Chapter%2018:%20Economic%20Policy

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Chapter 18 Economic Policy
Pages 492-511
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Economic Policy

• Deficit When government spends more than it
  takes in from taxes
• National Debt all the deficits we have had since
  George Washington was president

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Economic Policy

• The federal government never has to declare
  bankruptcy because when it needs more money, it
  borrows it by selling bonds
• Government must pay the interest on the bonds
• In a typical year interest payments are the
  third-biggest item in the national budget after
  money spent on redistribution and defense

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Economic Policy

• GDP Gross Domestic Product
• The total of all the goods and services produced
  in a country during a certain year

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Economic Policy

• How our country can make progress toward reducing
  our total National Debt
• Raise Taxes Democrats/Liberals
• Cut Spending Republicans/Conservatives

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The Politics of Economic Prosperity
Pages 494-496
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The Politics of Economic Prosperity

• Economic conditions are strongly associated with
  how much success the incumbent party has in
  keeping control of the Presidency and Congress
• Example President Bill Clintons Slogan Against
  George Bush, Sr.
• Its the Economy Stupid
• Bush Lost Because Economy was Bad

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The Politics of Economic Prosperity

• People are not just worried about their own
  pocketbooks but are worried unemployment of the
  Nation as a whole
• People look at the unemployment of the Nation
  when casting votes

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The Politics of Economic Prosperity

• What politicians try to do.
• They would love to produce low unemployment rates
  and rising family incomes just before an election
• Democrats want to reduce unemployment
• Republicans want to reduce inflation

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The Politics of Taxing Spending
Pages 496-497
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The Politics of Taxing Spending

• Politicians confront TWO inconsistent kinds of
  majoritarian politics
• Everyone wants general prosperity
• Large majorities want more government spending on
  popular programs Social Security

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The Politics of Taxing Spending

• TAXING POLICY THAT IS POPULAR
• Raise taxes on cigarettes (sin tax)
• Raise taxes on the wealthy

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The Politics of Taxing Spending

• Increase in spending is more popular than Cutting
  Taxes

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Economic Theories Political Needs
Pages 497-499
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Economic Theories Political Needs

• Since most tax issues are majoritarian issues
  they involve the president
• Think of how the people of the United States are
  depending on President Obama to get us out of the
  Recession

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Economic Theories Political Needs

• There are FOUR major theories about how to best
  manage the Economy
• Monetarism
• Keynesianism
• Economic Planning
• Supply-side Tax Cuts

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Economic Theories Political Needs

• Most tax issue are Majoritarian (All of Us)
  issues, they usually involve the president
• Example All of us in America are very concerned
  with the state of the Economy and we look to our
  president to help solve the problem

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Economic Theories Political Needs

• Four Economic Theories
• Monetarism Milton Friedman
• Believe that inflation occurs when there is too
  much money chasing too few goods
• Federal Government is allowed to print money
  according to Monetarists, inflation occurs when
  we print too much money

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Economic Theories Political Needs

• Monetarism (cont)
• When inflation is rampant and the government
  tries to do something about it, it often cuts
  back sharply on the amount of money in
  circulation raise interest rates on your credit
  cards

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Economic Theories Political Needs

• Monetarism (cont)
• Monetarists believe that the proper thing for a
  government to do is to have a steady, predictable
  increase in money supply at a rate that is about
  equal to the growth in the economys
  productivity beyond that the government should
  leave matters alone and let the free market
  operate

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Economic Theories Political Needs

• 2. Keynesianism John Maynard Keynes
• The key is to create the right level of demand
  this is the task of the government
• When demand is too little, the government should
  pump money into the economy (by spending more
  than it takes in taxes and by creating
  public-works programs)

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Economic Theories Political Needs

• 2. Keynesianism (cont)
• When demand is too great the government should
  take money out of the economy by increasing taxes
  or cutting federal expenditures this is an
  Activist Government Government is involved

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Economic Theories Political Needs

• PRESIDENT OBAMA IS USING THE KEYNESIAN MODEL TO
  HELP OUR ECONOMY

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Economic Theories Political Needs

