Chapter 18: Economic Policy Pages 492-511

Economic Policy Deficit: When government spends more than it takes in from taxes National Debt: all the deficits we have had since George Washington was president

Economic Policy The federal government never has to declare bankruptcy because when it needs more money, it borrows it by selling bonds Government must pay the interest on the bonds In a typical year interest payments are the third-biggest item in the national budget after money spent on redistribution and defense

Economic Policy GDP: Gross Domestic Product The total of all the goods and services produced in a country during a certain year

Economic Policy How our country can make progress toward reducing our total National Debt Raise Taxes – Democrats/Liberals Cut Spending – Republicans/Conservatives

The Politics of Economic Prosperity Pages 494-496

The Politics of Economic Prosperity Economic conditions are strongly associated with how much success the incumbent party has in keeping control of the Presidency and Congress Example: President Bill Clinton’s Slogan Against George Bush, Sr. “It’s the Economy Stupid” Bush Lost Because Economy was Bad

The Politics of Economic Prosperity People are not just worried about their own pocketbooks but are worried unemployment of the Nation as a whole People look at the unemployment of the Nation when casting votes

The Politics of Economic Prosperity What politicians try to do…. They would love to produce low unemployment rates and rising family incomes just before an election Democrats want to reduce unemployment Republicans want to reduce inflation

The Politics of Taxing & Spending Pages 496-497

The Politics of Taxing & Spending Politicians confront TWO inconsistent kinds of majoritarian politics Everyone wants general prosperity Large majorities want more government spending on popular programs – Social Security

The Politics of Taxing & Spending TAXING POLICY THAT IS POPULAR Raise taxes on cigarettes (sin tax) Raise taxes on the wealthy

The Politics of Taxing & Spending Increase in spending is more popular than Cutting Taxes

Economic Theories & Political Needs Pages 497-499

Economic Theories & Political Needs Since most tax issues are majoritarian issues they involve the president Think of how the people of the United States are depending on President Obama to get us out of the Recession

Economic Theories & Political Needs There are FOUR major theories about how to best manage the Economy Monetarism Keynesianism Economic Planning Supply-side Tax Cuts

Economic Theories & Political Needs Most tax issue are Majoritarian (All of Us) issues, they usually involve the president Example: All of us in America are very concerned with the state of the Economy and we look to our president to help solve the problem

Economic Theories & Political Needs Four Economic Theories Monetarism: Milton Friedman Believe that inflation occurs when there is too much money chasing too few goods Federal Government is allowed to print money; according to Monetarists, inflation occurs when we print too much money

Economic Theories & Political Needs Monetarism (con’t) When inflation is rampant and the government tries to do something about it, it often cuts back sharply on the amount of money in circulation – raise interest rates on your credit cards

Economic Theories & Political Needs Monetarism (con’t) Monetarists believe that the proper thing for a government to do is to have a steady, predictable increase in money supply at a rate that is about equal to the growth in the economy’s productivity; beyond that the government should leave matters alone and let the free market operate

Economic Theories & Political Needs 2. Keynesianism: John Maynard Keynes The key is to create the right level of demand; this is the task of the government When demand is too little, the government should pump money into the economy (by spending more than it takes in taxes and by creating public-works programs)

Economic Theories & Political Needs 2. Keynesianism (con’t) When demand is too great the government should take money out of the economy by increasing taxes or cutting federal expenditures – this is an Activist Government – Government is involved

Economic Theories & Political Needs PRESIDENT OBAMA IS USING THE KEYNESIAN MODEL TO HELP OUR ECONOMY

Economic Theories & Political Needs 3. Economic Planning: John Kenneth Galbraith Price and Wage Controls Big corporations can raise prices because the forces of competition are too weak to constrain them, and labor unions can force up wages because management finds it easy to pass the increase to consumers in the form of higher prices

Economic Theories & Political Needs 3. Economic Planning (Con’t) Thus during inflationary times (money value is weak) government should regulate the maximum prices that can be charged and wages that can be paid

Economic Theories & Political Needs 3. Economic Planning (Con’t) Government should somehow direct or plan investments so the industries would recover new and better industries to take their place Government directs industrial investments

Economic Theories & Political Needs PRESIDENT OBAMA IS ALSO EMPLOYING ECONOMIC PLANNING TO HELP OUR ECONOMY

Economic Theories & Political Needs 4. Supply-Side Tax Cuts: Arthur B. Laffer More planning but LESS GOVERNMENT INTERVENTION – Conservative Republicans prefer this Sharply cutting taxes will increase people’s incentive to work, save, and invest Greater investments lead to more jobs

Economic Theories & Political Needs Economic Ideology and Theory Conservatives = Monetarism or Supply-Side Tax Cuts (want less government in economy) Liberals = Keynesian because it allows government to carry a wide range of social welfare programs – Obama lower cost of health care insurance for those on unemployment Socialists = Economic Planning

Economic Theories & Political Needs What is Reaganomics? Economic Policy used by President Ronald Reagan It is a combination of Monetarism and Supply-Side Tax Cuts & budget cutting Reagan wanted to reduce the size of the federal government, stimulate economic growth, and increase spending on the military

Economic Theories & Political Needs What is Reaganomics? Decrease personal income tax but Reagan increased the Social Security Tax This created a massive budget deficit

