1. Economic Policy and the Budget

2. Economic Health  Deficits the last 35 years raise ongoing policy debates, as well as the surpluses on 1999 & 2000.  Republicans wanted to give it back to the public, while democrats wanted to use it for new programs.  Both sides won in 2001 when the republicans enacted 3 of the largest tax cuts since WWII & Democrats received the assurance that the tax cuts would end in 2010, and spending on federal programs would increase.  Economic forecast are always uncertain. (Sept 11 & the rest of the military actions cost $), these were followed by recession where tax revenues were sharply reduced.  Forecast made before Sept 11 had no chance of being accurate.

3. Economic Health  Voters see connections between their own economic circumstances, the president, and the nation as a whole.  Politicians, especially presidential candidates, worry about the so-called pocketbook issue just before the election.  Congressional Candidates, especially challengers, can easily evade responsibility for economic conditions, but the presidents are the ones who get blamed or get credit for the economy.

4. Economic Health  Remember voters tend to reelect incumbents, (esp. in the House, limited in the Senate), When their economic fortunes are good and vote them out when fortunes are bad. BUT voting behavior and economics are not always related at the national or individual level.  People do not always vote their pocketbooks because they understand the government cannot be held accountable for everything.  Politicians stances vary on the pocketbook issue.. Almost are in favor of benefits to their people. (i.e. Social Security, Veterans pensions) to gain more votes. They might not be able or know how to produce desirable results.

5. Economic Health  Ideology plays a basic, but big role in economic policy making.  Democrats- reduce unemployment, control demand  Republicans- reduce inflation, manipulate supply

6. Monetarism  By Milton Friedman.  Inflation occurs when there is to much money in the economy chasing after too few goods.  Monetarism advocates increasing the money supply at a rate equal to economic growth, then letting the free market operate.  This theory answer what libertarians, conservatives, and Republicans have with inflation.

7. Keynesianism  Derived from the work of the English economist John Keynes.  Keynesianism holds that government should create the right level of demand. The theory assumes that the health of the economy depends on how much of their incomes people save or spend.  When demand is low, government should pump money into the economy by spending more than it collects in taxes.  When demand is high, government should take money out of the economy by increasing taxes or cutting expenditures.  This theory answers the traditional concern with unemployment among liberals and Democrats.

8. Economic Planning  Some view that the free market is too undependable to ensure healthy economic activity.  They argue that government should plan parts of a country’s economic activity when the market fails to account for the public good.  Basically if you can’t control inflation.., implement wage and price control.  Others say the government should direct some investments to industry. & keep them out of private ownership  This is not popular in the United States. It is found in Europe, Asia, and African economies.

9. Supply-Side tax cuts  Advocates say there should be less government interference in the market and for lower taxes.  Lower taxes create incentives for investment, and greater economic productivity. This will all result in greater tax revenue.  This theory fits the traditional Libertarian and conservative. But it ignores the political concerns about inflation and unemployment.

10. Reaganomics  Started by President Ronal Reagan in 1981. It combines Monetarisms, supply-side tax cuts, and domestic budget cuts.  Reagan wanted to reduce the size of the federal government, to stimulate the economy, and increase military strength  The inconsistencies in Reaganomics were the result of trying to combine concern for inflation, economic freedom, unemployment, and increasing military spending.  Some effect of Reaganomics were : Economy was stimulated Military spending increased Government spending continued to increase, but at a slower rate than before The money supply was controlled, cutting inflation, but allowing interest rates to rise Income taxes were cut, but Social Security was increased. Large deficits incurred, dramatically increasing the national debt Important industries were deregulated – airplane & telephone companies

11. The Machinery of Economic Policy Making.  Policy making done in several ways: 1. Congress- Most important. Congress approves all taxes and almost all expenditures. It consents to wage and price control when necessary. Numerous committees set the economic policy 2. Council of Economic Advisors (CEA)- Part of the executive office. Contains economist sympathetic with the president's views.  It forecast trends and analyses issues. Prepares the annual economic report that the president sends to Congress

12. The Machinery of Economic Policy Making. 3. Office of Management and Budget (OMB)- Also part of the executive office. The OMB prepares estimates of amounts to be spent by federal government agencies, and will negotiate department budgets. It will make sure that programs are compatible with the presidents program. 4. Secretary of the Treasury- Member of the presidents cabinet. From the world of business or finance, is expected to argue the point of view of the financial community.

13. The Machinery of Economic Policy Making. 5. The Federal Reserve Board- Appointed by the president, confirmed by the Senate, and serve non- renewable 14 year terms. Members can be removed for cause. The chairmen of the Fed. Serves for 4 years. The Fed is independent of the president and Congress. Its most important job is to regulate the supply of money. (in circulation and thru reserve rates) and the price of money in the form of interest rates.

14. The Budget  A budget is a policy document that announces how much a government expects to collect in taxes, spend in revenues, and how those expenditures will be allocated among various programs.  No Budgets before 1921 & no overall presidential budget until 1930.  The Congressional Budget Act of 1974 established procedures to standardize the budgeting process: 1. The president submits the budget. 2. The House and Senate budget committees study the budget after receiving analysis from the Congressional Budget Office (CBO) 3. Each committee proposes a budget resolution that sets a total budget ceiling, as well as ceiling for each of several spending areas. 4. Congress is expected to adopt these resolutions in order to guide its budget debate. 5. Congress considers appropriations bills (bills that actually fund programs within established limits) and sees whether they are congruent with the budget resolution.

15. The Budget  Big changes in the budget are not possible because approximately 2/3 of our budget is tied up in entitlements. (federal programs like Medicare and Social Security that help a certain criteria of people)  Reducing federal spending~ Gramm-Rudman Balanced Budget Act (1985). Placed a cap on spending.  Across the board cuts would be made until 1991 or until the budget deficit disappeared.  Congress and the president still found ways to increase the budget.

16. The Budget  2 nd attempt to reduce spending. ~~ Budget Enforcement Act of 1990.  The BEA capped discretionary funding. If entitlement spending increased, either discretionary spending had to be cut or taxes had to be raised.  Current Policies are represent a blend between majoritarian and interest group politics. (Our tax burden is low compared to other democratic nations)

17. The Budget & Taxes  Most Americans are required to pay at least something.  A progressive tax structure in the U.S. requires higher income people to pay taxes at a rate higher than those for lower income.  Tax loopholes (deductions, exemptions, and exclusions) favor certain groups of people and usually reduce the progressivism of our tax structure.  Should we tax income or consumption?  Our tax rate had varied sine 1913. High during war, low during peace.  The Tax Reform Act of 1986 lowered rates and decreased deductions. Presidents in the last 2 decades have advocated increasing rates while keeping deductions low.  The desire is to balance the budget, but Medicare and Social Security are in desperate needs of funds.