16 Economic Policy

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Transcript 16 Economic Policy

Economic Policy
Figure 16.4:
Tax Burdens in
Source: Statistical Abstract of the United
States, 1998, 841.
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Economics and Voters
Economic indicators of importance to voters
1. Economic health of the nation
2. The amount and kinds of government spending
3. The level and distribution of taxes
Majoritarian political issues . . .Inflation, Unemployment, Economic growth
. . . And the imperfect economic theories that control clumsy government tools controlled
by divided political authorities (that ultimately lead the public to blame the President)
1. Monetarism (Friedman): increase money supply equal with growth, let market control
2. Keynesianism (Keynes): health of economy dependent on what fraction of incomes people save or spend
When demand is too low, government should pump money into economy through deficit spending
When demand is too high, government should take money out through taxes or cutting expenditures
3. Planning (Galbraith, Reich): free market is too undependable to ensure economic activity; therefore, gov’t
Wage-price controls (Galbraith)
Industrial policy- government directs industrial investments (Reich)
4. Supply-side tax cuts (Laffer, Roberts):
Lower taxes create investment; tax revenue made up on back end
All 4 ideololically driven. Reaganomics a combination supply side/monetarism/budget-cutting; inconsistent
Interest group and client politics, and the “budget”
1. When economic ill health occurs in some locations and not others, leads to tariffs, loopholes, incentives, etc.
2. Government spending is only theoretically determined by the budget; Pres/Congress struggle w/client politics
3. General shape of federal tax legislation is determined by majoritarian politics, but specific provisions: client
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The Budget Process
The Major Players . . . (what should be funded, what should be cut, who pays)
The Executive Branch
1. The Council of Economic Advisors: promarket views of professional economists, usu. ideologically sympathetic
2. The Office of Management and Budget: prepares federal budget in line with pres. program. Tries nonpartisan
3. The Secretary of the Treasury: generally expected to represent the finance community’s point of view
The Federal Reserve Branch
1. Theoretically independent, but appointment power affects. Members serve 14 year terms
Must approve all taxes and almost all expenditures
Pre-1974, budget was what decentralized committees spent money on
Now, each house imposes a budget resolution with a ceiling
Cutting spending difficult because 3/4ths of budget outlays are relatively uncontrollable. Cutting politically risky
. . . And the Major Plays
Cutting Taxes: payroll easier to swallow than local property
American more concerned about balancing the budget than about cutting taxes
Tax cuts exacerbate deficits
Reagan: votes to cut hard to get in Congress, but succeded through interest group “sweetners”
Tax brackets became indexed, avoiding bracket creep
Bush the Elder and Clinton raised taxes to balance the budget
Bush the Younger cut taxes; dems wanted to fund programs. Dems have sunset clause of 2010; Bush today?
All balanced budget talk seems moot, post-911.
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Figure 16.5: Federal Taxes on Income, Top
Percentage Rates
Source: Updated from Congressional Quarterly Weekly Report (September 18, 1993), 2488.
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Figure 16.2: History of the National Debt
Source: Economic Reports of the President, various years.
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Figure 16.3: When Will the Crunch Come?
Projections of the Growth in Federal Spending
Source: Congressional Budget Office, The Economic and Budget Outlook: An Update (July 1, 1999)
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Figure 16.1: Bad Economic Guesses
Source: National Journal (January 30, 1999), 251.
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