Transcript Chapter 16 PowerPoint Presentation

The Economy
& The National Budget
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Objectives
• Compare and contrast different economic models, and
identify specific features of the U.S. model.
• Describe how the U.S. government’s role in the
economy expanded and the nation became a leading
economic power.
• Identify the key people and factors involved in
attempting to make coherent and effective U.S.
economic policy.
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Objectives
• Analyze how government influences U.S. economic
policy, and discuss the potential conflicts and concerns
that can result.
• Describe the factors that led to the Great Recession of
2007-2009, and explain how the U.S. political system
responded to the crisis.
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Why are we
the way we
are?
Why does it
matter to you?
How does the
U.S.
government
use different
strategies
and policy
tools to
influence
economic
conditions?
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Core
Questions:
Government and the Economy
• Nations have different political systems, as well as
different economic systems.
• The relationship between these two systems may vary
across countries.
• The U.S. system is one of many.
• Most countries have mixed economies: Government
actions shape the behavior of individuals and firms in
markets.
• In the U.S., government seeks to stabilize overall
economic conditions, regulate behavior to achieve
economic or social goals, provide necessary services,
and help both citizens and businesses.
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Comparing Economic Systems
• Mercantilism
• During the 1700s, this economic theory dominated.
Treated colonial products, trade, and markets as a way
to enrich the mother country.
• Promotion of trade surplus. Colonies an economic asset:
source of raw materials and market for British goods.
• Laissez-faire
• View that originated with 18th-century French economists
that government should play a minimal role in the
economy.
• Adam Smith: Wealth of Nations
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Comparing Economic Systems
• Capitalism
• Derived from many of the ideas of laissez-faire economics.
• This economic system is distinguished by its reliance on selfinterested decisions of producers and consumers
exchanging items of value in a market of supply and demand
largely free of government direction.
• Socialism
• Arose in the 20th century as the major economic system to
challenge free-market capitalism.
• Developed as a way to correct many excesses of capitalism,
in which the government acts as both an owner of
enterprises and as a distributor of goods and services.
• Nationalization of industries, often utilities, railways and
airlines.
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• While countries such as the U.S. developed a laissez-fair
capitalist economy, other countries adopted the command
economy model.
• Command economy: Soviet-style where government officials
exercise broad control to decide the allocation of resources,
levels of production, and prices of goods.
• Doubts emerged about command economies as other types
outpaced them in terms of success.
• Mixed economy: government officials share power with
markets in deciding or influencing how resources are allocated
in society.
• Australia
• China moving in this direction
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Comparing Economic Systems
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Government & the U.S. Economy
• What does the U.S. government do in relation to its
economy?
• Economic stabilizer
1. Maintains a steady rate of economic growth that produces
new jobs and higher productivity to keep pace with
population growth;
2. Prevents unemployment from rising to damaging levels;
3. Avoids rising prices that seriously erode the buying power
of citizen’s earnings and savings – in other words, prevents
uncontrolled inflation.
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Government & the U.S. Economy
• Regulator
• Economic regulation: efforts by government to
establish and maintain fair competition in markets to
help consumers
• Anti-trust policies: designed to prevent collusion among
businesses that would suppress competition in order to
produce unnaturally high prices.
• Social regulation: laws and rules created to prevent
corporations from engaging in practices that result in
undesirable outcomes for society, such as air and water
pollution or unsafe working conditions.
• Consumer protection: laws and rules designed to protect
citizens from unsafe products and unfair business practices.
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Government & the U.S. Economy
• Service Provider
• In the U.S. the government, rather than the private
sector, provides many services.
• Defense, education, justice, police and fire protection,
highway construction, sanitary services, and mail
delivery
• Some private companies compete with the government:
private schools, UPS, and FedEx
• Government still principal provider of these services.
• Government has been reducing its efforts in these areas
in order to enhance quality and reduce costs, but still
dominate.
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Government & the U.S. Economy
• Social Helper
• U.S. government promotes the social welfare of its
citizens.
• Intervenes to provide opportunities to the poor and
to meet social needs.
• Social security and Medicare for older Americans;
loan guarantees to students for college, small
businesses and farmers, and home buyers.
• None of these economic roles were set out in the
Constitution but evolved over time as needs and
pressures arose.
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Colonial Inheritance
Independence to Civil War
North America settled as a
profit-making venture by
England.
Initial efforts in New England
failed, followed by the
Massachusetts Bay Company
in 1630.
Crown encouraged the
production of crops and goods.
Provide protection.
Colonists resented interference
with natural business of
production and marketing of
their goods. And resented the
• Independence expensive.
• Changing economic systems
challenging.
• New Constitution did not
immediately change economic
conditions, but it did set the
preconditions for growth and
development.
• Hamilton’s tariffs
• Encouragement of
industrialization, immigration, and
continental settlement.
• Transportation infrastructure
• Communication infrastructure
taxes imposed on them.
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Government’s Evolving Role in the U.S.
Economy
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Effects of Three Major Wars
Rise of Government Regulation
and Relief Programs
• Civil War triggered major
expansion of the government’s
political and economic power.
