Chapter 18 Economic Policy

WHO GOVERNS? TO WHAT ENDS? Who in the federal government can make our economy strong? Who was responsible for the recession? TO WHAT ENDS? Why does the federal government ever have a budget deficit? How do you end a recession? Copyright © 2011 Cengage

The Politics of Economic Prosperity Majoritarian politics Pocketbook Issues National level Individual level What Politicians Try to Do Unemployment Inflation Interest rates Copyright © 2011 Cengage

Figure 18.1 Federal Budget Deficit (or Surplus) Replace with jpeg, p. 487 Source: Budget of the U.S. Government, FY 2009 updated by OMB’s Mid-Session Review, July 2009 © 2003, AAAS. Reprinted with permission Copyright © 2011 Cengage

The Politics of Taxing and Spending Voters want Prosperity Lower taxes Less debt New/continued programs Objectives are inconsistent Add caption? P. 488 During the recession, people, including middle class workers, line up at the unemployment office. p. 490 Source: Yellow Dog Productions/ Getty Images Copyright © 2011 Cengage

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Economic Theories and Political Needs Monetarism Keynesianism Economic Planning Supply-side Tax Cuts DID THE FEDERAL GOVERNMENT END THE RECESSION? Copyright © 2011 Cengage

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The Machinery of Economic Policy Making The Fed Monetary policy – alters the supply of money and interest rates Congress Fiscal policy – uses tax and spending laws Globalization Ben Bernanke, Chairman of the Federal Reserve, speaks to a congressional committee. p. 495 Source: Mark Wilson/ Getty Images Copyright © 2011 Cengage

John Kenneth Galbraith Corbis/Corbis Sygma Bettmann/Corbis Milton Friedman Karen Vismara/ Black Star Arthur B. Laffer John Maynard Keynes Bettmann/Corbis John Kenneth Galbraith Copyright © 2011 Cengage

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Spending Money Conflicting interests Public Opinion Majoritarian politics Client politics Interest group politics Public Opinion Politicians’ appeals Copyright © 2011 Cengage

The Budget Budget Fiscal Year – October 1 through the following September 30 (federal) Budget resolution – A congressional decision that states the maximum amount of money the government should spend Entitlements - A claim for government funds that cannot be changed without violating the rights of the claimant Copyright © 2011 Cengage

Reducing Spending Congressional Budget Act of 1974 Balanced Budget Act of 1985 (Gramm-Rudman Act) Sequester – automatic spending cuts Budget Enforcement Act of 1990 Limits on discretionary spending Copyright © 2011 Cengage

Figure 18.2 Federal Outlays in 2008 Source: Office of Management and Budget, Mid-Season Review, 2009. Copyright © 2011 Cengage

Figure 18.2 Federal Revenues in 2008 Source: Office of Management and Budget, Mid-Season Review, 2009. Copyright © 2011 Cengage

Figure 18.3 Social Security and Medicare Cost as a % of GDP Replace with jpeg, p. 498 p. 498 Source: Trustees’ Report, 2009. Copyright © 2011 Cengage

Levying Taxes Majoritarian politics Client politics Modest tax burden Minimize cheating Client politics Loopholes Rise in the Income Tax Sixteenth Amendment Tax Reform Act of 1986 Tax increase of 1993 Tax cuts of 2002 Copyright © 2011 Cengage

Figure 18.4 Tax Burdens in Democratic Nations (Taxes as a Percentage of Income of a Family with Two Children) Source: Statistical Abstract of the United States, 2003, Table 1344. Copyright © 2011 Cengage

Figure 18.5 Federal Taxes on Income, Top Percentage Rates 1913-2002 Replace with jpeg, p. 500 Source: Updated from Congressional Quarterly Weekly Report (September 18, 1993), 2488. Copyright © 2011 Cengage

WHAT WOULD YOU DO? M E M O R A N D U M To: Elizabeth Gilbert, chairperson, Council of Economics From: Edward Larson, White House speechwriter Subject: Flat tax proposal The President would like your advice on whether to endorse a flat tax. His likely opponent is pushing this issue. Copyright © 2011 Cengage

WHAT WOULD YOU DO? Arguments for: 1. A flat tax is fair because it treats all income groups the same. We could leave the lowest income group with no taxes. 2. With a flat tax, we could eliminate almost all deductions and loopholes from the tax code. 3. Countries with a flat tax, such as Lithuania, have achieved great economic prosperity. Copyright © 2011 Cengage

WHAT WOULD YOU DO? Arguments against: 1. A flat tax is unfair because it treats all income groups the same. The rich should be taxed more heavily. 2. Many tax deductions, such as the one for home mortgages, are desirable. 3. We could eliminate undesirable tax loopholes without creating a flat tax. Copyright © 2011 Cengage

WHAT WOULD YOU DO? Your decision: Support? Oppose? Copyright © 2011 Cengage

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