CHAPTER 16: LEARNING OBJECTIVES Define the various stages in which the public policymaking process unfolds Assess the formal and informal players

CHAPTER 16: LEARNING OBJECTIVESCHAPTER 16: LEARNING OBJECTIVES

Define the various stages in which the public policymaking process unfolds

Assess the formal and informal players involved in the policymaking process

Recognize the different theories that justify decisions to craft fiscal policy

Copyright © 2012 Cengage Learning


Define the different measures used to assess the success or failure of fiscal policy

Analyze the budget-making process, how it unfolds, and the roles played by Congress and the president, respectively



Understand the different categories of tax policy, and how it has evolved in American history

Assess the differences between mandatory and discretionary spending by government



Understand the origins and development of the federal reserve system in the United States

Assess government’s role in crafting agricultural policy in the U.S.



Assess government’s role in crafting urban policy, including recent developments in urban planning

Define and assess the role that FEMA plays in assisting the victims of natural disasters


WHEN THE GREED AND ARROGANCE OF WHEN THE GREED AND ARROGANCE OF FINANCIAL INSTITUTIONS DEMAND A FINANCIAL INSTITUTIONS DEMAND A NATIONAL SOLUTION … NOW & THENNATIONAL SOLUTION … NOW & THEN

The U.S. capitalist system was in crisisAt least one major financial institution

had failed, and others were on the brink Some exploited the lax regulatory

environment and millions of others fell victim to the financial institutions


……NOW & THENNOW & THENThe president—bolstered by a

legislative branch controlled by his own party—favored regulation

When wealthy financial institutions driven by greed and arrogance defraud so many citizens

A new agenda to regulate such bad behavior is difficult to derail


Obama flanked by economic advisors (Larry Summers, Paul Volcker, Goolsbee, Tim Geithner) announcing new proposals to rein in banks JIM WATSON/AFP/GETTY IMAGES


NOW… THE “GREAT RECESSION” OF NOW… THE “GREAT RECESSION” OF 2007-2010 2007-2010

The U.S. banking system was suffering a major liquidity crisis brought on by: 1. Predatory lending practices

2. Upsurge in subprime lending to borrowers with weak credit histories

3. Incorrect pricing of risk on complex assets, i.e. “derivatives”


NOW… THE “GREAT RECESSION” OF NOW… THE “GREAT RECESSION” OF 2007-2010 2007-2010

4. Rise of the “shadow banking system” —non-bank financial institutions were lending money free of regulations

5. Investment banks like Goldman Sachs sold investments to unwitting clients even as they were secretly betting against those same investments


NOW… THE “GREAT RECESSION” OF NOW… THE “GREAT RECESSION” OF 2007–2010 2007–2010

Obama and Congressional Democrats introduced legislation in 2009:

Addressed consumer protection, bank capital requirements, executive pay

Also expanded regulation of the shadow banking system and derivatives, and set new trading limits


THEN… 1933THEN… 1933

1929: Wall Street Crash—major banks failed and a majority of Americans’ stock holdings disappeared

Congressional investigators turned up evidence of fraud and irresponsibility

Banks ignored conflicts of interest and underwrote unsound securities to pay off bad loans



Competing banks “pooled operations” to artificially support the price of bank stocks

Wall Street insiders like Joseph Kennedy used inside information about stocks to make millions

Officers had been playing by their own rules at many once revered institutions



Securities Act of 1933 penalized filing false information about stock offerings

Securities Exchange Act of 1934 formed the Securities and Exchange Commission

Congress now sought to end the era of unregulated securities, and public anger gave them little choice



RICHARD DREW/AP PHOTO

PABLO MARTINEZ/MONSIVAIS/AP PHOTO

AN OVERVIEW OF THE AN OVERVIEW OF THE POLICYMAKING PROCESSPOLICYMAKING PROCESS

The process varies considerably, but most policies unfold in five stages:1. Recognition/definition stage

2. Formulation stage

3. Adoption (or legitimation) stage

4. Implementation stage

5. Evaluation stage



A large number of actors and institutions are involved in making policy

Bureaucrats often play a key role Congress and the president are most

directly involved in the recognition, formulation, and adoption stages, when media attention is most intense



Courts may ensure that all procedures are followed in interpreting rules, regulations, and policies

Interest groups and “think tanks” (policy research institutes) tend to be most active in influencing program choices and decisions


THEORY AND PRACTICE IN FISCAL THEORY AND PRACTICE IN FISCAL POLICYPOLICY

Fiscal policy: how to raise revenue through taxation and how to spend the revenue generated

Federal budget: primary instrument the federal government uses to manage fiscal policy

Specifies estimated expenditures and revenues



Various economic theories explain U.S. fiscal policy at any given point -

Laissez-faire (“leave us alone”) guided U.S. fiscal policy for much of the 18th and 19th centuries

Favors less economic intervention and governmental regulations



In the 1930s, widespread support for FDR’s New Deal programs based on Keynesian theories spelled the end of laissez-faire fiscal policies

