US Politics

Economic Policy

Overview

• Basics of Public Policy• Basic Goals of Economic Policy

– Market Failures (public goods, externalities, monopolies)

– Economic Growth

• Basic Tools– Fiscal Policy – Monetary Policy

• Basic Strategies

Public Policy

• Problem Identification

• Agenda Setting

• Policy Formulation

• Policy Legitimation

• Policy Implementation

• Policy Evaluation

Participants:Congress, Pres,

IG, media, public

Is the problema “political”

problem?

Public Policy

• Problem Identification

• Agenda Setting

• Policy Formulation

• Policy Legitimation

• Policy Implementation

• Policy Evaluation

Participants:Congress, Pres,

IG, media, public

What issues needto be addressed

first?

Public Policy

• Problem Identification

• Agenda Setting

• Policy Formulation

• Policy Legitimation

• Policy Implementation

• Policy Evaluation

Participants:Congress, Pres,

IG, media, public

What policy is bestsuited to resolve

or solve theproblem?

Public Policy

• Problem Identification

• Agenda Setting

• Policy Formulation

• Policy Legitimation

• Policy Implementation

• Policy Evaluation

Participants:Congress, Pres,

Courts,IG, media, public

From the options,enact one into

law

Public Policy

• Problem Identification

• Agenda Setting

• Policy Formulation

• Policy Legitimation

• Policy Implementation

• Policy Evaluation

Participants:Pres, bureaucracy,

IG

Develop the administrativeprotocol andprocedures

Public Policy

• Problem Identification

• Agenda Setting

• Policy Formulation

• Policy Legitimation

• Policy Implementation

• Policy Evaluation

Participants:Congress, Pres,

bureaucracyIG, media, public

Is the programaccomplishing

what it wasmeant to?

Economic Policy

Goals of Economic Policy

• Primary goal is smooth running of a capitalist economy

• Maintain those features necessary for a market economy

1. Stability/Security

2. Fair Competition/Anti Monopoly

Goals of Economic Policy

Price

Quantity

Who determines the“price” of a good,buyers or sellers?

Goals of Economic Policy

Price

Quantity

Demand Curve

What would a“demand” curve

look like?

Goals of Economic Policy

Price

Quantity

Demand Curve

When price is high, buy fewer goods

Goals of Economic Policy

Price

Quantity

Demand Curve

When price is high, buy fewer goods

As price drops, buy more goods

Goals of Economic Polcy

Price

Quantity

Supply Curve

What wouldthe “supply”curve look

like?

Goals of Economic Polcy

Price

Quantity

Supply Curve

When price is low, try to sell fewer goods

As price rises, try to sell more goods

Goals of Economic Policy

Price

Quantity

Market Price

Who setsthe price ofthe good?

supply

demand

Goals of Economic Policy

• Market price is determined by the “invisible hand” of the market

• Buyers and sellers making individual decisions about what is best for them as consumers or sellers lead to market price that is best for all concerned

Goals of Economic Policy

Free market (laissez-faire) economics requires:

1. widespread information among buyers and sellers about the general tendencies and status of the market

Goals of Economic Policy

Free market (laissez-faire) economics requires:

2. Competition among buyers and sellers• monopoly: no competition among sellers

• monopsony: no competition among buyers

3. Rational preference schedules among participants:A>B, B>C A>C

Goals of Economic Policy

• Market Failures– Ensure fair competition

• Play by same rules• No monopolies/monopsonies

– Provide public goods• Minimum wage, consumer protection,

unemployment insurance

– Protect market externalities• e.g., anti pollution laws

Goals of Economic Policy

• For most of the country’s history, economic growth was not a government priority

• Market was responsible for the market

• Great Depression brings expanded government involvement

Tools of Economic Policy

• Fiscal Policy– Government’s ability to tax and spend

• Monetary Policy– Control the money supply through the

manipulation of interest rates

Tools of Economic Policy

• Tax revenue streams:– income (personal/corporate)– property– capital gains– sales– usage

• List of US tax forms

Tools of Economic Policy

• Types of taxes– Progressive Taxes

• Taxes increase (in percentage) as wealth increases– e.g., Income Tax

– Regressive Taxes• Taxes decrease (in percentage) as wealth increases

– e.g., Social Security tax– Proportional

• Taxes rise as percentage of some fixed measure– e.g., sales tax (you pay more as cost of good increases)

– Flat• Tax is same rate regardless of cost, income, etc.

– e.g., cigarette tax, user fees for driver’s license, parks, etc.

Basic Strategies

• Keynesian Economics– John Maynard Keynes

• Use government tools to manage economic growth

• Control the booms and limit impact of the busts in economic cycle

Basic Strategies

GDPGrowth

Years

“Normal” EconomicCycles

Basic Strategies

GDPGrowth

Years

“Normal” EconomicCycles

Managed EconomicGrowth

Basic Strategies

If economy is in downturn:

Government spending, Taxes

If economy is heating up too quickly:

Governmnt spending, Taxes

Basic Strategies

• Long term impact though has been steady increase in federal deficit and debt– Current Federal Budget Debt– Current foreign government ownership of the

debt– Historic data on the debt

Monetary Policy

• Control the circulation of money in the economy through the manipulation of interest rates

• Basically determines the “price” of money

• Determined by the Federal Reserve Board (the Fed)

Fed Chairman Ben Bernanke

Monetary Policy

If economy is in downturn:

Decrease rate

If economy is heating up too quickly:

Increase rate

Implications

• Debt obligations limit new government initiatives

• Ability of social security system and/or state pension systems to meet demands of retiring population.

• Ability for foreign governments to impact US government policy

Economic Inequality

Economic Inequality

Economic Inequality

Economic Inequality

Economic Inequality

Economic Inequality

Economic Inequality

Economic Inequality

Economic InequalityEconomic Inequality

Poverty in US

• Design a budget– Family of 4 in Hudson County– Calculate monthly expenses then determine the

yearly income necessary for those expenses

Poverty in US

Poverty rates for selected racial demographic groups

Poverty in US

• Beginning in 1930s, federal government began to put poverty relief on the public policy agenda

• Created:– Social Security

– Medicare

– AFDC (Aid for Families with Dependent Children)

– Food Stamp Program

– Unemployment Insurance

Poverty in US

• 1960s “Great Society” programs under Lyndon Johnson expanded federal involvement in poverty relief– Created Medicaid– Expanded Food Stamp– New programs to help poor families

• e.g. Head Start

Poverty in US

• Poverty has stabilized since 1970s, despite the expansion of federal dollars on the problem, and new efforts made to transform welfare to limit costs

• 1996 Welfare Reform Act– Shifts program from federal to state

administered system– Eliminated AFDC and created TANF

• (Temporary Assistance to Needy Families)

Poverty in the US

• 2008 Poverty Rate Guidelines (HHS)• HHS FAQ file on Poverty Rates and Poverty• Census bureau poverty data• Main Federal Poverty Programs

– TANF (HHS)

– HHS reports to Congress on TANFTANF data sets

– Food Stamps (Agriculture)