Transcript chapter 16: learning objectives

CHAPTER 16: LEARNING OBJECTIVES
Define the various stages in which the
public policymaking process unfolds
Assess the formal and informal players
involved in the policymaking process
Recognize the different theories that
justify decisions to craft fiscal policy
Copyright © 2012 Cengage Learning
CHAPTER 16: LEARNING OBJECTIVES
Define the different measures used to
assess the success or failure of fiscal
policy
Analyze the budget-making process,
how it unfolds, and the roles played by
Congress and the president, respectively
Copyright © 2012 Cengage Learning
CHAPTER 16: LEARNING OBJECTIVES
Understand the different categories of
tax policy, and how it has evolved in
American history
Assess the differences between
mandatory and discretionary spending
by government
Copyright © 2012 Cengage Learning
CHAPTER 16: LEARNING OBJECTIVES
Understand the origins and development
of the federal reserve system in the
United States
Assess government’s role in crafting
agricultural policy in the U.S.
Copyright © 2012 Cengage Learning
CHAPTER 16: LEARNING OBJECTIVES
 Assess government’s role in crafting
urban policy, including recent
developments in urban planning
Define and assess the role that FEMA
plays in assisting the victims of natural
disasters
Copyright © 2012 Cengage Learning
WHEN THE GREED AND ARROGANCE OF
FINANCIAL INSTITUTIONS DEMAND A
NATIONAL SOLUTION … NOW & THEN
The U.S. capitalist system was in crisis
At least one major financial institution
had failed, and others were on the brink
Some exploited the lax regulatory
environment and millions of others fell
victim to the financial institutions
Copyright © 2012 Cengage Learning
…NOW & THEN
The president—bolstered by a legislative
branch controlled by his own party—
favored regulation
When wealthy financial institutions
driven by greed and arrogance defraud
so many citizens
A new agenda to regulate such bad
behavior is difficult to derail
Copyright © 2012 Cengage Learning
Obama flanked by economic advisors (Larry
Summers, Paul Volcker, Goolsbee, Tim Geithner)
announcing new proposals to rein in banks JIM
WATSON/AFP/GETTY IMAGES
Copyright © 2012 Cengage Learning
NOW… THE “GREAT RECESSION” OF
2007-2010
The U.S. banking system was suffering
a major liquidity crisis brought on by:
1. Predatory lending practices
2. Upsurge in subprime lending to borrowers
with weak credit histories
3. Incorrect pricing of risk on complex assets,
i.e. “derivatives”
Copyright © 2012 Cengage Learning
NOW… THE “GREAT RECESSION” OF
2007-2010
4. Rise of the “shadow banking system” —
non-bank financial institutions were lending
money free of regulations
5. Investment banks like Goldman Sachs sold
investments to unwitting clients even as
they were secretly betting against those
same investments
Copyright © 2012 Cengage Learning
NOW… THE “GREAT RECESSION” OF
2007–2010
Obama and Congressional Democrats
introduced legislation in 2009:
Addressed consumer protection, bank
capital requirements, executive pay
Also expanded regulation of the shadow
banking system and derivatives, and set
new trading limits
Copyright © 2012 Cengage Learning
THEN… 1933
1929: Wall Street Crash—major banks
failed and a majority of Americans’ stock
holdings disappeared
Congressional investigators turned up
evidence of fraud and irresponsibility
Banks ignored conflicts of interest and
underwrote unsound securities to pay off
bad loans
Copyright © 2012 Cengage Learning
THEN… 1933
Competing banks “pooled operations” to
artificially support the price of bank
stocks
Wall Street insiders like Joseph
Kennedy used inside information about
stocks to make millions
Officers had been playing by their own
rules at many once revered institutions
Copyright © 2012 Cengage Learning
THEN… 1933
Securities Act of 1933 penalized filing
false information about stock offerings
Securities Exchange Act of 1934 formed
the Securities and Exchange
Commission
Congress now sought to end the era of
unregulated securities, and public anger
gave them little choice
Copyright © 2012 Cengage Learning
RICHARD DREW/AP PHOTO
PABLO MARTINEZ/MONSIVAIS/AP PHOTO
Copyright © 2012 Cengage Learning
AN OVERVIEW OF THE
POLICYMAKING PROCESS
 The process varies considerably, but
most policies unfold in five stages:
1. Recognition/definition stage
2. Formulation stage
3. Adoption (or legitimation) stage
4. Implementation stage
5. Evaluation stage
Copyright © 2012 Cengage Learning
AN OVERVIEW OF THE
POLICYMAKING PROCESS
A large number of actors and institutions
are involved in making policy
Bureaucrats often play a key role
Congress and the president are most
directly involved in the recognition,
formulation, and adoption stages, when
media attention is most intense
Copyright © 2012 Cengage Learning
AN OVERVIEW OF THE
POLICYMAKING PROCESS
Courts may ensure that all procedures
are followed in interpreting rules,
regulations, and policies
Interest groups and “think tanks” (policy
research institutes) tend to be most
active in influencing program choices
and decisions
Copyright © 2012 Cengage Learning
THEORY AND PRACTICE IN FISCAL
POLICY
Fiscal policy: how to raise revenue
through taxation and how to spend the
revenue generated
Federal budget: primary instrument the
federal government uses to manage
fiscal policy
Specifies estimated expenditures and
revenues
Copyright © 2012 Cengage Learning
THEORY AND PRACTICE IN FISCAL
POLICY
Various economic theories explain U.S.
