Chapter 18 Economic Policy

Copyright © 2011 Cengage WHO GOVERNS? WHO GOVERNS? 1.Who in the federal government can make our economy strong? 2.Who was responsible for the recession? TO WHAT ENDS? TO WHAT ENDS? 1.Why does the federal government ever have a budget deficit? 2.How do you end a recession?

The Politics of Economic Prosperity Majoritarian politics Majoritarian politics Pocketbook Issues Pocketbook Issues National levelNational level Individual levelIndividual level What Politicians Try to Do What Politicians Try to Do UnemploymentUnemployment InflationInflation Interest ratesInterest rates Copyright © 2011 Cengage

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

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

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

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

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

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

The Budget Budget Budget Fiscal Year – October 1 through the following September 30 (federal) 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 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 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 Congressional Budget Act of 1974 Balanced Budget Act of 1985 (Gramm-Rudman Act) Balanced Budget Act of 1985 (Gramm-Rudman Act) Sequester – automatic spending cutsSequester – automatic spending cuts Budget Enforcement Act of 1990 Budget Enforcement Act of 1990 Limits on discretionary spendingLimits on discretionary spending Copyright © 2011 Cengage

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

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

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

Levying Taxes Majoritarian politics Majoritarian politics Modest tax burdenModest tax burden Minimize cheatingMinimize cheating Client politics Client politics LoopholesLoopholes Rise in the Income Tax Rise in the Income Tax Sixteenth AmendmentSixteenth Amendment Tax Reform Act of 1986Tax Reform Act of 1986 Tax increase of 1993Tax increase of 1993 Tax cuts of 2002Tax 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) Copyright © 2011 Cengage Source: Statistical Abstract of the United States, 2003, Table 1344.

Figure 18.5 Federal Taxes on Income, Top Percentage Rates Copyright © 2011 Cengage Source: Updated from Congressional Quarterly Weekly Report (September 18, 1993), 2488.

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 WHAT WOULD YOU DO?

Copyright © 2011 Cengage Tribune Media Services, Inc. All rights reserved. Reprinted by permission. p. 502