DOMESTIC POLICY: THE ECONOMY AND SOCIAL WELFARE

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Chapter 17

• DOMESTIC POLICY THE ECONOMY AND SOCIAL WELFARE

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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.

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• 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.

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The battle had electoral consequences in 1996.

• 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 1998.
• The annual decision about the budget is one of
  the most important things that the president and
  Congress do.

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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.

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• 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.

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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.

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• 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

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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

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• 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.

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• 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 nations central bank, the Fed oversees
  the banking system and sets the nations monetary
  policy.

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• 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

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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

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• 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.

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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 percent to about 19 percent

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Taxes

• Public discontent with taxes
• How the U.S. tax system differs from other
  countries in the kinds of taxes we impose
• Complexity of Our Tax System

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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.

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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

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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

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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.

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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

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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.

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• 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.

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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 percent of the federal budget.
• Implications of the spending pattern

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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.

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Components of Social Insurance

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

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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.

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• 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 percent of those who are
  technically eligible

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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
  1996.
• 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

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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

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• 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.

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• The American welfare state is less
  redistributive.
• The American welfare state requires less of
  private employers.
• The American welfare state does not include
  universal health care.

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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.

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Why the American Welfare State Is Different

• Constitutional rules
• Racial and ethnic diversity
• Political culture
• Business power
• Weak labor unions

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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.

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• 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.

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• 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.