fiscal policy at any given point Laissez-faire (“leave us alone”) guided
U.S. fiscal policy for much of the 18th
and 19th centuries
Favors less economic intervention and
governmental regulations
Copyright © 2012 Cengage Learning
THEORY AND PRACTICE IN FISCAL
POLICY
In the 1930s, widespread support for
FDR’s New Deal programs based on
Keynesian theories spelled the end of
laissez-faire fiscal policies
Keynesian theory: government should
increase spending in bad economic
times to raise total demand for goods
and services
Copyright © 2012 Cengage Learning
THEORY AND PRACTICE IN FISCAL
POLICY
 Government spending may forestall or
even end a recession
Economic slowdown characterized by
higher unemployment, reduced
productivity, or some other negative
economic indicators,
But may also cause inflation and
chronically high deficits
Copyright © 2012 Cengage Learning
THEORY AND PRACTICE IN FISCAL
POLICY
Supply-side economics: argues in
favor of cutting taxes and government
Ronald Reagan seized on this theory
and secured passage of a large tax cut,
But federal spending and deficits also
multiplied during his eight years in office
Copyright © 2012 Cengage Learning
ASSESSING THE ECONOMY’S
PERFORMANCE
Gross domestic product (GDP):
Estimate of the total value of all goods
and services produced in the U.S. in a
one-year period
When GDP improves, workers are
producing more in fewer hours, allowing
employers to increase wages without
raising prices
Copyright © 2012 Cengage Learning
ASSESSING THE ECONOMY’S
PERFORMANCE
Consumer Price Index (CPI):
An index of prices for goods and
services regularly traded in the U.S.
A sustained rise over time indicates
inflation is on the rise and
Consumers’ buying power is on the
decline
Copyright © 2012 Cengage Learning
ASSESSING THE ECONOMY’S
PERFORMANCE
Unemployment rate:
Percentage of people unemployed and
actively looking for work
Full employment is elusive due to
seasonal factors, voluntary job changes,
and routine shifts in economic conditions
5% is now seen as a realistic minimum
Copyright © 2012 Cengage Learning
ASSESSING THE ECONOMY’S
PERFORMANCE
National debt:
Individuals or organizations purchase
interest-bearing U.S. savings bonds,
treasury notes, and treasury bills
Includes budget surpluses and deficits of
past years
Currently = trillions with billions paid in
interest annually
Copyright © 2012 Cengage Learning
ASSESSING THE ECONOMY’S
PERFORMANCE
Dow Jones Industrial Average: Most
widely used indicator of the overall
condition of the stock market
Price-weighted average of 30 actively
traded blue chip stocks
Standard & Poor’s 500 Index: broader
range of large company stocks
NASDAQ: high-tech company stocks
Copyright © 2012 Cengage Learning
ASSESSING THE ECONOMY’S
PERFORMANCE
Housing starts:
Number of U.S. residential building
construction projects begun in a specific
period
Many experts believe a decline is one of
the first signs of an approaching
economic downturn
Copyright © 2012 Cengage Learning
ASSESSING THE ECONOMY’S
PERFORMANCE
Balance of trade figures (aka, net
exports):
Money gained by selling exports, minus
the cost of buying imports
When a country exports more than it
imports it has a trade surplus, the
reverse situation denotes a trade deficit
Copyright © 2012 Cengage Learning
AMERICAN GOVERNMENT IN
POPULAR PERSPECTIVE
ASSESSING THE ALL-IMPORTANT
CONSUMER CONFIDENCE MEASURE
The monthly calculation is based on five
questions
1. Current U.S. business conditions
2. Expectations about how business conditions
might change in the next six months
Copyright © 2012 Cengage Learning
AMERICAN GOVERNMENT IN
POPULAR PERSPECTIVE
3. Current U.S. employment conditions
4. Expectations about how employment
conditions might change in the next six
months
5. Expectations about how one’s own income
situation might change in the next six
months
Copyright © 2012 Cengage Learning
AMERICAN GOVERNMENT IN
POPULAR PERSPECTIVE
What do you think is the best way to
instill a positive outlook in consumers?
