Economic Policy

Chapter 18Chapter 18Economic Economic

PolicyPolicy

Copyright © 2011 CengageCopyright © 2011 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?

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


Figure 18.1 Federal Budget Deficit Figure 18.1 Federal Budget Deficit (or Surplus)(or Surplus)


Source: Budget of the U.S. Government, FY 2009 updated by OMB’s Mid-Session Review, July 2009 © 2003, AAAS. Reprinted with permission

The Politics of Taxing and The Politics of Taxing and SpendingSpending

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

Objectives are Objectives are

inconsistentinconsistent


During the recession, people, including middle class workers, line up at the unemployment office. p. 490 Source: Yellow Dog Productions/ Getty Images


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 DID THE FEDERAL GOVERNMENT

END THE RECESSION? END THE RECESSION?



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

CongressCongress• Fiscal policy Fiscal policy – uses tax – uses tax

and spending lawsand spending laws

GlobalizationGlobalization


Ben Bernanke, Chairman of the Federal Reserve, speaks to a congressional committee. p. 495 Source: Mark Wilson/ Getty Images


Milton Friedman

John Maynard Keynes

John Kenneth Galbraith

Arthur B. LafferKaren Vismara/ Black Star

Bettmann/Corbis

Bettmann/Corbis

Corbis/Corbis Sygma


Spending MoneySpending Money

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

Public OpinionPublic Opinion Politicians’ appealsPoliticians’ appeals


The BudgetThe Budget

BudgetBudget Fiscal Year Fiscal Year – – October 1 through the October 1 through the

following September 30 (federal)following September 30 (federal) Budget resolution Budget resolution – – A congressional A congressional

decision that states the maximum amount decision that states the maximum amount of money the government should spendof money the government should spend

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


Figure 18.2 Federal Outlays Figure 18.2 Federal Outlays in 2008in 2008


Source: Office of Management and Budget, Mid-Season Review, 2009.

Figure 18.2 Federal Revenues Figure 18.2 Federal Revenues in 2008in 2008


Source: Office of Management and Budget, Mid-Season Review, 2009.

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


p. 498

Source: Trustees’ Report, 2009.

Levying TaxesLevying Taxes

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

Client politicsClient politics• LoopholesLoopholes

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


Figure 18.4 Tax Figure 18.4 Tax Burdens in Burdens in

Democratic Nations Democratic Nations (Taxes as a (Taxes as a

Percentage of Percentage of Income of a Family Income of a Family with Two Children)with Two Children)


Source: Statistical Abstract of the United States, 2003, Table 1344.

Figure 18.5 Federal Taxes on Income, Figure 18.5 Federal Taxes on Income, Top Percentage Rates 1913-2002Top Percentage Rates 1913-2002


Source: Updated from Congressional Quarterly Weekly Report (September 18, 1993), 2488.

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 EconomicsElizabeth Gilbert, chairperson, Council of Economics

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 pushing thisendorse a flat tax. His likely opponent is pushing this

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

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

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



Arguments against:Arguments against:

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

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

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



Your decision:Your decision:

Support?Support?

Oppose?Oppose?




Tribune Media Services, Inc. All rights reserved. Reprinted by permission. p. 502

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