Policy Policy MakinMakin

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Government Purposes and Government Purposes and Public PoliciesPublic Policies

A A public policypublic policy is a general plan of is a general plan of action.action.

All public policies are the means by which All public policies are the means by which government pursues goals.government pursues goals.

Government approaches can be put into Government approaches can be put into one of three types:one of three types: Distributive-allocate resourcesDistributive-allocate resources Redistributive-reallocate resourcesRedistributive-reallocate resources Regulation-guide the operation of governmentRegulation-guide the operation of government

Policy Making Policy Making ProcessProcess

Four StagesFour Stages Agenda Setting-Agenda Setting- problems defined. problems defined. Policy Formulation-Policy Formulation- choices are choices are

developed.developed. Implementation-Implementation- policies are carried policies are carried

out.out. Policy Evaluation-Policy Evaluation- analysis of analysis of

effectiveness.effectiveness.

Government, Politics, and Government, Politics, and the Economythe Economy

IntroductionIntroduction Capitalism:Capitalism:

An economic system in which individuals and An economic system in which individuals and corporations, not the government, own the corporations, not the government, own the principal means of productions and seek profitsprincipal means of productions and seek profits

Mixed Economy:Mixed Economy: An economic system in which the government An economic system in which the government

is deeply involved in economic decisions is deeply involved in economic decisions through its role as regulator, consumer, through its role as regulator, consumer, subsidizer, taxer, employer and borrowersubsidizer, taxer, employer and borrower

Government, Politics, and Government, Politics, and the Economythe Economy

Economic Policy at Work: An IllustrationEconomic Policy at Work: An Illustration Government Regulation and Business PracticesGovernment Regulation and Business Practices

Securities and Exchange Commission regulates Securities and Exchange Commission regulates stock fraudstock fraud

Minimum wageMinimum wage: the legal minimum hourly wage for : the legal minimum hourly wage for large employerslarge employers

Labor unionLabor union: an organization of workers intended to : an organization of workers intended to engage in collective bargainingengage in collective bargaining

Collective bargainingCollective bargaining: negotiations between labor : negotiations between labor unions and management to determine pay and unions and management to determine pay and working conditionsworking conditions

Policies for Controlling Policies for Controlling the Economythe Economy

Monetary Policy and “the Fed”Monetary Policy and “the Fed” Monetary PolicyMonetary Policy: the manipulation of the : the manipulation of the

supply of money in private hands–too much supply of money in private hands–too much cash and credit produces inflationcash and credit produces inflation

Money supply affects the rate of interest Money supply affects the rate of interest paid.paid.

Main policymaker is the Board of Governors Main policymaker is the Board of Governors of the Federal Reserve System–the “Fed”of the Federal Reserve System–the “Fed”

Created in 1913 to regulate lending practices of Created in 1913 to regulate lending practices of banks and thus they money supplybanks and thus they money supply

Policies for Controlling Policies for Controlling the Economythe Economy

Monetary Policy and “the Fed” Monetary Policy and “the Fed” (continued)(continued) The Feds instruments to influence the The Feds instruments to influence the

supply of money in circulation:supply of money in circulation: Sets the federal funds rateSets the federal funds rate Buys and sells government bondsBuys and sells government bonds

Through the use of these actions, the Through the use of these actions, the Fed can affect the economy.Fed can affect the economy.

Laissez-faireLaissez-faire: principle that government : principle that government should not meddle in the economyshould not meddle in the economy

Policies for Controlling Policies for Controlling the Economythe Economy

Fiscal Policy of Presidents and PartiesFiscal Policy of Presidents and Parties Fiscal PolicyFiscal Policy: the policy that describes the : the policy that describes the

impact of the federal budget on the impact of the federal budget on the economyeconomy

Keynesian Economic TheoryKeynesian Economic Theory: government : government spending and deficits help the economy spending and deficits help the economy weather its normal ups and downsweather its normal ups and downs

Government’s job is to increase demand Government’s job is to increase demand of goodsof goods

Fiscal PolicyFiscal PolicyExpansionaryExpansionary policies policies try to increase output.try to increase output.

ContractionaryContractionary policies policies try to decrease output.try to decrease output.

Effects of Expansionary Effects of Expansionary PolicyPolicy

Lower Output,

Lower Prices

Original Aggregate Demand

Aggregate Supply

Higher Output, Higher Prices

Aggregate Demand

with High Government

Spending

Effects of Contractionary Effects of Contractionary PolicyPolicy

Lower Output,

Lower Prices Original Aggregate Demand

Aggregate Supply

Higher Output, Higher Prices

Aggregate Demand with

Lower Government

Spending

Expansionary Fiscal Expansionary Fiscal PoliciesPolicies

Increasing Increasing Government Government Spending.Spending.

Cutting Taxes.Cutting Taxes.