Are consumers likely to react positively
when the federal government takes bold
actions, or
Do such moves only confirm the sense
that economic times are worsening?
Copyright © 2012 Cengage Learning
Copyright © 2012 Cengage Learning
THE FEDERAL BUDGET-MAKING
PROCESS
Agencies submit budget requests to the
Office of Management and Budget
(OMB)
OMB then prepares a budget proposal in
keeping with the president’s program
Sets guidelines for estimating revenue
and allotting spending
Copyright © 2012 Cengage Learning
THE FEDERAL BUDGET-MAKING
PROCESS
All appropriations bills originate in the
House
After the House Appropriations
Committee reports the bills to the full
House, and
After the full House has passed each
measure
Copyright © 2012 Cengage Learning
THE FEDERAL BUDGET-MAKING
PROCESS
The Senate Appropriations Committee
takes its turn revising the House version
Reports this to the Senate floor
The House and Senate must reconcile
their versions and secure enough votes
for approval of the final bill
Sent to the president for approval
Copyright © 2012 Cengage Learning
BALANCING THE FEDERAL BUDGET?
Congress has debated a balanced
budget amendment to the Constitution
Proponents argue it would force
lawmakers to become more accountable
Opponents counter that deficit spending
may be necessary during recessions and
in defending national security
Copyright © 2012 Cengage Learning
The Smithsonian
Institution was among
many government sites
closed down during the
1995 government
shutdown.
AFP/GETTY IMAGES
Copyright © 2012 Cengage Learning
TAXATION POLICY
July 1789: Congress passed its first
revenue-raising bill:
Levied tariffs: taxes on imported foreign
goods
Until the Civil War, tariffs provided
approximately 90% of federal revenue
Increased demands required additional
sources of revenue
Copyright © 2012 Cengage Learning
TAXATION POLICY
The Sixteenth Amendment authorizes
taxes on individual increases in wealth,
from wages, benefits, bonuses, or any
other form of income
Progressive tax: tax rate increases as
the amount of income gets larger
Regressive tax: charges the same
amount, regardless of income
Copyright © 2012 Cengage Learning
TAXATION POLICY
Social Security taxes: Created in 1935;
intended to be self-supporting:
Payroll taxes taken directly out of each
paycheck and held until retirement
In reality, the system has become “pay
as you go”
Current payroll taxes are going directly
to pay the benefits of current retirees
Copyright © 2012 Cengage Learning
TAXATION POLICY
Congress has also imposed corporate
income taxes
Other sources include taxes on—
Gasoline and communications services
Estates and large financial gifts, and
Customs duties
Copyright © 2012 Cengage Learning
AMERICAN GOVERNMENT. . . IN
GLOBAL PERSPECTIVE
What About Us? The Chinese
Reaction to the U.S. Fiscal Stimulus
Plan
The 2009 stimulus plan required that all
public works and building projects use
only U.S.-made goods
Exceptions allowed goods from Canada,
the European Union, and Japan
Copyright © 2012 Cengage Learning
AMERICAN GOVERNMENT. . . IN
GLOBAL PERSPECTIVE
China’s official news agency, Xinhua
reported this “trade protectionism” could
harm the world economy:
As the largest holder of U.S. Treasury
securities, they expressed concern about
asset depreciation and
“…catastrophic effects to some poor
countries…”
Copyright © 2012 Cengage Learning
YOUR PERSPECTIVE … ON
AMERICAN GOVERNMENT
College Students Get an Education …
in Credit Card Abuse
Credit card companies eagerly target
economically stressed college students
More likely to make late payments and
less likely to pay off their cards in full at
the end of each month
Copyright © 2012 Cengage Learning
YOUR PERSPECTIVE … ON
AMERICAN GOVERNMENT
Did you apply for a credit card during
your first semester as a college student?
