1. Policy Making

2. Government Purposes and Public Policies A public policy is a general plan of action. A public policy is a general plan of action. All public policies are the means by which government pursues goals. All public policies are the means by which government pursues goals. Government approaches can be put into one of three types: Government approaches can be put into one of three types: Distributive-allocate resources Distributive-allocate resources Redistributive-reallocate resources Redistributive-reallocate resources Regulation-guide the operation of government Regulation-guide the operation of government

3. Policy Making Process Four Stages Four Stages Agenda Setting- problems defined. Agenda Setting- problems defined. Policy Formulation- choices are developed. Policy Formulation- choices are developed. Implementation- policies are carried out. Implementation- policies are carried out. Policy Evaluation- analysis of effectiveness. Policy Evaluation- analysis of effectiveness.

4. Government, Politics, and the Economy Introduction Introduction Capitalism: Capitalism: An economic system in which individuals and corporations, not the government, own the principal means of productions and seek profits An economic system in which individuals and corporations, not the government, own the principal means of productions and seek profits Mixed Economy: Mixed Economy: An economic system in which the government is deeply involved in economic decisions through its role as regulator, consumer, subsidizer, taxer, employer and borrower An economic system in which the government is deeply involved in economic decisions through its role as regulator, consumer, subsidizer, taxer, employer and borrower

5. Government, Politics, and the Economy Economic Policy at Work: An Illustration Economic Policy at Work: An Illustration Government Regulation and Business Practices Government Regulation and Business Practices Securities and Exchange Commission regulates stock fraud Securities and Exchange Commission regulates stock fraud Minimum wage: the legal minimum hourly wage for large employers Minimum wage: the legal minimum hourly wage for large employers Labor union: an organization of workers intended to engage in collective bargaining Labor union: an organization of workers intended to engage in collective bargaining Collective bargaining: negotiations between labor unions and management to determine pay and working conditions Collective bargaining: negotiations between labor unions and management to determine pay and working conditions

6. Policies for Controlling the Economy Monetary Policy and “the Fed” Monetary Policy and “the Fed” Monetary Policy: the manipulation of the supply of money in private hands–too much cash and credit produces inflation Monetary Policy: the manipulation of the supply of money in private hands–too much cash and credit produces inflation Money supply affects the rate of interest paid. Money supply affects the rate of interest paid. Main policymaker is the Board of Governors of the Federal Reserve System–the “Fed” Main policymaker is the Board of Governors of the Federal Reserve System–the “Fed” Created in 1913 to regulate lending practices of banks and thus they money supply Created in 1913 to regulate lending practices of banks and thus they money supply

7. Policies for Controlling the Economy Monetary Policy and “the Fed” (continued) Monetary Policy and “the Fed” (continued) The Feds instruments to influence the supply of money in circulation: The Feds instruments to influence the supply of money in circulation: Sets the federal funds rate Sets the federal funds rate Buys and sells government bonds Buys and sells government bonds Through the use of these actions, the Fed can affect the economy. Through the use of these actions, the Fed can affect the economy. Laissez-faire: principle that government should not meddle in the economy Laissez-faire: principle that government should not meddle in the economy

8. Policies for Controlling the Economy Fiscal Policy of Presidents and Parties Fiscal Policy of Presidents and Parties Fiscal Policy: the policy that describes the impact of the federal budget on the economy Fiscal Policy: the policy that describes the impact of the federal budget on the economy Keynesian Economic Theory: government spending and deficits help the economy weather its normal ups and downs Keynesian Economic Theory: government spending and deficits help the economy weather its normal ups and downs Government’s job is to increase demand of goods Government’s job is to increase demand of goods

9. Fiscal Policy Expansionary policies try to increase output. Expansionary policies try to increase output. Contractionary policies try to decrease output. Contractionary policies try to decrease output.

10. Effects of Expansionary Policy Lower Output, Lower Prices Original Aggregate Demand Aggregate Supply Higher Output, Higher Prices Aggregate Demand with High Government Spending

11. Effects of Contractionary Policy Lower Output, Lower Prices Original Aggregate Demand Aggregate Supply Higher Output, Higher Prices Aggregate Demand with Lower Government Spending

12. Expansionary Fiscal Policies Increasing Government Spending. Increasing Government Spending. Cutting Taxes. Cutting Taxes.

