Transcript Economic Policy and the Budget

Economic Policy and the
Budget
Economic Health
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Deficits the last 35 years raise ongoing policy debates, as well
as the surpluses on 1999 & 2000.
Republicans wanted to give it back to the public, while
democrats wanted to use it for new programs.
Both sides won in 2001 when the republicans enacted 3 of the
largest tax cuts since WWII & Democrats received the
assurance that the tax cuts would end in 2010, and spending
on federal programs would increase.
Economic forecast are always uncertain. (Sept 11 & the rest
of the military actions cost $), these were followed by
recession where tax revenues were sharply reduced.
Forecast made before Sept 11 had no chance of being
accurate.
Economic Health
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Voters see connections between their own economic
circumstances, the president, and the nation as a
whole.
Politicians, especially presidential candidates, worry
about the so-called pocketbook issue just before the
election.
Congressional Candidates, especially challengers,
can easily evade responsibility for economic
conditions, but the presidents are the ones who get
blamed or get credit for the economy.
Economic Health
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Remember voters tend to reelect incumbents,(esp. in the
House, limited in the Senate), When their economic fortunes
are good and vote them out when fortunes are bad.
BUT voting behavior and economics are not always
related at the national or individual level.
People do not always vote their pocketbooks because
they understand the government cannot be held
accountable for everything.
Politicians stances vary on the pocketbook issue.. Almost are in favor of
benefits to their people. (i.e. Social Security, Veterans pensions) to gain
more votes. They might not be able or know how to produce desirable
results.
Economic Health
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Ideology plays a basic, but big role in
economic policy making.
Democrats- reduce unemployment, control
demand
Republicans- reduce inflation, manipulate
supply
Monetarism
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By Milton Friedman.
Inflation occurs when there is to much money in the
economy chasing after too few goods.
Monetarism advocates increasing the money supply
at a rate equal to economic growth, then letting the
free market operate.
This theory answer what libertarians, conservatives,
and Republicans have with inflation.
Keynesianism
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Derived from the work of the English economist John
Keynes.
Keynesianism holds that government should create the right
level of demand. The theory assumes that the health of the
economy depends on how much of their incomes people save
or spend.
When demand is low, government should pump money into
the economy by spending more than it collects in taxes.
When demand is high, government should take money out of
the economy by increasing taxes or cutting expenditures.
This theory answers the traditional concern with
unemployment among liberals and Democrats.
Economic Planning
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Some view that the free market is too undependable to ensure
healthy economic activity.
They argue that government should plan parts of a country’s
economic activity when the market fails to account for the
public good.
Basically if you can’t control inflation.., implement wage and
price control.
Others say the government should direct some investments to
industry. & keep them out of private ownership
This is not popular in the United States. It is found in
Europe, Asia, and African economies.
Supply-Side tax cuts
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Advocates say there should be less government
interference in the market and for lower taxes.
Lower taxes create incentives for investment, and
greater economic productivity. This will all result in
greater tax revenue.
This theory fits the traditional Libertarian and
conservative. But it ignores the political concerns
about inflation and unemployment.
Reaganomics
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Started by President Ronal Reagan in 1981. It combines
Monetarisms, supply-side tax cuts, and domestic budget cuts.
Reagan wanted to reduce the size of the federal government,
to stimulate the economy, and increase military strength
The inconsistencies in Reaganomics were the result of trying
to combine concern for inflation, economic freedom,
unemployment, and increasing military spending.
Some effect of Reaganomics were :
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Economy was stimulated
Military spending increased
Government spending continued to increase, but at a slower rate than before
The money supply was controlled, cutting inflation, but allowing interest rates to rise
Income taxes were cut, but Social Security was increased.
Large deficits incurred, dramatically increasing the national debt
Important industries were deregulated – airplane & telephone companies
The Machinery of Economic Policy
Making.
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Policy making done in several ways:
Congress- Most important. Congress approves all
taxes and almost all expenditures. It consents to
wage and price control when necessary. Numerous
committees set the economic policy
Council of Economic Advisors (CEA)- Part of the
executive office. Contains economist sympathetic
with the president's views.
It forecast trends and analyses issues. Prepares the
annual economic report that the president sends to
Congress
The Machinery of Economic Policy
Making.
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Office of Management and Budget (OMB)- Also
part of the executive office. The OMB prepares
estimates of amounts to be spent by federal
government agencies, and will negotiate department
budgets. It will make sure that programs are
compatible with the presidents program.
Secretary of the Treasury- Member of the
presidents cabinet. From the world of business or
finance, is expected to argue the point of view of
the financial community.
The Machinery of Economic Policy
Making.
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The Federal Reserve Board- Appointed by the
president, confirmed by the Senate, and serve nonrenewable 14 year terms. Members can be removed
for cause. The chairmen of the Fed. Serves for 4
years. The Fed is independent of the president and
Congress. Its most important job is to regulate the
supply of money. (in circulation and thru reserve
rates) and the price of money in the form of interest
rates.
The Budget
A budget is a policy document that announces how much a
government expects to collect in taxes, spend in revenues,
and how those expenditures will be allocated among various
programs.
No Budgets before 1921 & no overall presidential budget
until 1930.
The Congressional Budget Act of 1974 established
procedures to standardize the budgeting process:
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The president submits the budget.
The House and Senate budget committees study the budget after receiving
analysis from the Congressional Budget Office (CBO)
Each committee proposes a budget resolution that sets a total budget ceiling,
as well as ceiling for each of several spending areas.
Congress is expected to adopt these resolutions in order to guide its budget
debate.
Congress considers appropriations bills (bills that actually fund programs
within established limits) and sees whether they are congruent with the
budget resolution.
The Budget
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Big changes in the budget are not possible because
approximately 2/3 of our budget is tied up in
entitlements. (federal programs like Medicare and
Social Security that help a certain criteria of people)
Reducing federal spending~ Gramm-Rudman
Balanced Budget Act (1985). Placed a cap on
spending.
Across the board cuts would be made until 1991 or
until the budget deficit disappeared.
Congress and the president still found ways to
increase the budget.
The Budget
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2nd attempt to reduce spending. ~~ Budget
Enforcement Act of 1990.
The BEA capped discretionary funding. If
entitlement spending increased, either discretionary
spending had to be cut or taxes had to be raised.
Current Policies are represent a blend between
majoritarian and interest group politics. (Our tax
burden is low compared to other democratic nations)
The Budget & Taxes
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Most Americans are required to pay at least something.
A progressive tax structure in the U.S. requires higher income people to
pay taxes at a rate higher than those for lower income.
Tax loopholes (deductions, exemptions, and exclusions) favor certain
groups of people and usually reduce the progressivism of our tax
structure.
Should we tax income or consumption?
Our tax rate had varied sine 1913. High during war, low during peace.
The Tax Reform Act of 1986 lowered rates and decreased deductions.
Presidents in the last 2 decades have advocated increasing rates while
keeping deductions low.
The desire is to balance the budget, but Medicare and Social Security are
in desperate needs of funds.