Chapter 18 Economic Policy. Copyright © 2013 Cengage WHO GOVERNS? WHO GOVERNS? 1.Who in the federal government can make our economy strong? 2.Who was

Chapter 18Chapter 18Economic Economic

PolicyPolicy

Copyright © 2013 CengageCopyright © 2013 Cengage

WHO GOVERNS?WHO GOVERNS?1.1. Who in the federal government can Who in the federal government can

make our economy strong?make our economy strong?

2.2. Who was responsible for the recession?Who was responsible for the recession? TO WHAT ENDS?TO WHAT ENDS?

1.1. Why does the federal government ever Why does the federal government ever have a budget deficit?have a budget deficit?

2.2. How do you end a recession?How do you end a recession?



Source: Adapted from Office of Management and Budget (OMB), Historical Tables, February 1, 2010, Table 1.3.

Government Spending is Government Spending is DifferentDifferent

How do you handle your spending How do you handle your spending problems?problems?• You spend more than you earnYou spend more than you earn• You want to buy a car or houseYou want to buy a car or house• You You ““max outmax out”” your credit cards your credit cards• When do you declare bankruptcy?When do you declare bankruptcy? How does the government handle How does the government handle

its spending problems?its spending problems?


The Politics of Economic The Politics of Economic ProsperityProsperity

Majoritarian politicsMajoritarian politics Pocketbook IssuesPocketbook Issues

• National levelNational level• Individual levelIndividual level

What Politicians Try to DoWhat Politicians Try to Do• UnemploymentUnemployment• InflationInflation• Interest ratesInterest rates


The Politics of Taxing and SpendingThe Politics of Taxing and Spending

Voters wantVoters want• ProsperityProsperity• Lower taxesLower taxes• Less debtLess debt• New/continued programsNew/continued programs

Are there inconsistencies?Are there inconsistencies?



Thousands of Tea Party members gather in Nashville, Tennessee, in early 2009. The movement was named in part after the Boston Tea Party that in 1773 stimulated American resistance to the British. Others have said that “tea” stands for “taxed enough already.”

© Harrison Mcclary/Reuters/Corbis



Economic Theories and Political Economic Theories and Political NeedsNeeds

MonetarismMonetarism KeynesianismKeynesianism Economic PlanningEconomic Planning Supply-Side Tax CutsSupply-Side Tax Cuts

Did the Federal Government End the Did the Federal Government End the Recession? Recession?



Milton Friedman

John Kenneth Galbraith

Arthur B. Laffer

Walter Bennett/Time Life Pictures/Getty Images

© Bettmann/CORBIS

© Bettmann/CORBIS

Karen Vismara/Black Star

The Machinery of Economic Policy The Machinery of Economic Policy MakingMaking

Within the Executive BranchWithin the Executive Branch• The PresidentThe President• The TroikaThe Troika

Council of Economic Advisors (CEA)Council of Economic Advisors (CEA) Director of the Office of Management and Director of the Office of Management and

Budget (OMB)Budget (OMB) Secretary of the Treasury Secretary of the Treasury



The Machinery of Economic The Machinery of Economic Policy MakingPolicy Making

The FedThe Fed• Monetary policy Monetary policy – alters – alters

the supply of money the supply of money and interest ratesand interest rates


Ben Bernanke, Chairman of the Federal Reserve, speaks to a congressional committee.

Mark Wilson/Getty Images


The CongressThe Congress• Approves all taxesApproves all taxes• Approves almost all expendituresApproves almost all expenditures• Wage and price controlsWage and price controls• Ability to alter Federal Reserve Board Ability to alter Federal Reserve Board

policiespolicies• Creates the nationCreates the nation’’s fiscal policys fiscal policy



GlobalizationGlobalization• How do we experience it?How do we experience it?

