Economic Policy

The politics of deficit spending The general landscape Deficit: government spending over and above the amount taken in by taxes National debt: combined amount of all deficits Interest on the debt: typically the third highest item in that national budget Gross domestic product (GDP): proportion in relation to debt about the same as 1964 Strategy: get rid of the annual deficit to make progress on the overall debt By raising taxes (political liberals) By cutting spending (political conservatives)

Fiscal Policy Managing the economy by the use of tax and spending laws. Where the Money Comes From Federal Income Taxes Social Insurance Taxes Borrowing Other taxes Where the Money Goes Entitlement programs National defense National debt

Where does the Money come from? The main sources are taxes:

Where does the Money go?

Monetary Policy Managing the economy by altering the supply of money and interest rates Monetary policy is the government’s control of the money supply Too much money in the system leads to inflation (devaluation of dollar) Too little money in circulation leads to deflation

The Politics of Economic Prosperity Health of American economy creates majoritarian politics Voters influenced by their immediate economic situations Voters worry about the nation as a whole as well as their own situations Voting behavior and economic conditions correlated at the national level but not at the individual level People understand what government can and cannot be held accountable for (ex. You get fired b/c govt cut funding vs. you’re always late) People see economic conditions as affecting them indirectly, even when they are doing well (see others struggling, worry it could be them soon)

What politicians try to do Elected officials tempted to take short-term view of the economy Government uses money to influence elections (Congress passes favorable laws in election year), but government will not always do whatever is necessary. Why?: Government does not know how to produce desirable outcomes Attempting to cure one economic problem exacerbates another Ideology plays a large role in determining policy Democrats tend to want to reduce unemployment Republicans tend to want to reduce inflation  Everybody wants both, but have to choose to focus on one

The Politics of Taxing and Spending Inconsistency in what people want from majoritarian politics No tax increases No government deficit Continued/increased government spending Difficult to make meaningful tax cuts Politicians get reelected by spending money Strategy: raise taxes on “other people”

The Budget: Overview Document that announces How much the government will collect in taxes How much the government will spend in revenues How expenditures will be allocated among various programs Over the course of the fiscal year (October 1 to September 30) Spending decisions made with little regard to how much money is available

Congressional Budget Act of 1974: Procedures 1. President submits budget 2. House and Senate budget committees analyze budget 3. Budget resolution in May proposes budget ceilings 4. Members informed whether or not spending proposals conform to budget resolutions 5. Committees approve appropriations bills, Congress passes them, and send them to the president for signature 6. Hard to make big changes in government spending b/c much is mandatory (entitlements) 7. Big loophole: Congress not required to tighten government’s financial belt (don’t have to follow president’s proposal)

Levying Taxes Tax policy reflects blend of majoritarian and client politics “What is a ‘fair’ tax law?” (majoritarian) Tax burden is kept low; Americans pay less than citizens in most other countries Requires everyone to pay something; Americans cheat less than others “How much is in it for me?” (client) Requires the better-off to pay more (Progressive taxes) Progressiveness is a matter of dispute: hard to calculate Many loopholes: example of client politics Client politics (special interest) make tax reforms difficult Tax Reform Act passed (1986)- closed many loopholes

Levying Taxes The rise of the income tax Most revenue derived from tariffs until 1913 and ratification of Sixteenth Amendment (allowed income tax) Taxes then varied with war (high), peace (low) High rates offset by many loopholes; compromise Constituencies organized around loopholes Tax bills before 1986 dealt more with deductions than with tax rates Tax Reform Act of 1986: low rates with smaller deductions Individuals benefited, Businesses suffered