Were you surprised at how easy it was
to sign up for your own credit card?
Should colleges limit credit card
companies’ access to college students?
Why or why not?
Copyright © 2012 Cengage Learning
YOUR PERSPECTIVE … ON
AMERICAN GOVERNMENT
Would you favor requiring that all
undergraduate students take a course in
personal financial management?
If the government can rack up large
deficits, why do you think families and
individuals like yourself are so heavily
penalized for doing so?
Copyright © 2012 Cengage Learning
SPENDING POLICIES –
DIVIDING UP THE PIE
Mandatory spending: not controlled by
annual budget decisions
Obligated by previously enacted laws
and may only be modified by repeal or
revising the original legislation
Discretionary spending: may be
modified or eliminated in a given year
Copyright © 2012 Cengage Learning
Figure 16.1 Where Do Federal Tax Dollars
Come From and Where Do They Go?
Source: Budget of the U.S. Government Fiscal Year 2011, Historical Tables, published by the Executive Office of the President.
Copyright © 2012 Cengage Learning
THEORIES AND PRACTICE IN
MONETARY POLICY
Monetary policy: how the government
controls the supply and price of money in
the economy
With few exceptions, the Federal
Reserve System headed by the Federal
Reserve Board (“the Fed”) –
Determines U.S. monetary policy
Copyright © 2012 Cengage Learning
CHECK THE LIST
G-7 Nations, Ranked According to
Income Tax Rates Imposed on Their
Citizens
Organization for Economic Cooperation
and Development (OECD)
Data on state and federal wage taxes for
the G-7 shows the U.S. tax burden is
toward the lower end
Copyright © 2012 Cengage Learning
Copyright © 2012 Cengage Learning
EMERGENCY AND DISASTER RELIEF
POLICY
Federal Emergency Management
Agency (FEMA) provides relief after
disasters
When the president declares a state of
emergency, FEMA coordinates federal
relief efforts and offers assistance
FEMA’s delayed response to Hurricane
Katrina drew widespread criticism
Copyright © 2012 Cengage Learning
AMERICAN GOVERNMENT… IN
HISTORICAL PERSPECTIVE
HURRICANE RELIEF THAT CALLS
FOR A “HANDS-ON” PRESIDENT
9/5/1965: Category 4 Hurricane Betsy
left 3/4ths of New Orleans underwater
Initially resistant, but heeding advice,
President Johnson visited New Orleans
to reach out to the storm’s victims
Copyright © 2012 Cengage Learning
AMERICAN GOVERNMENT… IN
HISTORICAL PERSPECTIVE
 8/30/2005: Category 4 Hurricane
Katrina proved among the deadliest
Over 1300 fatalities and $100 billion in
damage
Like LBJ, Bush failed to immediately
see that entrusting subordinates to onsite activities is never enough in natural
disasters
Copyright © 2012 Cengage Learning
NOW & THEN: MAKING THE
CONNECTION
Most modern presidents’ political fates
rise and fall with the U.S. economy
Hoover’s presidency essentially ended
with the Great Depression
Carter’s presidency coincided with a
near record high misery index, and he
too became a one-term president
Copyright © 2012 Cengage Learning
NOW & THEN: MAKING THE
CONNECTION
FDR’s and Obama’s economic policies
clearly reflected Keynesian principles
It is easy to look back decades later
and judge a president’s economic
policies
Presidents reacting to the moment do
not have that luxury
Copyright © 2012 Cengage Learning
POLITICS INTERACTIVE!
FORMER FED CHAIRMAN GREENSPAN: A
LEGACY OF FORCEFULNESS
One of the most renowned Fed chairman in
history
During his 19-year term he became so
respected that even a simple appearance by
him before Congress became a marketshifting event
Copyright © 2012 Cengage Learning
POLITICS INTERACTIVE!
www.cengage.com/dautrich/american
government/2e Find the Politics
Interactive link for the challenges faced
by current Federal Reserve Chairman,
Ben Bernanke
How do they differ from the challenges
faced by Greenspan?
Did the ‘08–09 recession fundamentally
Copyright © 2012 Cengage Learning
alter the role of Fed Chairman?
Brokers on the NY
Stock Exchange at
work as they listen to
former Federal
Reserve Chairman
Alan Greenspan
testifying before
Congress
AP
PHOTO/RICHARD
DREW
Copyright © 2012 Cengage Learning