SupportersSupporters• Increased income, literacy and standards of living Increased income, literacy and standards of living

in almost every country involved.in almost every country involved.• Makes products cheaperMakes products cheaper

OpponentsOpponents• Undercuts the wages of American workersUndercuts the wages of American workers• Exploits people in poor countriesExploits people in poor countries• Imposes one culture on everyone in ways that Imposes one culture on everyone in ways that

hurt the local culturehurt the local culture


Spending MoneySpending Money

Conflicting interestsConflicting interests• Majoritarian politicsMajoritarian politics• Client politicsClient politics• Interest group politicsInterest group politics

Public opinionPublic opinion PoliticiansPoliticians’’ appeals appeals


The BudgetThe Budget

The U.S. BudgetThe U.S. Budget: What is it?: What is it? • In theoryIn theory• In practiceIn practice

Before 1921: no federal budgetBefore 1921: no federal budget Fiscal Year Fiscal Year – – October 1 through the October 1 through the

following September 30 (federal)following September 30 (federal)


The BudgetThe Budget

The Congressional Budget Act of The Congressional Budget Act of 19741974• The PresidentThe President’’s Roles Role• The Congressional Budget Committees of the The Congressional Budget Committees of the

House and SenateHouse and Senate• Budget resolution Budget resolution – A congressional decision – A congressional decision

that states the maximum amount of money the that states the maximum amount of money the government should spendgovernment should spend

• EntitlementsEntitlements - A claim for government funds - A claim for government funds that cannot be changed without violating the that cannot be changed without violating the rights of the claimantrights of the claimant


Reducing SpendingReducing Spending

Congressional Budget Act of 1974Congressional Budget Act of 1974 Balanced Budget Act of 1985 Balanced Budget Act of 1985

(Gramm-Rudman Act)(Gramm-Rudman Act)• Sequester – automatic spending cutsSequester – automatic spending cuts

Budget Enforcement Act of 1990Budget Enforcement Act of 1990• Limits on discretionary spendingLimits on discretionary spending



Source: Office of Management and Budget (OMB), Receipts and Outlays, Tables 2.1, 8.5, and 8.7, OMB Review, 2010.

Figure 18.3 Social Security and Figure 18.3 Social Security and Medicare Cost as a % of GDPMedicare Cost as a % of GDP


Trustees’ Report, 2009.

Levying TaxesLevying Taxes

Majoritarian politicsMajoritarian politics• Modest tax burdenModest tax burden• Minimize cheatingMinimize cheating

Client politicsClient politics• LoopholesLoopholes


Levying TaxesLevying Taxes

Rise in the Income TaxRise in the Income Tax

• Sixteenth AmendmentSixteenth Amendment• Tax Reform Act of 1986Tax Reform Act of 1986• Tax increase of 1993Tax increase of 1993• Tax cuts of 2002Tax cuts of 2002• Tax cut extension in 2010Tax cut extension in 2010




Source: Updated from Congressional Quarterly Weekly Report (various years).

M E M O R A N D U MM E M O R A N D U M

To: To: Elizabeth Gilbert, chairperson, Council of Elizabeth Gilbert, chairperson, Council of EconomicsEconomics

From: From: Edward Larson, White House Edward Larson, White House speechwriterspeechwriter

Subject: Subject: Flat tax proposalFlat tax proposal

The President would like your advice on whether toThe President would like your advice on whether to

endorse a flat tax. His likely opponent is pushing endorse a flat tax. His likely opponent is pushing thisthis

issue.issue.


WHAT WOULD YOU DO?WHAT WOULD YOU DO?

Arguments for:Arguments for:

1. A flat tax is fair because it treats all income 1. A flat tax is fair because it treats all income groups the same. We could leave the lowest groups the same. We could leave the lowest income group with no taxes.income group with no taxes.

2. With a flat tax, we could eliminate almost all 2. With a flat tax, we could eliminate almost all deductions and loopholes from the tax code.deductions and loopholes from the tax code.

3. Countries with a flat tax, such as Lithuania, have 3. Countries with a flat tax, such as Lithuania, have achieved great economic prosperity.achieved great economic prosperity.



Arguments againstArguments against::

1. A flat tax is unfair because it treats all income 1. A flat tax is unfair because it treats all income groups the same. The rich should be taxed more groups the same. The rich should be taxed more heavily.heavily.

2. Many tax deductions, such as the one for home 2. Many tax deductions, such as the one for home mortgages, are desirable.mortgages, are desirable.

3. We could eliminate undesirable tax loopholes 3. We could eliminate undesirable tax loopholes without creating a flat tax.without creating a flat tax.



Your decision:Your decision:

Support?Support?

Oppose?Oppose?



Documents

Chapter 18 Economic Policy. Copyright © 2013 Cengage WHO GOVERNS? WHO GOVERNS? 1.Who in the federal government can make our economy strong? 2.Who was