Transcript Janda.Chapter 17 - Dr. Cash`s AP US Government & Politics

Chapter 17
ECONOMIC
POLICY
Learning Outcomes
17.1 Compare and contrast three theories of
market economics: laissez-faire, Keynesian, and
supply-side.
17.2 Describe the process by which the national
budget is prepared and passed into law and the
reforms undertaken by Congress to balance the
budget.
17.3 Identify the objectives of tax policies and
explain why tax reform is difficult.
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Learning Outcomes
17.4 Identify the major areas of government
outlays and explain the role of incremental
budgeting and uncontrollable spending on the
growth of government spending.
17.5 Identify the origins of the income tax, trace
the influence of government spending and taxing
policies on inequality, and examine these policies
from the majoritarian and pluralist perspectives.
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Theories of Economic Policy

Laissez-Faire Economics
 Absence of government control
 Strict advocates maintain government interference with
business obstructs workings of the free market
 Mainstream economists today favor market principles but
recognize that “government can sometimes improve
market outcomes”
 Efficient market hypothesis has held that financial
markets are informally efficient
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Theories of Economic Policy

Keynesian Theory
 John Maynard Keynes
 Business cycles stem from imbalances between
aggregate demand and productive capacity
 Productive capacity – gross domestic product
 Government could stabilize economy by controlling level
of aggregate demand
 Aggregate demand can be adjusted through fiscal and
monetary policies
 Low demand: government spend more money or cut taxes
 Demand too great: government spend less or raise taxes
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Theories of Economic Policy

Keynesian Theory (cont.)
 Capitalist countries have widely adopted Keynesian
theory in some form
 Employment Act in 1946, reflects Keynesian theory
 Established government responsibility for economy
 Tremendous effect on government economic policy
 Council of Economic Advisors (CEA)
 Keynes-Hayek: debate in 2012 election
 Obama auto industry bailout (Keynes)
 Romney “Let Detroit Go Bankrupt” (Hayek)
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Dueling Economists on YouTube
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Theories of Economic Policy

Monetary Policy
 Monetarists, such as Nobel Laureate Milton Friedman,
argue that government can control the economy’s
performance simply by controlling the nation’s money
supply
 Monetary policies are under control of Federal Reserve
System in U.S.
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Three goals:
Controlling inflation
Maintaining maximum employment
Insuring moderate interest rates
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Theories of Economic Policy

Monetary Policy (cont.)

2010 Dodd-Frank financial reform bill granted even
greater powers to the Fed to regulate large complex
financial firms
Ways the Fed controls money supply

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Sells securities, takes money out of circulation, raising
interest rate
Buys securities, process in reverse, lowers interest rate
Sets federal funds rate – rate banks charge one
another for overnight loans
Less frequently, may change its discount rate
Can change its reserve requirement
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Theories of Economic Policy

Monetary Policy (cont.)
 Formally, president responsible for state of the
economy and voters hold him accountable
 President neither determines interest rates (Fed does)
nor controls spending (Congress does)
 Fed’s activities are essential parts of government’s
overall economic policy but lie outside president’s control
and in hands of Fed chair
 Fed Chair – Critical player in economic affairs
 Ben Bernanke – Stretched Fed’s authority during financial crisis
of 2008
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Theories of Economic Policy

Supply-Side Economics
 Stimulate investment through tax cuts and less
government regulation of business
 Reaganomics
 Economic Recover Tax Act of 1981




Tax cuts
Cuts in spending for social programs
Deregulation
Increases in defense spending
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Theories of Economic Policy

Supply-Side Economics (cont.)
 How Well Did Reaganomics Work?
 Worked as expected, except deficit
 Inflation dropped:13% in 1981 to 3% by 1983
 Due more to Fed chair Paul Volcker’s actions
 Deregulated business
 Unemployment increased to 9.6%
 Didn’t reduce budget deficit
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Public Policy and the Budget

Congressional budgeting
 Congress in charge of budget until 1921

Today, President prepares budget, Congress
approves it
 Budget and Accounting Act of 1921
 Established Bureau of the Budget (now Office of
Management and Budget) to prepare president’s budget
to be submitted to Congress each January
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Public Policy and the Budget

The Nature of the Budget
 Budget of the United States Government – annual plan
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Applies to next fiscal year – October 1 to September 30
Defines budget authority and outlays
Receipts – expected tax and revenues
Deficit – difference between receipts and outlays
National debt – sum of all unpaid government deficits
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Public Policy and the Budget