Keynesian theory: government should increase spending in bad economic times to raise total demand for goods and services



Government spending may forestall or even end a recession

Economic slowdown characterized by higher unemployment, reduced productivity, or some other negative economic indicators,

But may also cause inflation and chronically high deficits



Supply-side economics: argues in favor of cutting taxes and government

Ronald Reagan seized on this theory and secured passage of a large tax cut,

But federal spending and deficits also multiplied during his eight years in office


ASSESSING THE ECONOMY’S ASSESSING THE ECONOMY’S PERFORMANCEPERFORMANCE

Gross domestic product (GDP):Estimate of the total value of all goods

and services produced in the U.S. in a one-year period

When GDP improves, workers are producing more in fewer hours, allowing employers to increase wages without raising prices



Consumer Price Index (CPI):An index of prices for goods and

services regularly traded in the U.S. A sustained rise over time indicates

inflation is on the rise and Consumers’ buying power is on the

decline



Unemployment rate: Percentage of people unemployed and

actively looking for work Full employment is elusive due to

seasonal factors, voluntary job changes, and routine shifts in economic conditions

5% is now seen as a realistic minimum



National debt: Individuals or organizations purchase

interest-bearing U.S. savings bonds, treasury notes, and treasury bills

Includes budget surpluses and deficits of past years

Currently = trillions with billions paid in interest annually



Dow Jones Industrial Average: Most widely used indicator of the overall condition of the stock market

Price-weighted average of 30 actively traded blue chip stocks

Standard & Poor’s 500 Index: broader range of large company stocks

NASDAQ: high-tech company stocksCopyright © 2012 Cengage Learning


Housing starts:Number of U.S. residential building

construction projects begun in a specific period

Many experts believe a decline is one of the first signs of an approaching economic downturn



Balance of trade figures (aka, net exports):

Money gained by selling exports, minus the cost of buying imports

When a country exports more than it imports it has a trade surplus, the reverse situation denotes a trade deficit


AMERICAN GOVERNMENT IN AMERICAN GOVERNMENT IN POPULAR PERSPECTIVEPOPULAR PERSPECTIVE

ASSESSING THE ALL-IMPORTANT CONSUMER CONFIDENCE MEASURE

The monthly calculation is based on five questions1. Current U.S. business conditions2. Expectations about how business conditions

might change in the next six months



3. Current U.S. employment conditions

4. Expectations about how employment conditions might change in the next six months

5. Expectations about how one’s own income situation might change in the next six months



What do you think is the best way to instill a positive outlook in consumers?

Are consumers likely to react positively when the federal government takes bold actions, or

Do such moves only confirm the sense that economic times are worsening?



THE FEDERAL BUDGET-MAKING THE FEDERAL BUDGET-MAKING PROCESSPROCESS

Agencies submit budget requests to the Office of Management and Budget (OMB)

OMB then prepares a budget proposal in keeping with the president’s program

Sets guidelines for estimating revenue and allotting spending



All appropriations bills originate in the House

After the House Appropriations Committee reports the bills to the full House, and

After the full House has passed each measure



The Senate Appropriations Committee takes its turn revising the House version

Reports this to the Senate floorThe House and Senate must reconcile

their versions and secure enough votes for approval of the final bill

Sent to the president for approvalCopyright © 2012 Cengage Learning

BALANCING THE FEDERAL BUDGET?BALANCING THE FEDERAL BUDGET?

Congress has debated a balanced budget amendment to the Constitution

Proponents argue it would force lawmakers to become more accountable

Opponents counter that deficit spending may be necessary during recessions and in defending national security


The Smithsonian Institution was among many government sites closed down during the 1995 government shutdown.AFP/GETTY IMAGES


TAXATION POLICYTAXATION POLICY

July 1789: Congress passed its first revenue-raising bill:

Levied tariffs: taxes on imported foreign goods

Until the Civil War, tariffs provided approximately 90% of federal revenue

Increased demands required additional sources of revenue



The Sixteenth Amendment authorizes taxes on individual increases in wealth, from wages, benefits, bonuses, or any other form of income

Progressive tax: tax rate increases as the amount of income gets larger

Regressive tax: charges the same amount, regardless of income


TAXATION POLICYTAXATION POLICYSocial Security taxes: Created in 1935;

intended to be self-supporting: Payroll taxes taken directly out of each

paycheck and held until retirement In reality, the system has become “pay

as you go” Current payroll taxes are going directly

to pay the benefits of current retireesCopyright © 2012 Cengage Learning


Congress has also imposed corporate income taxes

Other sources include taxes on— Gasoline and communications servicesEstates and large financial gifts, andCustoms duties


AMERICAN GOVERNMENT. . . IN AMERICAN GOVERNMENT. . . IN GLOBAL PERSPECTIVEGLOBAL PERSPECTIVE

What About Us? The Chinese Reaction to the U.S. Fiscal Stimulus Plan

The 2009 stimulus plan required that all public works and building projects use only U.S.-made goods

