. All rights reserved. 18-13 Figure 18.2: Federal Spending in 2005, by Function

14. Copyright © Houghton Mifflin Company. All rights reserved. 18-14 Spending Policies The general trend of increase in the percentage of federal spending relative to GDP from World War II to the present is explained by bureaucratic (incremental and uncontrollable spending) and political factors.

15. Copyright © Houghton Mifflin Company. All rights reserved. 18-15 Figure 18.3: National Government Outlays over Time

16. Copyright © Houghton Mifflin Company. All rights reserved. 18-16 Figure 18.4: Government Outlays and Receipts as a Percentage of GDP

17. Copyright © Houghton Mifflin Company. All rights reserved. 18-17 Economic Equality How have government spending and tax policies affected economic inequality in America? Transfer payments—government payments to individuals—have had a definite effect, increasing income equality.

18. Copyright © Houghton Mifflin Company. All rights reserved. 18-18 Economic Equality (Cont’d) Although the tax burden of the federal income tax is progressive, the burden of other taxes is highly regressive. The highly unequal distribution of income in American society can be analyzed from the perspective of the two models of democracy.