Chapter 18 Economic Policy US Government AP

The Economy HHard to predict how policy will impact the economy over the long term NNatural business cycle

The Business Cycle  Over time a business gains and loses  This is normal

The Impact of Government  Policy goal is to keep the line as straight as possible, with steady growth  Becomes a valence issue

The Debt  To eliminate it: Raise taxes or Reduce spending Or a combination of both Enter valance—Dem’s vs Rep’s

1990’s We had a budget surplus Had to compromise (did both) Dems -start new programs Rep’s -give a tax cut

The players in Fiscal Policy  OMB  CBO  Congress  President  Cabinet Departments  Agencies (GAO)  Interest groups

Other Players-Monetary Policy 1. The Federal Reserve Board  Sets interest rates  Is independent 2. Congress  Approves taxes  Approves the budget (CBO)  Foreign policy laws (NAFTA)

Triple play……. 1. OMB Director 2. Chair of the Council of Economic Advisors 3. Treasury Secretary These 3 offices are the closest advisors to the President on the economy

Economy and Elections “Pocket Book” issues during an election help/hurt incumbents (2008) 1. Unemployment 2. Inflation 3. Older voters/Fixed income

Econ and Elections II  Makes politicians tempted to look at short term policy  Try to improve it at election time IMPOSSIBLE TO DO D= ↓ unemployment R= ↓ inflation

The “Perfect” Policy 1. Have nice Govt. programs 2. Have less debt (Lower spending) 3. Keep taxes low mission: impossible

5 Economic theories 1. Monetarism 2. Keynesianism 3. Planning 4. Supply Side tax cuts 5. Reaganomics

5 theories  Each President chooses advisors who have his point of view on policies

Monetary policy  Govt. focus on the supply of money  Control the supply by: a. Deposit requirements (reserve req.) b. Interest rates (prime)

Fiscal Policy  Government spending policy a. The budget b. The tax rate

The Budget 1. October 1 to September Executive branch and Congress 3. President/OMB put it out 4. Congress (H/S) go over it—put ceilings in place 5. Changes are usually small

Entitlements  Most of the Budget is money that must be spent (66%)  Social Security  Medicare  Bond payments

The Budget-The End  Is out of control  Deficit spending allows the budget to be whatever it “needs” to be  Current deficit: $15 trillion (Growing at $1.3 million a minute today) (your share?-$50,000)

The “Perfect” Policy 1. Have nice Govt. programs 2. Have less debt (Lower spending) 3. Keep taxes low mission: impossible

3 Things that Matter in Economic Policy 1. The economic health of the nation (real vs. perceived) (interest group) 2. The types of govt. spending (client, interest group) 3. Taxes- rates and distribution of benefits (majoritarian or client)