• 3. Economic Planning John Kenneth Galbraith
• Price and Wage Controls
• Big corporations can raise prices because the
  forces of competition are too weak to constrain
  them, and labor unions can force up wages because
  management finds it easy to pass the increase to
  consumers in the form of higher prices

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Economic Theories Political Needs

• 3. Economic Planning (Cont)
• Thus during inflationary times (money value is
  weak) government should regulate the maximum
  prices that can be charged and wages that can be
  paid

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Economic Theories Political Needs

• 3. Economic Planning (Cont)
• Government should somehow direct or plan
  investments so the industries would recover new
  and better industries to take their place
• Government directs industrial investments

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Economic Theories Political Needs

• PRESIDENT OBAMA IS ALSO EMPLOYING ECONOMIC
  PLANNING TO HELP OUR ECONOMY

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Economic Theories Political Needs

• 4. Supply-Side Tax Cuts Arthur B. Laffer
• More planning but LESS GOVERNMENT INTERVENTION
  Conservative Republicans prefer this
• Sharply cutting taxes will increase peoples
  incentive to work, save, and invest
• Greater investments lead to more jobs

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Economic Theories Political Needs

• Economic Ideology and Theory
• Conservatives Monetarism or Supply-Side Tax
  Cuts (want less government in economy)
• Liberals Keynesian because it allows government
  to carry a wide range of social welfare programs
  Obama lower cost of health care insurance for
  those on unemployment
• Socialists Economic Planning

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Economic Theories Political Needs

• What is Reaganomics?
• Economic Policy used by President Ronald Reagan
• It is a combination of Monetarism and Supply-Side
  Tax Cuts budget cutting
• Reagan wanted to reduce the size of the federal
  government, stimulate economic growth, and
  increase spending on the military

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Economic Theories Political Needs

• What is Reaganomics?
• Decrease personal income tax but Reagan increased
  the Social Security Tax
• This created a massive budget deficit

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The Machinery of Economic Policy Making
Pages 499-502
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The Machinery of Economic Policy Making

• Machinery about making decisions about economic
  matters is complex and not under the Presidents
  full-control
• Troika (THE THREE)
• Chairman of the Council of Economic Advisors
  (CEA)
• The Director of Economic Advisors
• Secretary of the Treasury

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The Machinery of Economic Policy Making

• THE PRESIDENT SUBMITTS AN ECONOMIC REPORT TO
  CONGRESS EACH YEAR

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The Machinery of Economic Policy Making

• The Fed (The Federal Reserve System)
• Created in 1913
• Chairman of Fed is Ben Bernanke
• 7 members are appointed by the president with
  consent of the Senate, for fourteen year
  non-renewable terms and may not be removed except
  for cause

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The Machinery of Economic Policy Making

• The Fed (Cont)
• Chairman of the Fed serves a four year term
• The Fed is independent of the President and
  Congress
• Most important function of the Fed is to
  regulate, insofar as it can, the supply and price
  of money

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The Machinery of Economic Policy Making

• The Fed (Cont)
• The Federal Reserves sets Monetary Policy
  effort to shape the economy by controlling the
  supply of money and interest rates.
• BOX on page 500

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The Machinery of Economic Policy Making

• Congress
• Most important part of making economic policy
• Congress must approve all taxes and most money
  spent by the Government
• There can be NO wage or price controls unless
  Congress says it is OK

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The Machinery of Economic Policy Making

• Congress (Cont)
• Congress has the ability to alter the policy of
  the nominally independent Federal Reserve Board
  The Fed by threatening to pass laws that would
  reduce the Feds power

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The Machinery of Economic Policy Making

• Congress (Cont)
• Congress has the power of Fiscal Policy managing
  the economy by the use of tax and spending laws
• When Congress passes laws governing Foreign
  Trade, it is responding to interest group politics

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The Machinery of Economic Policy Making

• Congress (Cont)
• Industries that find it easy to sell American
  products abroad Want Free Trade
• Industries that find it hard to compete with
  foreign imports (goods coming into the country)
  OPPOSE Free Trade
• Free Trade means NO taxes or restrictions on
  International Trade