• Interstate Commerce
Commission
• Sherman Antitrust Act
• Progressive Era (1895-1930)
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Subsidies to railroads
Oversight of immigration
Department of Agriculture
Defense industries
National Academy of Sciences
• World Wars I and II left
important legacies
• Regulation of the economy
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Government’s Evolving Role in the U.S.
Economy
• Avalanche of political and
economic reforms
• New Deal and FDR
• Social security, FDIC, FSLIC,
TVA
• Great Society and Johnson
• Regulation during the ’70s
• Deregulation during the ’80s
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Wake of WWII, U.S. was the world’s most powerful economic
system as well as a world military power.
Bretton Woods System: established by U.S. and 40 other nations.
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Government’s Evolving Role in the U.S.
Economy: Rise of a Global Role
System of international agreements created at the end of WWII that
created a global financial and trade system dominated by the U.S.
dollar.
States agreed to maintain a steady value for their currency that could
be exchanged for gold. Based on their holdings of gold reserves or a
reserve currency (U.S. dollar)
U.S. left the gold standard in 1971 (refused to any longer exchange
dollars for gold); the dollar became the world’s top reserve currency.
Rise of China has eroded American dominance, but so had the
growth of free trade and rapid globilization.
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Fragmented Economic Decision Making
National economic policy making begins with joint
decision making by the president and Congress.
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Annual process of the federal budget
The budget process
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Office of Management and Budget: assists president in
compiling a budget that meets the requirements of law,
makes recommendations about how much should be spent
on public programs, lays out previous budgets and makes
projections for the next five to ten years.
Congress then has eight months to work out tax and
spending decisions.
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Discretionary spending
Mandatory spending
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Fragmented Economic Decision Making
The budget process continues when Congress adopts a
budget resolution.
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Budget resolutions originate in the Budget Committees in the
House and Senate.
Set out broad guidelines on revenue and spending.
Gives specific amounts for the programs that fall within different
committees’ jurisdictions.
Is a concurrent resolution and therefore is not subject to a
presidential veto or a Senate filibuster.
Only a simple majority vote is needed in both houses to adopt a
budget resolution.
Must be done by April 15, but usually takes longer.
Congressional Budget Office was created to help in this process.
(1973)
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Fragmented Economic Decision Making
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After the budget resolution has been approved by both
chambers, then action shifts to the standing committees.
Almost every committee participates in the budget process.
Authorizing committees must consider changes in legislation
that establishes programs.
House and Senate appropriations committees decide on
funding for the next fiscal year.
Revenue committees in the chambers make any changes
needed in tax laws.
Very fragmented process.
Goal: to adopt 12 separate appropriations bills that fund
different segments of the federal government by Sept. 30
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Fragmented Economic Decision Making
Each segment must receive a presidential signature in order
to be come law.
House moves first on appropriations decisions.
If Congress fails to meet the Oct. 1 deadline (which happens
often), Congress must approve a continuing resolution: a
temporary action that allows the programs that have not yet
received a new annual appropriation to continue to operate.
Supplemental appropriations: spending decisions that are
outside of the regular budget process.
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Wars in Afghanistan and Iraq under Bush.
Obama has made these war expenses part of the annual
budget.
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National Priorities and Burdens
•
The budget prioritizes the purposes of government and
allocates the burdens to different segments of society.
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Taxation
•
Who pays for government?
• The largest share comes from individuals who pay income
taxes and have payroll taxes withheld from their
paychecks.
• Corporate income taxes provide a substantially lower
portion of overall federal revenue than that paid by
individuals.
• Other fees and excise taxes generate most of the
remainder.
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Taxation
Our tax system is very complex.
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Tax loopholes: special treatment given to groups of
taxpayers in the tax laws that help lower or eliminate their
tax burden.
Progressive tax rates: citizens who have higher incomes
and can afford to pay more for government services pay
a higher tax rate on their income.
Regressive tax rates: taxation in which the share of
citizen’s income paid in taxes declines as income
increases.
Proportional tax rates: taxation in which citizens pay the
same flat tax rate regardless of income level.
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Taxation
In U.S. we have a mixture of
regressive and progressive taxes.
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Sales taxes – regressive
Progressive taxes, such as those
found in Sweden, tend to reduce
income inequalities
Major difference across nations is
the tax rate levied.
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Single tax rate applied to all citizens
regardless of their personal wealth –
“flat tax”
Multiple rates depending on citizens’
incomes. Sweden tax rates range from
0 to 57%.
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Inequality
• Taxation can reduce or increase income inequality.
• Economists have developed a way to measure inequality: GINI
coefficient.
• 0 = everyone earns the same income or 1 = a single person earns all the
income. The higher the coefficient, the greater the nation’s income
inequality.
• Americans in the top 1 percent of income take in 25% of the nation’s
total income.
• Top 1 percent control 40% of nation’s total wealth.
• Progressive tax structure one way to reduce income inequality.
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Budget Deficits
• When revenues fall short of expenditures in a given year, the country
runs a budget deficit.
• The cumulative total of these annual deficits is the national debt.
• Budget deficits have persisted in the U.S. since 1940.
• Bill Clinton left office with a budget surplus. Short-lived legacy.
