Transcript Ch. 18 Economic Policy - St. Francis School District

Chapter 18
Economic
Policy

WHO GOVERNS?
1. Who in the federal government can
make our economy strong?
2. Who was responsible for the recession?

TO WHAT ENDS?
1. Why does the federal government ever
have a budget deficit?
2. How do you end a recession?
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The Politics of Economic
Prosperity



Majoritarian politics=people don’t want an
unhealthy economy
Pocketbook
Issues=unemployed=dem/inflation=rep.
• National level=unemployment
• Individual level
What Politicians Try to Do
• Unemployment=want it low
• Inflation=low
• Interest rates
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Figure 18.1 Federal Budget Deficit
(or Surplus)
Source: Budget of the U.S. Government, FY 2009 updated by OMB’s Mid-Session Review, July 2009 © 2003, AAAS.
Reprinted with permission
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The Politics of Taxing and
Spending

Voters want
• Prosperity
• Lower taxes
• Less debt
• New/continued programs

Objectives are
inconsistent
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During the recession,
people, including middle
class workers, line up at
the unemployment office.
p. 490 Source: Yellow
Dog Productions/ Getty
Images
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Economic Theories and Political
Needs




Monetarism=inflation occurs when too
much money is chasing too few goods
Keynesianism=gov’t puts $ into economy
during recession, takes out during inflation
Economic Planning=gov’t plans wages,
price controls, investments of economy
Supply-side Tax Cuts=lower taxes and
fewer regulations will stimulate the
economy
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The Machinery of Economic
Policy Making

The Fed
• Monetary policy – alters
the supply of money
and interest rates

Ben Bernanke, Chairman of
the Federal Reserve, speaks
to a congressional
committee. p. 495 Source:
Mark Wilson/ Getty Images
Congress
• Fiscal policy – uses tax
and spending laws

Globalization
• Growing integration of
the economies and
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societies of the world
Corbis/Corbis Sygma
Bettmann/Corbis
Milton
Friedman
Karen Vismara/
Black Star
Arthur B. Laffer
John
Maynard
Keynes
Bettmann/Corbis
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John Kenneth
Galbraith
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Spending Money

Conflicting interests
• Majoritarian politics
• Client politics
• Interest group politics


Public Opinion=gov’t spending too
much/not taxing too little
Politicians’ appeals=1. vote for me I
will cut spending/2. vote for me I will
keep your favorite programs
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The Budget


Budget
Fiscal Year – October 1 through the
following September 30 (federal)

Budget resolution – A congressional
decision that states the maximum amount
of money the government should spend

Entitlements - A claim for government
funds that cannot be changed without
violating the rights of the claimant
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Reducing Spending


Congressional Budget Act of 1974
Balanced Budget Act of 1985
(Gramm-Rudman Act)
• Sequester – automatic spending cuts

Budget Enforcement Act of 1990
• Limits on discretionary spending
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Figure 18.2 Federal Outlays
in 2008
Source: Office of
Management and Budget,
Mid-Season Review, 2009.
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Figure 18.2 Federal Revenues
in 2008
Source: Office of
Management and Budget,
Mid-Season Review, 2009.
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Figure 18.3 Social Security and
Medicare Cost as a % of GDP
p. 498
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Source: Trustees’
Report, 2009.
Levying Taxes

Majoritarian politics (What is good for
the country)
• Modest tax burden
• Minimize cheating

Client politics (how much is in it for me)
• Loopholes

Rise in the Income Tax
• Sixteenth Amendment=1913 income tax
• Tax Reform Act of 1986=low rates/smaller
deductions (good for ind. Bad for businesses)
• Tax increase of Copyright
1993=Clinton
tax raise 39%
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• Tax cuts of 2002 (Pres. Bush)
Figure 18.4 Tax
Burdens in
Democratic Nations
(Taxes as a
Percentage of
Income of a Family
with Two Children)
Source: Statistical Abstract of the United
States, 2003, Table 1344.
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Figure 18.5 Federal Taxes on Income,
Top Percentage Rates 1913-2002
Source: Updated from Congressional Quarterly Weekly Report (September 18, 1993), 2488.
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WHAT WOULD YOU DO?
MEMORANDUM
To: Elizabeth Gilbert, chairperson, Council of Economics
From: Edward Larson, White House speechwriter
Subject: Flat tax proposal
The President would like your advice on whether to
endorse a flat tax. His likely opponent is pushing this
issue.
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WHAT WOULD YOU DO?
Arguments for:
1. A flat tax is fair because it treats all income groups the
same. We could leave the lowest income group with no
taxes.
2. With a flat tax, we could eliminate almost all deductions
and loopholes from the tax code.
3. Countries with a flat tax, such as Lithuania, have achieved
great economic prosperity.
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WHAT WOULD YOU DO?
Arguments against:
1. A flat tax is unfair because it treats all income groups the
same. The rich should be taxed more heavily.
2. Many tax deductions, such as the one for home mortgages,
are desirable.
3. We could eliminate undesirable tax loopholes without
creating a flat tax.
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WHAT WOULD YOU DO?
Your decision:
Support?
Oppose?
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Tribune Media Services, Inc. All rights reserved. Reprinted by permission. p. 502
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