Transcript Chapter 14: Economic and Social Policy fiscal

Chapter 14: Economic and Social Policy
Chapter 14: Economic and Social Policy
• laissez-faire economics: A classic economic
philosophy holding that owners of business
should be allowed to make their own production
and distribution decisions without government
regulation or control.
• regulation: A term that refers to government
restrictions on the economic practices of private
firms.
• deregulation: The rescinding of excessive
government regulations for the purpose of
improving economic efficiency.
Chapter 14: Economic and Social Policy
• supply-side economics: A form of fiscal policy
that emphasizes “supply” (production). An
example of supply-side economics is a tax cut for
business.
• demand-side economics: A form of fiscal policy
that emphasizes “demand” (consumer spending).
Government can use increased spending or tax
cuts to place more money in consumers’ hands
and thereby increase demand.
Chapter 14: Economic and Social Policy
• fiscal policy: A tool of economic management by
which government can attempt to maintain a
stable economy through its taxing and spending
policies.
• monetary policy: A tool of economic
management based on manipulation of the
amount of money in circulation.
• inflation: A general increase in the average level
of prices of goods and services.
Chapter 14: Economic and Social Policy
• economic depression: A very severe and
sustained economic downturn. Depressions are
rare in the United States; the last one was in the
1930s.
• economic recession: A moderate but sustained
downturn in the economy. Recessions are part of
the economy’s normal cycle of ups and downs.
Chapter 14: Economic and Social Policy
• budget deficit: The situation when the
government’s expenditures exceed its tax and
other revenues.
• national debt: The total cumulative amount that
the U.S. government owes to creditors.
• balanced budget: The situation when the
government’s tax and other revenues for the year
are roughly equal to
Chapter 14: Economic and Social Policy
• Federal Government attempts to maintain a
strong and stable economy
• high productivity
• high employment
• low inflation
The Key Players in Economic Policy Making:
Congress
• Congress is at the center of economic policy
making.
• Fiscal policies are government decisions
regarding taxing and spending.
• Ways and Means Committee (House) and
Finance Committee (Senate)
The Key Players in Economic Policy Making
• Fiscal policy is worked out through Congress and
the president and consequently is responsive to
political pressures.
• However, because it is difficult to raise taxes or
cut programs, the government’s ability to apply
fiscal policy as an economic remedy is somewhat
limited.
The Key Players in Economic Policy Making
• Congress (cont’d)
• Recall from Chapter 10, “The Congress,” that
budget making is a decentralized endeavor.
• There have been battles between Congress
and the executive branch.
• Sequestration
• Annual Budget Authorizations
• Debt Ceiling
• The CBO provides Congress with
independent expertise on budgetary issues.
The Key Players in Economic Policy
Making: the President
• President has under him:
• Office of Management and Budget
• Council of Economic Advisers
• U.S. Trade Representative
• National Economic Council
The Key Players in Economic Policy
Making: the Bureaucracy
The Key Players in Economic Policy Making:
Federal Reserve System (the Fed)
• An independent agency and its decisions are not
subject to presidential and congressional review.
• The Federal Reserve Board is a group of seven
presidential appointees who govern the Fed.
• Six of the seven have 14-year terms, while the
Fed chair has an overlapping (across presidential
terms) four-year term.
• Current Chair: Janet Yellen
• The Fed establishes monetary policy for the
United States.
• Independent agency that serves as the central
bank for the United States.
The Key Players in Economic Policy Making:
Federal Reserve System (the Fed)
• Monetary policy is based on the money supply.
• The Fed, as the Federal Reserve is commonly
called, has become the primary instrument for
managing the economy. It can affect the amount
of money circulating in the economy
• by raising or lowering the interest rate that
banks are charged for borrowing from the Fed
• by raising or lowering the percent of their funds
(reserve rate) that member banks are required
to keep on hand
• and by buying and selling securities.
The Key Players in Economic Policy Making:
Treasury Department
• In general, Treasury:
• Manages federal finances
• Collects taxes
• Produces money (currency and coinage)
• Supervises the national banks
• Advises on all kinds of economic policy
• Enforces federal finance and tax laws
The Key Players in Economic Policy Making
• Courts
• The courts have no direct involvement in
economic policy making. However, when we
look at the developing world, it becomes clear
that legal matters such as contract law, patent
law, and the like help to create a solid, legal
foundation for economic development.
Goals of Economic Policy: Full Employment
and Stable Prices
Goals of Economic Policy: Promote Free
Market and Growth
Goals of Economic Policy: Balanced Budgets
Federal Debt
Tools and Theories of Economic Policy: Fiscal
Policy
Tools and Theories of Economic Policy: Fiscal
Policy
Top Marginal Tax Rates, 1913–2010
Tools and Theories of Economic Policy
• Monetary policy
• The Fed uses central monetary policy tools.
• Reserve requirement: the minimum amount of money
a bank must have on hand to back up its assets
• Discount rate: short-term loan interest rates banks
must pay on loans from the Federal Reserve Bank
• Federal funds rate: the interest rate a bank pays on
an overnight loan provided by a different bank
• Open market operations: the process used by the
Fed to buy and sell securities, which influences the
money supply
Tools and Theories of Economic Policy:
Regulatory Policy
• Economic regulation deals with price setting of the
conditions of entry facing firms in a particular
industry, while social regulation concerns itself
with issues of safety and quality.
Case Study: 2008–2009 Economic Crisis
• Problems in the subprime mortgage industry
forced the government to intervene in 2008.