Contractionary Fiscal Contractionary Fiscal PoliciesPolicies

Increasing TaxesIncreasing TaxesDecreasing Decreasing Government Government SpendingSpending

Limits of Fiscal Limits of Fiscal PolicyPolicy

Difficulty of Changing Difficulty of Changing Spending Levels.Spending Levels.

Predicting the Future.Predicting the Future. Delayed Results.Delayed Results. Political Pressures.Political Pressures. Coordinating Fiscal Policies.Coordinating Fiscal Policies.

Instruments for Instruments for Controlling the EconomyControlling the Economy

Fiscal Policy of Presidents and Fiscal Policy of Presidents and Parties, Parties, (continued)(continued) Supply-Side EconomicsSupply-Side Economics: the policy that : the policy that

says there is too much taxation and not says there is too much taxation and not enough money to purchase goods and enough money to purchase goods and servicesservices

Reduce taxation and government Reduce taxation and government regulation then people will work harder, regulation then people will work harder, and thus create a greater supply of goodsand thus create a greater supply of goods

Public Policy and the Public Policy and the Budget Budget

Since 1921, the president has been Since 1921, the president has been responsible for drafting and responsible for drafting and submitting the budget to Congress submitting the budget to Congress for approval. for approval.

The budget states how much money The budget states how much money government agencies will be allowed government agencies will be allowed to spend on their programs, planned to spend on their programs, planned expenditures and receipts. expenditures and receipts.

Public Policy and the Public Policy and the BudgetBudget

The preparation of the budget is The preparation of the budget is supervised by the Office of supervised by the Office of Management and Budget (OMB).Management and Budget (OMB).

The budget must then be passed The budget must then be passed

by Congress. by Congress.

Public Policy and the Public Policy and the BudgetBudget

Attempted reforms to the Attempted reforms to the budget process have included budget process have included the Budget and Impoundment the Budget and Impoundment Control Act, Gramm-Rudman Control Act, Gramm-Rudman balanced budget act, the balanced budget act, the Budget Enforcement Act and Budget Enforcement Act and finally the Balanced Budget Act.finally the Balanced Budget Act.

Tax Policies Tax Policies Tax policies are designed to provide a Tax policies are designed to provide a

continuous flow of revenue without continuous flow of revenue without requiring new annual legislation. requiring new annual legislation.

Nevertheless, tax policy is often Nevertheless, tax policy is often adjusted to meet budgetary outlays, adjusted to meet budgetary outlays, to make the tax burden more to make the tax burden more equitable, or to control the economy. equitable, or to control the economy.

Type of Type of TaxTax DescriptionDescription ExamplExampl

eeRon’s Taxes Ron’s Taxes

($50K)($50K)

Mary’s Mary’s Taxes Taxes ($150)($150)

ProportionProportionalal

A constant A constant percentage of percentage of income is taken in income is taken in taxes and income taxes and income increases.increases.

““Flat” Flat” TaxTax $7,500 (15%)$7,500 (15%) $22,500 $22,500

(15%)(15%)

ProgressivProgressivee

A larger A larger percentage of percentage of income is taken in income is taken in taxes as income taxes as income increases.increases.

Income Income TaxTax $5,000 (10%)$5,000 (10%) $45,000 $45,000

(30%)(30%)

RegressiveRegressive

A smaller A smaller percentage of percentage of income is taken in income is taken in taxes as income taxes as income increases.increases.

Sales Sales TaxTax

$2K or 5% of $2K or 5% of $40K in $40K in

purchases, purchases, bill is 4% of bill is 4% of

incomeincome

$3K or 5% of $3K or 5% of $60K in $60K in

purchases, purchases, bill is 2% of bill is 2% of

income.income.

Spending Policies Spending Policies Unlike tax policies, which usually do Unlike tax policies, which usually do

not vary greatly from year to year, not vary greatly from year to year, government spending is subject to government spending is subject to annual changes. annual changes.

Most federal spending has shifted to Most federal spending has shifted to two major categories, payments to two major categories, payments to individuals and net interest individuals and net interest payments. payments.

Spending PoliciesSpending Policies The general trend of increase in The general trend of increase in

the percentage of federal spending the percentage of federal spending relative to GDP from World War II relative to GDP from World War II to the present is explained by to the present is explained by bureaucratic (bureaucratic (incremental and incremental and uncontrollable spendinguncontrollable spending) and ) and political factors. political factors.

Tomorrow’s QuizTomorrow’s Quiz Know the vocabulary!!Know the vocabulary!! Sources of Fragmentation.Sources of Fragmentation. Supply Side v. Keynesian Supply Side v. Keynesian

TheoryTheory Progressive, Regressive and Progressive, Regressive and

Proportional Taxes.Proportional Taxes. Fiscal v. Monetary PolicyFiscal v. Monetary Policy