Chapter 17 DOMESTIC POLICY: THE ECONOMY AND SOCIAL WELFARE

Budget Chaos in the 104th Congress, Compromise in the 105th House Republicans under the leadership of Newt Gingrich in the 104th Congress were eager to take on the task of cutting back on the size and role of the federal government. The budget bill fashioned in the House of Representatives was unprecedented. Senate Republicans forced some changes in the bill, but they went along with most of what the House Republicans were trying to achieve.

Congressional Republicans were confident that Bill Clinton would waiver under threats to close down the government in the absence of a budget. –Clinton refused to be intimidated; he vetoed temporary measures in November and the full budget bill in December. –After each veto, the federal government shut down, with only essential services permitted to operate. Republican leaders were unprepared for the firestorm of criticism.

The battle had electoral consequences in –Democrats increased their numbers in the House and Bill Clinton was reelected to the Presidency. –The GOP leadership entered into serious bipartisan negotiations with Clinton in the opening months of the 105th Congress. –A landmark compromise emerged from the negotiations, one that promised a balanced budget by 2002 and was actually accomplished in The annual decision about the budget is one of the most important things that the President and Congress do.

Why Government Is Involved in the Economy And Social Welfare Economic management –Governments in all modern capitalist societies play a substantial role in the management and direction of their economies. –Government responsibility for the national economy is so widely accepted that national elections are often decided by the voters’ judgment of how well the party in power is carrying out this duty.

Social welfare –A social welfare state is a society with a set of government programs that protect the minimum standards of living of families and individuals. –All rich democracies have social welfare states.

Economic Policy Goals of economic policy –Economic growth is sought by economic policymakers. –Low unemployment historically was associated with economic growth. –Economic recessions bring slower job growth and rising unemployment rates. –Political leaders seek policies that dampen inflation and provide stable prices.

–All nations try to keep a positive balance of payments. –The U.S. trade deficit has been in the red for many years. –A growing free enterprise economy produces a range of adverse consequences (called diseconomies). Air and water pollution Toxic wastes Workplace injuries and health hazards

Tools of Macroeconomic Policy Macroeconomic policy looks at the performance of the economy as a whole or broad areas of the economy, such as employment. Fiscal policy — altering government finances by raising or lowering government spending, raising or lowering taxes, and raising or lowering government borrowing

–Fiscal tools are not easy to use. –Many issues come into play in setting fiscal policy. Federal spending cannot be easily adjusted up or down. Tax rates cannot be easily adjusted. Changes in spending and taxes take so long to accomplish that there is danger that the policies will be inappropriate by the time they filter into the economy.

Monetary policy — government policy to influence interest rates and control the supply of money in circulation, primarily accomplished through the operations of the Federal Reserve Board As the nation’s central bank, the Fed oversees the banking system and sets the nation’s monetary policy.

–Actions by the Fed affect how much money is available to businesses and individuals in banks, savings and loans, and credit unions. –It influences interest rates and the money supply. –How the Fed sets monetary policy Open market operations Discount rate Reserve requirements

Managing the Economy Debate over the role that government should play in managing the economy revolves around four main alternatives: –Keynesianism –Monetarism –Supply side economic policy –Industrial policy

There is no consensus among the four groups on how to meet economic responsibilities. –Keynesian and industrial policy approaches favor a large and interventionist government. –Monetarist and supply side theorists favor a small and noninterventionist government.

The Federal Budget and Fiscal Policy Government spending Federal government spending in 1999 –Fourfold increase since 1960 in constant dollars –Expansion of federal outlays as a proportion of GDP from 18% to about 19%

Taxes Public discontent with taxes How the U.S. tax system differs from other countries in the kinds of taxes imposed Complexity of tax system

The Deficit and the National Debt The budget deficit is the annual shortfall between what the government spends and what it takes in. The national debt refers to the total of what the government owes.

