chapter 17 economic policy. copyright © houghton mifflin company. all rights reserved.18 | 2...
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Chapter 17
Economic Policy
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Politics and Economics
• Deficit: when expenditures exceed revenues
• National debt: the total amount of deficits we have had since George Washington was president
• Debt is currently about 40% of GDP
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Figure 18.3: History of the National Debt
Economic Reports of the President, various years.
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Figure 18.4: When Will The Crunch Come? Projections of the Growth in Federal Spending
Congressional Budget Office, The Economic and Budget Outlook: An Update (July 1, 1999).
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Policy Debates
• Both the deficit and balanced budget proposals have led to policy debates
• Republicans: Economic Growth and Tax Relief Reconciliation Act of 2001, one of only three large tax cuts since WWII
• Democrats: Most tax cuts end in 2010; spending was increased to many federal programs
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Uncertainty
• Economic forecasts are always uncertain –September 11th attacks and subsequent military actions had significant economic implications
• When nation is in recession, tax revenues decrease and spending on social programs may increase
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Figure 18.2: Bad Economic Guesses
National Journal (January 30, 1999), 251.
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The Politics of Prosperity
• Voters see connections between the nation as a whole and their own situations
• Voting behavior and economic conditions are not always correlated at the national and individual levels—people do not always vote in line with their pocketbooks
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Politicians and the Economy
• Elected officials are tempted to take a short-term view of the economy and satisfy the self-regarding voter
• Government does not know how to produce all desirable outcomes
• Economic pressures are often inter-related
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Ideology and the Economy
• Ideology plays large role in shaping policy choices
• Democrats tend to want to reduce unemployment
• Republicans tend to want to reduce inflation
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The Politics of Taxing and Spending
• Majoritarian politics yields conflicting recommendations: lower taxes, less debt, new programs are all wanted
• Meaningful tax cuts are politically difficult; new programs tend to be more popular with politicians
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Figure 18.5: Tax Burdens in Democratic Nations Taxes as a Percentage of Income of a Family with Two Children
Statistical Abstract of the United States, 2003, Table 1344.
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Monetarism
• Monetarism: inflation occurs when there is too much money chasing too few goods
• Monetarists advocate increasing the money supply at a rate about equal to economic growth and then letting the free market operate
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Keynesianism
• Assumes that the health of the economy depends on what fraction of their incomes people save or spend
• When demand is too low, the government should pump money into the economy by spending more than it collects in taxes
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Supply-Side Tax Cuts
• There is a need for less government interference in the market and lower taxes
• Lower taxes would create incentives for investment
• Greater economic productivity will then produce more tax revenue
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Reaganomics
• Combination of monetarism, supply-side tax cuts, and domestic budget cutting
• Military spending increased sharply
• Money supply controlled—cut inflation but allowed interest rates to rise
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Reaganomics
• Personal income taxes were cut, but Social Security taxes were increased
• Large deficits were incurred, dramatically increasing size of national debt
• Stimulated economy—unemployment decreased, business activity increased
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Economic Policy Making
• Council of Economic Advisers: professional economists sympathetic to the president’s view of economics
• Office of Management and Budget: prepares estimates of amounts to be spent by federal government agencies; negotiates department budgets
• Secretary of the Treasury: reflects the point of view of the financial community
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The Federal Reserve Board
• Members are appointed by the president, confirmed by the Senate; serve a nonrenewable fourteen-year term; removable for cause
• Somewhat independent of both the president and Congress
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The Federal Reserve Board
• Regulates the supply and price of money
• Sets monetary policy: the effort to shape the economy by controlling the amount of money and bank deposits and the interest rates charged for money
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The Budget
• Budget: a document that announces how much the government will collect in taxes and spend in revenues and how those expenditures will be allocated among various programs
• Fiscal year: time period covered by the budget, running from October 1 to September 30 of the following year
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Congressional Budget Act of 1974
• President submits budget• House and Senate budget committees
analyze the budget, with the Congressional Budget Office
• Each committee proposes to its house a budget resolution that sets a total budget ceiling and ceilings for each of several spending areas
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Congressional Budget Act of 1974
• Congress considers appropriations bills and sees whether they are congruent with the budget resolution
• Appropriations bills cannot make big changes in the budget because approximately 2/3 of government spending is on entitlements
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Gramm-Rudman Balanced Budget Act (1985)
• Called for automatic cuts from 1986–1991, until the federal deficit disappeared
• If there was a lack of agreement between the president and Congress on the total spending level, there would be automatic across-the board cut (a sequester)
• The president and Congress still found ways to increase spending
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1990 Budget Strategy
• Congress voted a tax increase and the Budget Enforcement Act capped non-entitlement (discretionary) funding
• If entitlement spending increased, there had to be cuts in discretionary spending or taxes had to be raised
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Levying Taxes
• Most revenue was derived from tariffs until ratification of the Sixteenth Amendment (1913)
• Taxes then varied with war (high) and peace (low)
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Figure 18.6: Federal Taxes on Income, Top Percentage Rates, 1913-2002
Updated from Congressional Quarterly Weekly Report (September 18, 1993), 2488.
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Levying Taxes
• George H.W. Bush and Clinton increased tax rates, keeping deductions low
• Balanced budget switched policy debates to tax cuts, but Social Security and Medicare policy problems remain