Chap18

11
Chapter 18Chapter 18
Economic PolicyEconomic Policy

22Copyright © 2013 CengageCopyright © 2013 Cengage
 WHO GOVERNS?WHO GOVERNS?
1.1. Who in the federal government canWho 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 everWhy 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.

55
Government Spending is DifferentGovernment Spending is Different
 How do you handle your spendingHow 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 “max out” your credit cardsYou “max out” your credit cards
• When do you declare bankruptcy?When do you declare bankruptcy?
 How does the government handleHow does the government handle
its spending problems?its spending problems?
Copyright © 2013 CengageCopyright © 2013 Cengage

66
The Politics of Economic ProsperityThe Politics of Economic Prosperity
 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

77
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

1111
Economic Theories and PoliticalEconomic Theories and Political
NeedsNeeds
 MonetarismMonetarism
 KeynesianismKeynesianism
 Economic PlanningEconomic Planning
 Supply-Side Tax CutsSupply-Side Tax Cuts
 Did the Federal Government End theDid 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

1313
The Machinery of Economic PolicyThe 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 andDirector of the Office of Management and
Budget (OMB)Budget (OMB)
 Secretary of the TreasurySecretary of the Treasury

1515
MakingMaking
 The FedThe Fed
• Monetary policyMonetary policy – alters– alters
the supply of moneythe supply of money
and interest ratesand interest rates
Ben Bernanke, Chairman of the
Federal Reserve, speaks to a
congressional committee.
Mark Wilson/Getty Images

1616
MakingMaking
 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 BoardAbility to alter Federal Reserve Board
policiespolicies
• Creates the nation’s fiscal policyCreates the nation’s fiscal policy

1717
MakingMaking
 GlobalizationGlobalization
• How do we experience it?How do we experience it?
 SupportersSupporters
• Increased income, literacy and standards of livingIncreased 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 thatImposes one culture on everyone in ways that
hurt the local culturehurt the local culture

1818
Spending MoneySpending Money
 Conflicting interestsConflicting interests
• Majoritarian politicsMajoritarian politics
• Client politicsClient politics
• Interest group politicsInterest group politics
 Public opinionPublic opinion
 Politicians’ appealsPoliticians’ appeals

1919
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 YearFiscal Year –– October 1 through theOctober 1 through the
following September 30 (federal)following September 30 (federal)

2020
The BudgetThe Budget
 The Congressional Budget Act ofThe Congressional Budget Act of
19741974
• The President’s RoleThe President’s Role
• The Congressional Budget Committees of theThe Congressional Budget Committees of the
House and SenateHouse and Senate
• Budget resolutionBudget resolution – A congressional decision– A congressional decision
that states the maximum amount of moneythat states the maximum amount of money
the government should spendthe government should spend
• EntitlementsEntitlements - A claim for government funds- A claim for government funds
that cannot be changed without violating thethat cannot be changed without violating the
rights of the claimantrights of the claimant

2121
Reducing SpendingReducing Spending
 Congressional Budget Act of 1974Congressional Budget Act of 1974
 Balanced Budget Act of 1985Balanced 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.

2323
Figure 18.3 Social Security andFigure 18.3 Social Security and
Medicare Cost as a % of GDPMedicare Cost as a % of GDP
Trustees’ Report, 2009.

2424
Levying TaxesLevying Taxes
 Majoritarian politicsMajoritarian politics
• Modest tax burdenModest tax burden
• Minimize cheatingMinimize cheating
 Client politicsClient politics
• LoopholesLoopholes

2525
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).

2828
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 ofElizabeth Gilbert, chairperson, Council of
EconomicsEconomics
From:From: Edward Larson, White House speechwriterEdward Larson, White House speechwriter
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 pushingendorse a flat tax. His likely opponent is pushing
thisthis
issue.issue.
WHAT WOULD YOU DO?WHAT WOULD YOU DO?

2929
Arguments for:Arguments for:
1. A flat tax is fair because it treats all income1. A flat tax is fair because it treats all income
groups the same. We could leave the lowestgroups 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 all2. 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, have3. Countries with a flat tax, such as Lithuania, have
achieved great economic prosperity.achieved great economic prosperity.

3030
Arguments againstArguments against::
1. A flat tax is unfair because it treats all income1. A flat tax is unfair because it treats all income
groups the same. The rich should be taxed moregroups the same. The rich should be taxed more
heavily.heavily.
2. Many tax deductions, such as the one for home2. Many tax deductions, such as the one for home
mortgages, are desirable.mortgages, are desirable.
3. We could eliminate undesirable tax loopholes3. We could eliminate undesirable tax loopholes
without creating a flat tax.without creating a flat tax.

3131
Your decision:Your decision:
Support?Support?
Oppose?Oppose?

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