Transcript Economic Policy

Economic Policy
Chapter 16
Politics of Economic Prosperity
• Voters can see a connection between the nation
and their own situation. Economy is the number
one reason person gets voted for or against. For
example: The economy was solid while he was in
office so the people viewed him as a solid
president and he was re-elected.
• Because of that, politicians are more likely to
think short-term and satisfy the voters.
• Ideology:
• Democrats want to reduce unemployment
• Republicans want to reduce inflation
Taxing and Spending
• Congress controls Fiscal policygovernment expenditures, revenues, and
debt
• The Federal Reserve Board (“The Fed”)
controls the Monetary policy – money
supply and interest rates.
What The People Want
• Low Taxes
• Less Debt
• Favored Programs funded such as
education, medical care and the
environment. (ENTITLEMENTS)
Theories of Economics
• Monetarism: Inflation is caused when too much
money is chasing too few goods. The government
should increase money supply at the rate of
economic growth and control the money in the
economy by making sure prices are not too high or
too low. (The Fed)
• Keynesianism: The economy needs people to
spend money to save money. The government
should put money into the economy if we’re not
spending enough and tax us or inflate the economy
if we spend too much.
• Planning: The government should plan parts of
the economy but not wage and price controls.
• Supply-side tax cuts: Lower taxes help investors.
With more money, we spend more and the
economy is good.
• Reaganomics: A combination of supply-side tax
cuts, monetarism, and domestic budget cutting.
Reduces the size of the federal government while
increasing military strength.
• Some results of this are that the military
increased, the national debt increased and the
unemployment rate decreased.
Machinery of Economic Policy
Making
• There is fragmented policy-making that is not
under the presidents full control because within
the executive branch, numerous organizations
influence policy.
• Congress is most important in economic policy
making. It approves all taxes and most
expenditures. It consents to wage and price
controls. It can influence the Fed by threatening to
reduce it powers.
Organizations That Influence Policy
• Council of Economic Advisors (CEA): They forecast
economic trends and prepare the annual economic report that the
President sends to Congress
• Office of Management and Budget (OMB): They prepare
estimates or amounts spent by government agencies and ensure
legislative proposals are compatible with the president’s
program. (MOST IMPORTANT bureaucratic agency)
• Secretary of Treasury: He/she reflects the view of the financial
community and provide estimates of government revenues.
• The Federal Reserve Board (“The Fed”): There are 7
members. They serve a 14 year term. This is a somewhat
independent organization that controls interest rates and money
supply.
The Budget
• The Budget Account Act of 1921:
• This created the OMB and delegated budget power to the
President.
• The Congressional Budget Act of 1974:
• This created new procedures for the budget. First, the President
submits the budget. Then, the House and Senate budget
committees analyze the budget with the Congressional Budget
Office (CBO).
• 2/3 of spending is on entitlements: A government program that
guarantees and provides benefits to a particular group. This is
uncontrollable spending.
Path to Reducing Spending
• The Gramm-Rudman Balanced Budget Act
of 1985 was unsuccessful.
• New Strategy of 1990:
– If entitlements increase, then taxes have to
increase
Levying Taxes
• Policies on Taxing:
• The tax burden is too low on citizens, however,
there are loopholes for industry (client politics).
• The rise of Income tax:
• The 16th amendment (1913)
• Usually, taxes increase during wartime and decrease
during peace.