• Tea Party
Budget Deficits
National Debt
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Domestic Economic Policies
• Government uses policies, fiscal and monetary, to
guide the economy, but these policies are crafted by different
institutions with different institutions with differing interests.
• Congress and president: Most attention is focused on trying to
limit unemployment.
• Federal Reserve: focus on the threat of inflation.
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Interest Group Reform
• Restriction of Activities
• Usually related to campaign activities and lobbying activities
• 2007 Honest Leadership and Open Government Act used to strengthen
earlier act, Lobbying Disclosure Act (1995)
• No revolving door for one to two years
• Federal crime for lobbyist to provide gifts or meals to government officials
and staff
• Bars former senators who are now lobbyists from walking onto the Senate
floor or going to the Senate gym
• Increasing Transparency
• Continued registration and disclosure of lobbyists and their activities
• Must submit report of their activities four times a year; detailing all
campaign contributions and all meetings with officials.
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• Congressional and presidential efforts to stabilize the
economy through the taxing, spending, and borrowing
decisions are now part of the annual budget policy.
• States make fiscal policy as well, but generally limited
to balanced budgets, whereas the federal government
may run a budget deficit.
• Economic justifications for running deficit:
• Gross domestic product declines: recession (decline in
economic activity for two consecutive quarters or at least
six months) or depression (decline over sustained
period that totals 10 percent or more).
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Fiscal Policy
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Keynesian economics
• Set of countercyclical policy
prescriptions proposed by
British economist John
Maynard Keynes at the time
of the Great Depression.
• Calls for government to use
taxes and expenditures to
control economic
recessions and expansions.
Supply-side economics
• Policies designed to
stimulate producers’
economic activity by
reducing tax rates and
removing the costs of
regulation.
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Fiscal Policy
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• In 2008 the U.S.’s national debt reached $10 trillion.
• It had quadrupled over twenty years.
• Congress must approve government borrowing by setting a
debt ceiling: the official limit set by Congress and the president
on the federal government’s ability to borrow funds through the
sale of Treasury bonds.
• A growing debt increases the interest payments that the
government must pay to lenders. Mandatory expense.
• Debt ceiling gives the Treasury Department some flexibility, and
most votes have been routine.
• Not so in 2011. Controversial vote and great concern over the
mounting debt and inability to make policy to deal with it.
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The National Debt
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• Federal Reserve Board, an independent federal
agency created in 1913 to regulate the banking
industry and set monetary policy, uses a number of
techniques to shape monetary policy (terms under
which money and credit are available in the market).
• Seven member Board of Governors based in D.C.
• Coordinates the activities of 12 regional Federal Reserve
Banks and 25 branches in major cities.
• Monitor conditions in their section of the nation’s economy
and a subgroup meets monthly to take actions that move
interest rates up (contractionary policy – reduces supply of
money) or down (expansionary policy- increases money
supply).
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Monetary Policy
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• The Federal Reserve is self-funding.
• Insulated from political pressure.
• It provides many services for the economy.
• Federal funds rate: the interest charges that banks collect
from each other for loans, which are set by a committee of
the Federal Reserve Board in order to influence economic
activity through monetary policy.
• Every major industrial nation in the world has a central
bank comparable to the Fed.
• Typically control the national currency, set national interest
rates, and support the banking industry with loans during
times of financial stress.
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Monetary Policy
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• Both the federal and state governments regulate economic activity in
the U.S.
• Focus on consumer protection, prevention of monopolies and semimonopolies.
• Federal government created a number of commissions and boards to
provide the infrastructure to foster economic growth beginning with
the now defunct Interstate Commerce Commission in 1887.
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Federal Trade Commission (1914)
Federal Communications Commission (1934)
Securities and Exchange Commission (1934)
Civil Aeronautics Board (1940)
National Labor Relations Board (1935)
Consumer Product Safety Commission (1972)
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Regulation
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• Today, making economic policy is complicated by
interdependence among nations.
• Very important that international coordination exist.
• Leaders communicate regularly; but difficult job to do.
• What is the purpose of this need for coordination? Can
we produce sound fiscal and monetary policy for the
globe?
• Globalization is relatively new and we are just starting
to understand how global markets operate.
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Limits of Domestic Economic Policies
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• How does a highly fragmented political system
respond to a major economic crisis?
• Bush and Obama sought to stimulate the economy
with massive combinations of tax cuts and spending
increases that produced huge budget deficits.
• Treasury Department and the Federal Reserve worked
to stabilize the banking system and save major
corporations that were in deep trouble with loans to
corporations and very low interest rates, and programs
to reduce home mortgage default rates.
• The decline slowed, but unemployment remained high.
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Responding to the Great Recession of 20072009 and Beyond
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• Shift emerged that went from spend to save
the economy to a focus on reduction in future
expenditures.
• Emergence of the Tea Party activists and
their influence on the Republican Party,
especially action in the House of
Representatives in 2011.
• New debate has emerged: whether the U.S.
can afford Social Security, Medicare, and
Medicaid or continue to function as the
world’s police force – and who should pay
how much for government services.
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Responding to the Great Recession of 20072009 and Beyond
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