Economic Policy

The politics of deficit spending The general landscape

Deficit: government spending over and above the amount taken in by taxes

National debt: combined amount of all deficits

Interest on the debt: typically the third highest item in that national budget

Gross domestic product (GDP): proportion in relation to debt about the same as 1964

Strategy: get rid of the annual deficit to make progress on the overall debt By raising taxes (political liberals)By cutting spending (political conservatives)

The Politics of Economic Prosperity Health of American economy creates majoritarian

politics Voters influenced by their immediate economic

situations Voters worry about the nation as a whole as well as

their own situations Voting behavior and economic conditions

correlated at the national level but not at the individual level

People understand what government can and cannot be held accountable for

People see economic conditions as affecting them indirectly, even when they are doing well

What politicians try to do Elected officials tempted to take short-term view of

the economy Government uses money to influence elections, but

government will not always do whatever is necessary Government does not know how to produce

desirable outcomes Attempting to cure one economic problem

exacerbates another Ideology plays a large role in determining policy

Democrats tend to want to reduce unemployment

Republicans tend to want to reduce inflation

The Politics of Taxing and Spending

Inconsistency in what people want out of majoritarian politics No tax increases No government deficit Continued (or higher)

government spending Difficult to make meaningful tax

cuts Politicians get reelected by

spending money Strategy: raise taxes on “other

people”

Economic Theories & Political Needs 1. Monetarism – inflation occurs when there is too

much money chasing too few goods; advocates increase in money supply about equal to economic growth

2. Keynesianism – government should create right level of demand

3. Planning – free market too undependable to ensure economic efficiency; therefore government should control it

4. Supply-side tax cuts – need for less government interference and lower taxes

5. Ideology and theory: people embrace an economic theory partly because of their political beliefs

6. “Reaganomics”: Combination of monetarism, supply-side tax cuts, and domestic budget cutting

The Machinery of Economic Policy Making

Fragmented policymaking: not under president’s full control

3 people of special importance (The Troika):Chairman of Council of Economic Advisers

Forecast trends, analyze issues, submit congressional report

Director of Office of Management and Budget Analyzes and estimates what departments

will spendSecretary of Treasury

Estimates US revenue from taxes Usually closely tied to business/finance world

The Machinery of Economic Policy Making

The Fed (Federal Reserve Board) 7 members, Pres appointed-Senate

confirmed, 14yr terms Regulates the supply of money and interest

rates (=monetary policy) Independent of Pres and Congress (though

sometimes questionable)

Congress Most important! Creates the nation’s tax

and spending laws (= fiscal policy)

Fiscal Policy Managing the economy by the use of tax and spending laws.

Where the Money Comes FromFederal Income TaxesSocial Insurance TaxesBorrowingOther taxes

Where the Money GoesEntitlement programsNational defense National debt

Where does the Money come from?

The main sources are taxes:

Where does the Money go?

Monetary PolicyManaging the economy by

altering the supply of money and interest rates

Monetary policy is the government’s control of the money supplyToo much money in system leads to inflation (devaluation of dollar)

Too little money in circulation leads to deflation

The Budget: Overview Document that announces

How much the government will collect in taxes

How much the government will spend in revenues

How expenditures will be allocated among various programs

Over the course of the fiscal year (October 1 to September 30)

Spending decisions make with little regard to how much money is available

Congressional Budget Act of 1974: Procedures

1. President submits budget 2. House and Senate budget committees analyze budget 3. Budget resolution in May proposes budget ceilings 4. Members informed whether or not spending proposals

conform to budget resolutions 5. Committees approve appropriations bills, Congress

passes them, and send them to the president for signature

6. Hard to make big changes in government spending (entitlements)

7. Big loophole: Congress not required to tighten government’s financial belt

Levying TaxesTax policy reflect blend of majoritarian and client

politics 1.“What is a ‘fair’ tax law?” (majoritarian)

Tax burden is kept low; Americans pay less than citizens in most other countries

Requires everyone to pay something; Americans cheat less than others

2. “How much is in it for me?” (client) Requires the better-off to pay more Progressiveness is a matter of dispute: hard to

calculate Many loopholes: example of client politics

3.Client politics (special interest) make tax reforms difficult, but Tax Reform Act passed (1986)

Levying Taxes The rise of the income tax1. Most revenue derived from tariffs until 1913

and ratification of Sixteenth Amendment 2.Taxes then varied with war (high), peace

(low) High rates offset by many loopholes;

compromise Constituencies organized around loopholes

3.Tax bills before 1986 dealt more with deductions than with rates

4.Tax Reform Act of 1986: low rates with smaller deductions