Preparing the President’s Budget
 The Office of Management and Budget (OMB)
oversees process
 OMB initiates process in spring, agencies prepare
budgets in summer and submit to OMB in fall, analysts
review requests, negotiations until budget goes to printer
 Proposed budget submitted to Congress
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Public Policy and the Budget

Passing the Congressional Budget
 The Traditional Procedure
 Tax committees
 Ways and Means in the House
 Finance in the Senate
 Authorization committees
 Approximately 20 in House; Senate 15
 Appropriations committees: House and Senate
 More powerful than authorization committees
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Public Policy and the Budget

Passing the Congressional Budget (cont’d)
 Two serious problems in budgeting process
 Spending process is complex
 No one is responsible for budget as a whole
 Budget committees supervise comprehensive review
process aided by Congressional Budget Office (CBO)
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Public Policy and the Budget

Passing the Congressional Budget (cont’d)
 Congress tried twice to pass Budget Enforcement Act
(BEA) of 1990
 Defined spending
 Mandatory spending
 Discretionary spending
 Previous laws paved way for Clinton’s Balanced
Budget Act of 1997 (BBA)
 Led to balanced budget and produced a surplus
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Public Policy and the Budget

Passing the Congressional Budget (cont’d)
 Congress allowed caps on discretionary spending to
expire at end of 2002
 Gramm-Rudman-Hollings Balanced Budget and
Emergency Deficit Control Act in 1985
 Law utter failure, deficit targets eliminated in 1990
 Balanced budget amendment (BBA) introduced again
in 2011 but failed
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Tax Policies

Reform
 Reform proposals influenced by interest groups
 Pre-1987 – 14 income brackets
 President Reagan reduced to two
 Flat tax violates principle of progressive taxation
 Progressive taxation allows government to redistribute
wealth and promote economic equality
 Presidents G.H.W. Bush and Clinton added two more
brackets, moved to more progressive tax structure
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Tax Policies

Reform (cont.)
 George W. Bush pushed Congress to pass tax cuts
 Reduced revenues increased deficits
 Economic downturn, homeland defense, and military
expenses compounded problem
 Bush’s last budget – over a trillion dollars deficit
 Deficit continued to grow under Obama
 2012, Obama campaigned to restore 39.6 tax bracket
for highest tax bracket
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Tax Policies

Comparing Tax Burdens
 Tax burden on U.S. citizens has decreased since
1950s
 Tax burden not large compared to other democratic
nations
 Almost every democratic nation taxes more heavily than
the U.S. does
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Spending Policies

Incremental Budgeting…
 Agencies submit budgets based on previous year
 Congress rarely looks at base budget items
 Few agencies ever cut back, spending continually goes
up
 Earmarks greatly increased until early 1990s
 Congress declared moratorium on earmarks after 2010
election
 Some members repackaging them as “special funds”
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Spending Policies

…and Uncontrollable Spending
 Earmarks are discretionary outlays
 Most government spending is mandatory outlays and
uncontrollable without change in law authorizing
program
 Politics argue against large-scale reductions
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Taxing, Spending, and
Economic Equality

Government Effects on Economic Equality
 Do government spending policies have measurable
effect on income inequality?
 Government payments to individuals: transfer
payments
 Don’t always go to poor
 Farm program: Wealthiest farmers often receive largest
subsidies
 Have definite effect on reducing income inequality
 National tax policies at all levels have historically
favored those with higher incomes and the wealthy
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Taxing, Spending, and
Economic Equality

Effects of Taxing and Spending Policies over
Time
 Poorer citizens pay higher percentage of income in
taxes than wealthier citizens
 In capitalist system, some degree of inequality is
inevitable
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FIGURE 17.5 Distribution of Family Income over Time
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Taxing, Spending, and
Economic Equality

Democracy and Equality
 U.S. prizes political equality, but economic equality not
as strong
 Wealthiest 1% control 35% of nations household wealth
 Distribution among ethnic groups alarming
 Typical white family’s annual income 1.5 times of blacks and
Hispanics
 One theory - Pluralist interest group activity distorts
government’s efforts to promote equality
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Taxing, Spending, and
Economic Equality

Democracy and Equality
 String of Gallup polls from 1985 to 2008:
 Clear majority said distribution of wealth not fair and favor
some redistribution – but not through heavy taxes on rich
 Favor national sales tax or weekly lottery
 Sales tax, flat tax = regressive effect, promoting inequality
 Lottery also contributes to wealth inequality
 Poor more willing to chance income than rich
 Majoritarians argue most Americans don’t understand
inequities of national tax system
 Economic policy determined through pluralist politics
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