Transcript Fiscal+MonetaryPolicy - New Smyrna Beach High School

The Congress, the President,
and the Budget:
The Politics of Taxing and
Spending
Chapter 14
Economic Basics
•To what extent should
the economy be
regulated, if at all?
 •Pure Capitalist Economy

– Laissez-faire
 Argument for:
 Argument against:

Socialist Economy
 Mixed Economy
Capitalism v. Democracy





Should social justice be a
societal goal?
–Equality of opportunity or
equality of result?
Are both attainable?
Desirable? How?
Is democracy a vehicle towards
social justice?
Is capitalism a vehicle towards
social justice?
Are capitalism and democracy
compatible or antithetical to
one another?
Key Terms






Budget:
– A policy document allocating burdens (taxes) and benefits
(expenditures).
Expenditures:
– What the government spends money on.
Revenues:
– Sources of money for the government.
Deficit:
– An excess of federal expenditures over federal revenues in a
given year. (Surplus opposite)
National Debt:
– Money owed overall
Monetary vs. Fiscal Policy
– Money supply (interest rates) vs. money spent
Sources of Federal Revenue

Borrowing
– The Treasury Department sells bonds - this is
how the government “borrows” money.

Taxes
– Income tax (16th Amendment)
– Corporate income tax
– Social Security and Medicare Payroll taxes
– Excise
– Tariff
Should we all be taxed according to income
(wealthy pay more) or should we have a set
amount that each person pays?



Progressive (Graduated) Tax:
– A tax proportionate to income –High to Low
– 10% for income 0-$27,050
– 35% for income $357,000 and above
– In 1945 the lowest bracket was 23% and the
highest was 94%
– In 1970 the lowest bracket was 14% and the
highest was 71.75%
– Reagan Era: lowest was 15% and highest was
28%
Regressive Taxing: (Florida)
– A tax that takes a larger percentage from lowincome people than from high-income people
– The term is frequently applied in reference to
fixed taxes, where every person has to pay the
same amount of money
Flat Tax:
– One percentage rate despite income
Supply-Side Economics

Supply-side economics (trickle-down economics)
call for lower taxes, specifically for the rich, and
less regulation to stimulate the economy by
allowing industry to create more ―supply
 Reaganomics (1981-?)
– Tax Cuts to stimulate economy
– Deregulation of industry/banks will lead to better
growth (industry will invest in expansion and
thus create more ―stuff—supply)
– Decrease in government spending on domestic
programs but a massive increase in military
spending (to win the Cold War)
– Continued Nixon’s ―New Federalism
―Devolution –more power and authority back
to the states, especially spending (increase in
block grants)
18 Trillion National Debt: Who
does the US owe?
Why can the US not
balance its budget?
Federal Expenditures

The Rise and Decline of the National Security State
– In the 50’s & 60’s, the DOD received more than half the
federal budget.
– Defense now constitutes about one-sixth of all federal
expenditures.

The Rise of the Social Service State
– The biggest part of federal spending is now for income
security (entitlement )programs.
– The biggest of these is Social Security.
– Social Security has been expanded since 1935 to include
disability benefits and Medicare.
– These benefit programs face financial problems with
more recipients living longer.
“Uncontrollable” Expenditures
•Spending determined by the number of
recipients, not a fixed dollar figure.
•Mainly entitlement programs where
the government pays known benefits to
an unknown number of recipients Social Security.
•The only way to control the
expenditures is to change the rules.
Trends in Social Service Spending
Social Security: Income
Security

Social security is a government program
designed to provide for the basic financial
security and welfare of individuals and their
dependents.
 The program is primarily used by those who
retire and are 65 years of age or older.
 It also covered those who are disabled
 The Social Security Agency issues checks to 48
million Americans every month. The average
retiree receives $1,053 a month (as of 2007).
Who Receives Social
Security?
Current Problems in Social
Security

Extremely Expensive and only getting more expensive as
expense of living conditions increase
– About 51 million people collect Social Security benefits each month for
annual expenses of $615 billion (2008).

Baby boomer generation (1946-1964) is retiring which is
causing a large strain on the system
 People are living longer (and thereby drawing more from the
account)
– Medical costs have sky-rocketed only increasing the problem, especially
for the elderly who tend to need more medical treatment.