13. Contractionary Fiscal Policies Increasing Taxes Increasing Taxes Decreasing Government Spending Decreasing Government Spending

14. Limits of Fiscal Policy Difficulty of Changing Spending Levels. Difficulty of Changing Spending Levels. Predicting the Future. Predicting the Future. Delayed Results. Delayed Results. Political Pressures. Political Pressures. Coordinating Fiscal Policies. Coordinating Fiscal Policies.

15. Instruments for Controlling the Economy Fiscal Policy of Presidents and Parties, (continued) Fiscal Policy of Presidents and Parties, (continued) Supply-Side Economics: the policy that says there is too much taxation and not enough money to purchase goods and services Supply-Side Economics: the policy that says there is too much taxation and not enough money to purchase goods and services Reduce taxation and government regulation then people will work harder, and thus create a greater supply of goods Reduce taxation and government regulation then people will work harder, and thus create a greater supply of goods

16. Public Policy and the Budget Since 1921, the president has been responsible for drafting and submitting the budget to Congress for approval. Since 1921, the president has been responsible for drafting and submitting the budget to Congress for approval. The budget states how much money government agencies will be allowed to spend on their programs, planned expenditures and receipts. The budget states how much money government agencies will be allowed to spend on their programs, planned expenditures and receipts.

17. Public Policy and the Budget The preparation of the budget is supervised by the Office of Management and Budget (OMB). The preparation of the budget is supervised by the Office of Management and Budget (OMB). The budget must then be passed by Congress. The budget must then be passed by Congress.

18. Public Policy and the Budget Attempted reforms to the budget process have included the Budget and Impoundment Control Act, Gramm-Rudman balanced budget act, the Budget Enforcement Act and finally the Balanced Budget Act. Attempted reforms to the budget process have included the Budget and Impoundment Control Act, Gramm-Rudman balanced budget act, the Budget Enforcement Act and finally the Balanced Budget Act.

19. Tax Policies Tax policies are designed to provide a continuous flow of revenue without requiring new annual legislation. Tax policies are designed to provide a continuous flow of revenue without requiring new annual legislation. Nevertheless, tax policy is often adjusted to meet budgetary outlays, to make the tax burden more equitable, or to control the economy. Nevertheless, tax policy is often adjusted to meet budgetary outlays, to make the tax burden more equitable, or to control the economy.

20. Type of Tax DescriptionExample Ron’s Taxes ($50K) Mary’s Taxes ($150) Proportional A constant percentage of income is taken in taxes and income increases. “Flat” Tax $7,500 (15%) $22,500 (15%) Progressive A larger percentage of income is taken in taxes as income increases. Income Tax $5,000 (10%) $45,000 (30%) Regressive A smaller percentage of income is taken in taxes as income increases. Sales Tax $2K or 5% of $40K in purchases, bill is 4% of income $3K or 5% of $60K in purchases, bill is 2% of income.

21. Spending Policies Unlike tax policies, which usually do not vary greatly from year to year, government spending is subject to annual changes. Unlike tax policies, which usually do not vary greatly from year to year, government spending is subject to annual changes. Most federal spending has shifted to two major categories, payments to individuals and net interest payments. Most federal spending has shifted to two major categories, payments to individuals and net interest payments.

22. Spending Policies The general trend of increase in the percentage of federal spending relative to GDP from World War II to the present is explained by bureaucratic (incremental and uncontrollable spending) and political factors. The general trend of increase in the percentage of federal spending relative to GDP from World War II to the present is explained by bureaucratic (incremental and uncontrollable spending) and political factors.

23. Tomorrow’s Quiz Know the vocabulary!! Know the vocabulary!! Sources of Fragmentation. Sources of Fragmentation. Supply Side v. Keynesian Theory Supply Side v. Keynesian Theory Progressive, Regressive and Proportional Taxes. Progressive, Regressive and Proportional Taxes. Fiscal v. Monetary Policy Fiscal v. Monetary Policy