The Machinery of Economic Policy Making Pages: 499-502

The Machinery of Economic Policy Making Machinery about making decisions about economic matters is complex and not under the President’s full-control Troika (THE THREE) Chairman of the Council of Economic Advisors (CEA) The Director of Economic Advisors Secretary of the Treasury

The Machinery of Economic Policy Making THE PRESIDENT SUBMITTS AN ECONOMIC REPORT TO CONGRESS EACH YEAR

The Machinery of Economic Policy Making The “Fed” (The Federal Reserve System) Created in 1913 Chairman of “Fed” is Ben Bernanke 7 members are appointed by the president with consent of the Senate, for fourteen year non-renewable terms and may not be removed except for cause

The Machinery of Economic Policy Making The “Fed” (Con’t) Chairman of the Fed serves a four year term The “Fed” is independent of the President and Congress Most important function of the “Fed” is to regulate, insofar as it can, the supply and price of money

The Machinery of Economic Policy Making The “Fed” (Con’t) The Federal Reserves sets Monetary Policy: effort to shape the economy by controlling the supply of money and interest rates. BOX on page 500

The Machinery of Economic Policy Making Congress Most important part of making economic policy Congress must approve all taxes and most money spent by the Government There can be NO wage or price controls unless Congress says it is “OK”

The Machinery of Economic Policy Making Congress (Con’t) Congress has the ability to alter the policy of the nominally independent Federal Reserve Board “The Fed” by threatening to pass laws that would reduce the “Feds” power

The Machinery of Economic Policy Making Congress (Con’t) Congress has the power of Fiscal Policy: managing the economy by the use of tax and spending laws When Congress passes laws governing Foreign Trade, it is responding to interest group politics

The Machinery of Economic Policy Making Congress (Con’t) Industries that find it easy to sell American products abroad – Want Free Trade Industries that find it hard to compete with foreign imports (goods coming into the country) OPPOSE Free Trade Free Trade means NO taxes or restrictions on International Trade

The Machinery of Economic Policy Making NAFTA – North American Free Trade Agreement – is FREE TRADE between the United States, Canada, and Mexico Republicans usually support Free Trade

Spending Money Pages 502-503

Spending Money Who decides how to spend the government’s (our) money? Congress and President AND/OR Voters and Interest Groups

Spending Money What the “people” want from political candidates “Vote for me and I will keep government spending down and cut the deficit” “Vote for me and I will make certain that your favorite program gets more money”

The Budget Pages: 503-504

The Budget Budget: is a document that announces how much the government will collect in taxes and spend in revenues and how those expenditures will be distributed among different programs the government establishes

The Budget Fiscal Year: each budget covers a fiscal year Fiscal year runs from October 1 to September 30 of the next year A fiscal year is named after the year in which it ends (thus “fiscal 2006” or “FY 2006 means the year ending on September 30, 2006

The Budget The federal budget is a list of everything the government is going to spend money on, with only slight regard for how much money is available to be spent

The Budget Congressional Budget Act of 1974 Now after the president submits his budget in February, two budget committees – one in the House and one in the Senate – study the president’s overall package and obtain an analysis of it from the Congressional Budget Office (CBO)

The Budget Congressional Budget Office Each committee then submits a budget resolution: a congressional decision that states the maximum amount of money the government should spend and where it should be spent

The Budget In the month of May Congress is to adopt, with some modifications, the budget resolutions, intending them to be targets to guide the work on each legislative committee as it decides what should be spent in it’s area Discipline is imposed of various committees when it comes to spending After each committee approves its appropriations bills and Congress passes it, it then goes to the president for his signature

The Budget Entitlements: government funds cannot be changed. About two-thirds of what the government spends is mandatory: money goes to people who are entitled to it Examples of entitlements: Social security, veterans’ benefits, food stamps, and money owed to investors who have Treasury Bonds

The Budget The government can only change about one-third of federal spending in any year

The Budget But, if you require Congress to vote first on a budget ceiling (the most the Gov can spend) then total spending will go down If there is NO budget ceiling adopted by Congress, the money problems would be left to the appropriations committee

Levying Taxes Pages 505-509

Levying Taxes Tax policy reflects a mixture of majoritarian politics (us) “What is a ‘Fair’ tax law?”

Levying Taxes Tax policy also reflects client politics – interest groups “How much is in it for me?”

Levying Taxes In the United States a Fair Tax law has generally been viewed as one that keeps the overall tax burden low, requires everyone to pay something, and requires the better-off to pay at a higher rate than the less-well-off

Levying Taxes Income tax burden is lower in the United States than in most other democratic nations Most nations use sales tax more than income tax because people cannot evade a sales tax

Levying Taxes THE RISE OF THE INCOME TAX (507-509) In 1913, Congress proposed and the States ratified the 16th Amendment which authorized the Income Tax For the next forty years, tax rates tended to be higher during wartime and lower during peacetime

Levying Taxes THE RISE OF THE INCOME TAX (507-509) Progressive Tax: wealthy pay a higher tax than the poor Loopholes: since the rich pay more in taxes we have loopholes – which means deductions, exemptions, and exclusions by which people could shelter some of their income from taxation (write-off) – deduct interest paid on your mortgage Republicans (rich) = loopholes Democrats (poor) = low tax rate

Levying Taxes The Rise of the Income Tax Tax Reform Act of 1986: Instead of high tax rates with big deductions, we got lower tax rates with smaller deductions People (me & you) benefit from this Act Businesses big losers with implementation of this Act

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