Subsidizing Business All governments in the rich democracies support a variety of economic activities considered important to society. In Western Europe, public ownership of economic activities is common. In the United States, government support for business enterprises is more likely to take the form of tax incentives. –Loan guarantees to major firms –Subsidies to private businesses

Regulation Regulation refers to the issuing of rules and regulations by federal agencies that private businesses must follow. History of American regulation –Progressive Era regulation –New Deal regulation –The new social regulation

Deregulation By the end of the 1970s, the mood of opinion leaders had turned against regulation. The airline, banking, railroad, and trucking industries were deregulated under President Carter. President Reagan pursued a policy of regulatory relief. President Clinton reversed many Reagan-Bush era policies but continued to use anti-regulatory rhetoric much of the time.

The Future of Regulation The regulatory state is likely to expand in the future –Most regulatory policies are supported by the public. –New problems will probably stimulate public demands for government intervention. Making economic policy: the main players –Political linkage factors –Governmental factors

Social Welfare An outline of the American welfare state –Social welfare in the United States is provided by a complex mix of programs. –The programs are diverse and generally supported by the public, though some remain controversial and unpopular.

Types of programs –Distinctions can be made based on methods of dispensing benefits. Social insurance programs Means-tested programs –Some welfare state programs are entitlement programs. Payments made automatically to people who meet eligibility requirements Debate about controlling entitlements as the way to gain control over the federal budget.

The Cost of the Social Welfare State A substantial amount of money is spent on what the U.S. budget calls social welfare. In 1999, outlays for Social Security, Medicare, Medicaid, and means-tested entitlement programs came to almost 48% of the federal budget. Implications of the spending pattern

Social Security and Other Social Insurance Programs Social insurance programs that guard against loss of income due to old age, disability, and illness are the largest, most popular, and fastest-growing parts of the American welfare state. There are a number of social insurance programs that are designed to meet different contingencies.

Components of Social Insurance Old Age, Survivors, and Disability Insurance (OASDI), usually referred to as Social Security Medicare Unemployment Insurance

Do Social Insurance Programs Work? Successes Problems Public assistance (welfare) –Public assistance accounts for only a small part of the annual federal budget, but it is the subject of widespread criticism and resentment. –Most Americans see welfare as a contradiction of cherished cultural values.

Components of public assistance (means-tested federal programs designed to assist low-income Americans) –Food stamps –Medicaid –Supplemental Security Income (SSI) –Head Start — the only widely popular means-tested social welfare program, but it reaches only about 20% of those who are technically eligible

Welfare Block Grants The United States’ way of providing public assistance to the needy changed dramatically with passage of a new welfare block grant program in The new welfare system –Ends the status of welfare assistance as a federal entitlement –Requires recipients to work to support themselves within two years of going on welfare –Limited to a total of five years of support

How the American Welfare State Is Different All modern capitalist countries have social welfare states. Welfare states range from low-benefit, targeted types (minimal or liberal welfare states) to high-benefit, universal types (developed or social democratic welfare states). The United States is very close to being at the minimum end of the spectrum

Comparison of the United States to Social Welfare States in the Organization of Economic Cooperation and Development (OECD) –The U.S. welfare state developed later than the others. –Ours is one of the smallest of the welfare states. –The elderly do considerably better than the young in the American welfare state.

–The American welfare state is less re- distributive. –The American welfare state requires less of private employers. –The American welfare state does not include universal health care.

Are the Western European welfare states becoming more like us? Competitive pressures are forcing even very rich nations to become more concerned about high taxes and budget deficits. Several nations with highly developed welfare states have stopped the growth of social welfare spending as a proportion of their GDP. The vast majority of people in Western Europe support the welfare state and are willing to fight to keep it.

Why the American Welfare State Is Different Constitutional rules Racial and ethnic diversity Political culture Business power Weak labor unions

Economic Policy, Social Welfare, and Democracy Economic and social welfare policies in the United States reflect both democratic and non-democratic factors. There seems to be a fairly close fit between what the majority of Americans want and what the federal government does.

Economic policies are formulated by Presidents and members of Congress who are sensitive to the wishes of the electorate. Monetary policy is fashioned by a Federal Reserve Board that is largely insulated from the pressures of democratic politics. The primary components of social welfare in the United States were only enacted because of pressure from the public on political and economic leaders.

The kind of welfare state that we have is also attributable to the prominent role played by business and by interest groups representing the professions and the elderly. Popular sovereignty is served in the general outlines of economic and social welfare policy, but the details favor special interests.