Exceptions allowed goods from Canada, the European Union, and Japan


AMERICAN GOVERNMENT. . . IN AMERICAN GOVERNMENT. . . IN GLOBAL PERSPECTIVEGLOBAL PERSPECTIVE

China’s official news agency, Xinhua reported this “trade protectionism” could harm the world economy:

As the largest holder of U.S. Treasury securities, they expressed concern about asset depreciation and

“…catastrophic effects to some poor countries…”


YOUR PERSPECTIVE … ON YOUR PERSPECTIVE … ON AMERICAN GOVERNMENTAMERICAN GOVERNMENT

College Students Get an Education … in Credit Card Abuse

Credit card companies eagerly target economically stressed college students

More likely to make late payments and less likely to pay off their cards in full at the end of each month



Did you apply for a credit card during your first semester as a college student?

Were you surprised at how easy it was to sign up for your own credit card?

Should colleges limit credit card companies’ access to college students? Why or why not?



Would you favor requiring that all undergraduate students take a course in personal financial management?

If the government can rack up large deficits, why do you think families and individuals like yourself are so heavily penalized for doing so?


SPENDING POLICIES – SPENDING POLICIES – DIVIDING UP THE PIEDIVIDING UP THE PIE

Mandatory spending: not controlled by annual budget decisions

Obligated by previously enacted laws and may only be modified by repeal or revising the original legislation

Discretionary spending: may be modified or eliminated in a given year


Figure 16.1 Where Do Federal Tax Dollars Come From and Where Do They Go?


Source: Budget of the U.S. Government Fiscal Year 2011, Historical Tables, published by the Executive Office of the President.

THEORIES AND PRACTICE IN THEORIES AND PRACTICE IN MONETARY POLICYMONETARY POLICY

Monetary policy: how the government controls the supply and price of money in the economy

With few exceptions, the Federal Reserve System headed by the Federal Reserve Board (“the Fed”) –

Determines U.S. monetary policy


CHECK THE LISTCHECK THE LIST

G-7 Nations, Ranked According to Income Tax Rates Imposed on Their Citizens

Organization for Economic Cooperation and Development (OECD)

Data on state and federal wage taxes for the G-7 shows the U.S. tax burden is toward the lower end



EMERGENCY AND DISASTER RELIEF EMERGENCY AND DISASTER RELIEF POLICYPOLICY

Federal Emergency Management Agency (FEMA) provides relief after disasters

When the president declares a state of emergency, FEMA coordinates federal relief efforts and offers assistance

FEMA’s delayed response to Hurricane Katrina drew widespread criticism


AMERICAN GOVERNMENT… IN AMERICAN GOVERNMENT… IN HISTORICAL PERSPECTIVEHISTORICAL PERSPECTIVE

HURRICANE RELIEF THAT CALLS FOR A “HANDS-ON” PRESIDENT

9/5/1965: Category 4 Hurricane Betsy left 3/4ths of New Orleans underwater

Initially resistant, but heeding advice, President Johnson visited New Orleans to reach out to the storm’s victims


AMERICAN GOVERNMENT… IN AMERICAN GOVERNMENT… IN HISTORICAL PERSPECTIVEHISTORICAL PERSPECTIVE

8/30/2005: Category 4 Hurricane Katrina proved among the deadliest

Over 1300 fatalities and $100 billion in damage

Like LBJ, Bush failed to immediately see that entrusting subordinates to on-site activities is never enough in natural disasters


NOW & THEN: MAKING THE NOW & THEN: MAKING THE CONNECTIONCONNECTION

Most modern presidents’ political fates rise and fall with the U.S. economy

Hoover’s presidency essentially ended with the Great Depression

Carter’s presidency coincided with a near record high misery index, and he too became a one-term president


NOW & THEN: MAKING THE NOW & THEN: MAKING THE CONNECTIONCONNECTION

FDR’s and Obama’s economic policies clearly reflected Keynesian principles

It is easy to look back decades later and judge a president’s economic policies

Presidents reacting to the moment do not have that luxury


POLITICS INTERACTIVE!POLITICS INTERACTIVE!

FORMER FED CHAIRMAN GREENSPAN: A LEGACY OF FORCEFULNESS

One of the most renowned Fed chairman in history

During his 19-year term he became so respected that even a simple appearance by him before Congress became a market-shifting event


POLITICS INTERACTIVE!POLITICS INTERACTIVE!

www.cengage.com/dautrich/americangovernment/2e Find the Politics Interactive link for the challenges faced by current Federal Reserve Chairman, Ben Bernanke

How do they differ from the challenges faced by Greenspan?

Did the ‘08–09 recession fundamentally alter the role of Fed Chairman?


Brokers on the NY Stock Exchange at work as they listen to former Federal Reserve Chairman Alan Greenspan testifying before CongressAP PHOTO/RICHARD DREW


Documents

CHAPTER 16: LEARNING OBJECTIVES Define the various stages in which the public policymaking process unfolds Assess the formal and informal players