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The Machinery of Economic Policy Making

• NAFTA North American Free Trade Agreement is
  FREE TRADE between the United States, Canada, and
  Mexico
• Republicans usually support Free Trade

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Spending Money
Pages 502-503
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Spending Money

• Who decides how to spend the governments (our)
  money?
• Congress and President
• AND/OR
• Voters and Interest Groups

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Spending Money

• What the people want from political candidates
• Vote for me and I will keep government spending
  down and cut the deficit
• Vote for me and I will make certain that your
  favorite program gets more money

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The Budget
Pages 503-504
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The Budget

• Budget is a document that announces how much the
  government will collect in taxes and spend in
  revenues and how those expenditures will be
  distributed among different programs the
  government establishes

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The Budget

• Fiscal Year each budget covers a fiscal year
• Fiscal year runs from October 1 to September 30
  of the next year
• A fiscal year is named after the year in which it
  ends (thus fiscal 2006 or FY 2006 means the
  year ending on September 30, 2006

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The Budget

• The federal budget is a list of everything the
  government is going to spend money on, with only
  slight regard for how much money is available to
  be spent

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The Budget

• Congressional Budget Act of 1974
• Now after the president submits his budget in
  February, two budget committees one in the
  House and one in the Senate study the
  presidents overall package and obtain an
  analysis of it from the Congressional Budget
  Office (CBO)

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The Budget

• Congressional Budget Office
• Each committee then submits a budget resolution
  a congressional decision that states the maximum
  amount of money the government should spend and
  where it should be spent

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The Budget

• In the month of May Congress is to adopt, with
  some modifications, the budget resolutions,
  intending them to be targets to guide the work on
  each legislative committee as it decides what
  should be spent in its area
• Discipline is imposed of various committees when
  it comes to spending
• After each committee approves its appropriations
  bills and Congress passes it, it then goes to the
  president for his signature

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The Budget

• Entitlements government funds cannot be
  changed. About two-thirds of what the government
  spends is mandatory money goes to people who are
  entitled to it
• Examples of entitlements
• Social security, veterans benefits, food stamps,
  and money owed to investors who have Treasury
  Bonds

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The Budget

• The government can only change about one-third of
  federal spending in any year

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The Budget

• But, if you require Congress to vote first on a
  budget ceiling (the most the Gov can spend) then
  total spending will go down
• If there is NO budget ceiling adopted by
  Congress, the money problems would be left to
  the appropriations committee

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Levying Taxes
Pages 505-509
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Levying Taxes

• Tax policy reflects a mixture of majoritarian
  politics (us)
• What is a Fair tax law?

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Levying Taxes

• Tax policy also reflects client politics
  interest groups
• How much is in it for me?

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Levying Taxes

• In the United States a Fair Tax law has generally
  been viewed as one that keeps the overall tax
  burden low, requires everyone to pay something,
  and requires the better-off to pay at a higher
  rate than the less-well-off

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Levying Taxes

• Income tax burden is lower in the United States
  than in most other democratic nations
• Most nations use sales tax more than income tax
  because people cannot evade a sales tax

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Levying Taxes

• THE RISE OF THE INCOME TAX (507-509)
• In 1913, Congress proposed and the States
  ratified the 16th Amendment which authorized the
  Income Tax
• For the next forty years, tax rates tended to be
  higher during wartime and lower during peacetime

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Levying Taxes

• THE RISE OF THE INCOME TAX (507-509)
• Progressive Tax wealthy pay a higher tax than
  the poor
• Loopholes since the rich pay more in taxes we
  have loopholes which means deductions,
  exemptions, and exclusions by which people could
  shelter some of their income from taxation
  (write-off) deduct interest paid on your
  mortgage
• Republicans (rich) loopholes
• Democrats (poor) low tax rate

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Levying Taxes

• The Rise of the Income Tax
• Tax Reform Act of 1986
• Instead of high tax rates with big deductions, we
  got lower tax rates with smaller deductions
• People (me you) benefit from this Act
• Businesses big losers with implementation of
  this Act

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THE END