• Took coordination among all economic players:
Federal Reserve, Treasury, Congress, and the
financial industry
• The bailouts were successful in stabilizing the
financial sector but were unpopular.
History and Background of Social Policy
• poverty line: As defined by the federal
government, the annual cost of a thrifty food
budget for an urban family of four, multiplied by
three to allow also for the cost of housing, clothes,
and other expenses. Families below the poverty
line are considered poor and are eligible for
certain forms of public assistance.
• 11,670 individual
• 23,850 family of four
History and Background of Social Policy
• negative government: The philosophical belief
that government governs best by staying out of
people’s lives, giving individuals as much freedom
as possible to determine their own pursuits.
• positive government: The philosophical belief
that government intervention is necessary in order
to enhance personal liberty and security when
individuals are buffeted by economic and social
forces beyond their control.
History and Background of Social Policy
• entitlement programs: Any of a number of
individual-benefit programs, such as social
security, that require government to provide a
designated benefit to any person who meets the
legally defined criteria for eligibility.
• social insurance: Social welfare programs based
on the “insurance” concept, requiring that
individuals pay into the program in order to be
eligible to receive funds from it. An example is
social security for retired people.
History and Background of Social Policy
• public assistance: A term that refers to social
welfare programs funded through general tax
revenues and available only to the financially
needy. Eligibility for such a program is established
by a means test.
• means test: The requirement that applicants for
public assistance must demonstrate that they are
poor in order to be eligible for the assistance.
History and Background of Social Policy
• Generally, we think of social policy in terms of a
“social safety net” or welfare.
• A broader interpretation includes government
programs aimed at societal goal such as support
for public schools.
• Throughout much of our nation’s history, the
federal government paid little attention to social
welfare.
History and Background of Social Policy
• Civil War pensions (paid between 1880 and 1910)
were among the first forays into social policy.
• After the 1929 stock market crash, presidential
candidate Franklin Roosevelt promised a “new
deal for the American people.” Many of the New
Deal policies required the government to get
involved in the economy.
History and Background of Social Policy: New
Deal policies
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Agricultural Adjustment Administration
National Recovery Administration
Public Works Administration
Federal Emergency Relief Administration
Social Security
National Labor Relations Act
History and Background of Social Policy
• The Great Society under President Lyndon
Johnson expanded social welfare policy.
• Civil Rights Act
• Voting Rights Act
• War on Poverty
• Many social programs were eliminated during the
Reagan years.
History and Background of Social Policy
• The 1960s is thought of as the time during which
the “Old Left” (of the World War II generation)
started to be overtaken by the “New Left” (of the
Woodstock generation).
• The emphasis on improving racial equality
through the expansion of equal rights was not on
the “Old Left” agenda. Civil rights were a cause of
the New Left. The New Left was a generation of
protest, particularly against the Vietnam War.
• Vietnam War caused trade-off problems; it was
challenging to continue funding the war and social
policies without creating inflation.
History and Background of Social Policy
• George W. Bush continued much of America’s
social policy.
• – He did, however, call for changes in Social
Security.
• – Bush tried to push America toward an
ownership society, in which people took control of
their own social welfare.
• – Interesting fact: George W. Bush increased
domestic, nondefense spending more than any
president since Lyndon “Great Society” Johnson.
• President Obama has focused on a melding of
market and community while still keeping a role
for government.
• Expanded Government role in healthcare
Poverty and Income Inequality
Social Policy Today: Social Security
Social Policy Today: Health
Care
Social Policy Today: Health
Care
Social Policy Today: Health
Care
Social Policy Today: Health
Care
• Patient Protection and Affordable Care Act signed
in 2010
• Comprehensive coverage
• Electronic medical records
• Comparative effectiveness research
• Law has proven controversial and despite being
upheld by the Supreme Court, remains unsettled
in the long run
Social Policy Today: Income Support and
Welfare
• Income support is broader than welfare.
• Example: the earned income tax credit
• Provides tax credits for workers who do not earn
enough to pay taxes
• Food stamps are government-issued coupons
that can be used to buy groceries (same as cash).
Participation in Means-Tested Programs
Public Opinion Poll
Do you believe the federal government should do
more, about the same, or less to ensure equality
of opportunity for all of its citizens?
a) More
b) About the same
c) Less
Public Opinion Poll
Do you believe the current education system in the
United States promotes or hinders equality of
opportunity for its citizens?
a) Promotes equality of opportunity
b) Hinders equality of opportunity
Public Opinion Poll
Do you believe Social Security will exist by the time
you retire?
a) Yes
b) No
Public Opinion Poll
Do you believe the federal government should
provide universal health care coverage to
American citizens?
a) Yes
b) No
Public Opinion Poll
Which of the following do you believe should be the
primary goal of the federal government’s
economic policy?
a)
b)
c)
d)
Promoting stable markets
Promoting economic prosperity
Promoting business development
Protecting the economic interests of employees
and consumers
Public Opinion Poll
Do you believe the federal government’s
involvement in the American economy should
increase, remain about the same, or decrease?
a) Increase
b) Remain about the same
c) Decrease
Public Opinion Poll
Which of the following do you believe has the
greatest impact on the economy of the United
States?
a)
b)
c)
d)
U.S. president
U.S. Congress
Chairman of the Federal Reserve
Individual state governments
Public Opinion Poll
Which of the following tax systems do you believe is
best for the United States?
a) Progressive tax system (upper tax brackets pay
more)
b) Flat tax system (all income brackets pay the
same)
c) Regressive tax system (upper tax brackets pay
less)