•Declining birth-rates (less people to contribute to the fund)
while increasing use of social security (more people using it)
Social Security Reform
Proposals:

Increase age at which retirees can collect it (current is 65)
–


Would force people to work longer and thus contribute more
Reduce benefits for those who receive it
Increase pay-roll taxes for it
–
Remove or adjust cap (as of 2009, only on the first $106,000 of their wages are
subject to payroll tax)
– This is therefore a regressive tax, since the rich pay less of a


percent of their income than poor and middle class
Allow younger citizens to have private accounts (similar to a 401K)
through the government and their payroll
Abolish social security for future generations and have them use
private companies or employers
Additions to Social Security:
Welfare Programs

Expanded Unemployment Insurance (federal funding with
state administration, so each program varies by state)
 Welfare programs such as:
– Job Training, subsidized school lunches, food stamps,
reduced or free access to public transportation, federal
Housing projects.
 Food Stamps: 51% of all participants are children (17
or younger), and 65% of them live in single-parent
households
 41% of participants are white; 36% are AfricanAmerican, non-Hispanic; 18% are Hispanic;
 These programs comprise less than 2% of the federal
budget.
Health Care Entitlements



Medicare and Medicaid were created in 1965 as part of President
Johnson ―Great Society program and war on poverty
Medicare (“care for elderly”)is a single-payer national insurance
health insurance program for the elderly (age 65). Medicare does
not cover all medical costs and surgeries.
– Program last expanded under Bush, Part D: Prescription Drug
plans
Medicaid (“aid to poor”)Medicaid is a joint federal-state program
(funded by federal and state money but run by states) that
provides health insurance coverage to certain categories of lowincome individuals, including children, pregnant women, and
people with disabilities.
–Eligibility is means-tested and reserved solely for those receiving
welfare payments and varies by state.
Medicare and Medicaid
Reform Proposals:





Put more money into Medicare and Medicaid through
raising payroll taxes (FICA).
Create a national health care system (like most developed
nations) and this way everyone will pay into one system.
Privatize these programs (still funded by taxes) and have
companies bid for the lowest cost.
Eliminate these programs and rely on private industry and
faith-based groups.
Stop federal programs and encourage states to expand their
programs.
How else can the
federal government
affect the economy?
Monetary Policy and the
Federal Reserve System
Janet Yellen




The Federal Reserve: The Central Bank of the United
States
Part public, Part private institution (quasi-public
institution)
Run by a 7-member board of economists who serve a
single but staggered 14-year term. Each person is
nominated by the President (Senate confirmation) and
one person serves as Chairmen for a 4-year period.
The Fed is supposed to have independence in making
monetary policy:
–
Keeps them insulated from political pressure
– They are experts on monetary policy so Government defers to
them when making decisions on monetary policy
Alan Greenspan
– In theory, the fed makes decision efficiently.

12-regional banks make up the Federal Reserve
System
(1987-2006)
Ben
Bernanke
2006-2014
How does the Federal Reserve
control the money supply?

THREE PRIMARY WAYS:
#1. It can buy U.S. Treasury bonds with its ―federal reserve notes
(printed by the Treasury Department) thus increasing the money
supply.
 With more $$ in circulation, interest rates tend to drop and vice
versa. The Fed sells these bonds to decrease the $$ supply which
tends to raise interest rates.
#2. Change the interest rate it charges member
banks to borrow money from the Federal
Reserve (known as the discount rate)—most
reported by Media!
 When inflation is a threat (too much money
supply), the fed will increase rates in order to
tighten the money supply, as well as sell its U.S.
Treasury bonds (thereby taking money out of
circulation, thus reducing inflation and
effectively raising interest rates across the
nation)
 In order to stimulate the economy during a
recession(two consecutive quarters of economic
contraction), the fed will lower interests rates to
stimulate borrowing and growth, as well as buy
more Treasury Bonds, thereby increasing the
money supply and lowering interest rates
across the nation.
–
Problem: Stagflation—high unemployment and little
growth (recession) and inflation
#3. Regulate the reserve requirement that banks must keep
 The Fed will tell banks how much of an initial deposit
they must keep on ―reserve while loaning the rest out.
– Lowering the requirement allows banks to lend out
more, thus stimulating the economy
– Increasing the reserve requirement allows banks to lend
less (since more must be kept in the bank)
Conclusion: Big Picture

Democracy and Budgeting
– Many politicians “spend” money to buy votes.
– People like government programs, but they really
don’t want to pay for them, thus there are deficits &
the public debt.

The Budget and the Scope of Government
– In sum, the budget represents the scope of
government.
– The bigger the government, the bigger the budget.
– Limits on funding (taxes) can limit what the
government can do.
Quote

“A democracy cannot exist as a permanent form of
government. It can only exist until the voters
discover that they can vote themselves largesse from
the public treasury. From that moment on, the
majority always votes for the candidates promising
the most benefits from the public treasury with the
result that a democracy always collapses over loose
fiscal policy, always followed by a dictatorship, and
then a monarchy. The average age of the world's
greatest civilizations has been 200 years.”
2006

Fiscal policy and monetary policy are two tools used by
the federal government to influence the United States
economy. The executive and legislative branches share the
responsibility of setting fiscal policy. The Federal Reserve
Board has the primary role of setting monetary policy.
– Define fiscal policy.
– Describe one significant way the executive branch
influences fiscal policy.
– Describe one significant way the legislative branch
influences fiscal policy.
– Explain two reasons why the Federal Reserve Board is
given independence in establishing monetary policy.