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Copyright © 2011 Pearson Education, Inc. Publishing as Longman
Copyright © 2011 Pearson Education, Inc. Publishing as Longman
CHAPTER 14
The Policy Process and
Economic Policy
Key Objectives
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14.1
Ideas and Values in Public Policy
Illustrate how values shape public policy in a democracy.
14.2
Types of Public Policy
Compare and contrast the three main types of public policies.
14.3
The Public Policy Process
Analyze how the policy process is shaped by political
influences.
14.4
Economic Basics
Identify the key indicators of economic performance used by
economists.
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Key Objectives
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14.5
Fiscal Policy
Describe the major actors responsible for creating economic
policy.
14.6
Revenue and Expenditures
Explain the major sources of U.S. government revenue and
expenditure.
14.7
Monetary Policy
Identify the major instruments of monetary policy.
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Ideas and Values in Public Policy
14.1
Illustrate how values shape public policy in a democracy.
• Policy is the output of politics
• Policy can be viewed as a series of phases in a
process
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The Steps of Policymaking
14.1
• The policy process model describes policymaking
in five or six steps
– Identifying the policy problem
– Setting an agenda
– Formulating a solution
– Legitimizing the solution
– Implementing the solution
– In some versions, evaluating the solution
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Values
14.1
• Two terms lay at the center of policy debates and
the how they are defined are connected closely to
people’s views of the role of government
– Freedom
– Equality
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Political Ideology
14.1
• Classical Liberalism: A political philosophy
based on the desire for limited government; the
basis for modern conservatism.
– Modern conservatives debate whether
expansion of government and increased
spending violate the true meaning of
conservatism.
• Modern Liberalism (Progressivism): A political
philosophy based on the belief that government is
the best actor to solve social, economic, and
political problems.
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14.1
According to the process model of the
policy process, the step associated with
putting a policy into action would be:
A.
B.
C.
D.
agenda setting.
evaluation.
formulation.
implementation.
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14.1
According to the process model of the
policy process, the step associated with
putting a policy into action would be:
A.
B.
C.
D.
agenda setting.
evaluation.
formulation.
implementation.
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Types of Public Policy
14.2 Compare and contrast the three main types of public policies.
• Organizing policies by issue areas helps make
sense of the broad contours of both the
problems and their possible solutions but may
not help to understand many of the particular
nuances that shape public policies
• A more sophisticated approach to studying
public policy involves creating policy categories
that classify what policies do and how they do it
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Categorizing Policies by Basic
Functions of Government
14.2
• Political scientists have identified three basic
functions of government:
– Distribution
– Regulation
– Redistribution
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Categorizing Policies by
Tangible or Symbolic Benefits
14.2
• Policies themselves can produce either tangible
benefits for the public or merely symbolic benefits
– Tangible benefits
– Symbolic benefits
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14.2
Which of the following represent a
symbolic benefit?
A. Housing subsidies for low-income families
B. Designating next Tuesday “Iraqi Freedom
Day”
C. Pell Grants for students
D. Most favored nation trading status for China
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14.2
Which of the following represent a
symbolic benefit?
A. Housing subsidies for low-income families
B. Designating next Tuesday “Iraqi Freedom
Day”
C. Pell Grants for students
D. Most favored nation trading status for China
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What do you think?
Do members of Congress abuse
the ability to formulate
distributive policy?
YES. Members of Congress attach far too
much emphasis to ‘bringing home the
bacon’ at the risk of jeopardizing financial
stability of the nation.
NO. Congressional members are elected
based upon their ability to provide goods
and services to their local constituents, and
distributive policy is one means by which
they are able to do that.
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The Public Policy Process
14.3 Analyze how the policy process is shaped by political influences.
• Like all models, it is a generalization—a
simplified representation of reality
• Process implies separate actions that lead
to a final goal
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14.3
Identifying the Problem
• What constitutes a problem?
• Who identifies problems?
– Pluralists argue anyone can identify a problem
and bring it to the attention of a policymaker
– Elitists posit that only the affluent and well
connected identify problems and are able to
have policymakers address them
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Setting an Agenda
14.3
• The ability to exclude an item from the agenda,
for whatever reason, is a powerful way to control
what government does
• The process of crafting an agenda cannot begin
until formal decision makers place the problem on
the nation’s formal or institutional agenda
• Sometimes a focusing event propels issues onto
the agenda
• Getting an issue onto the agenda doesn’t assure
a solution
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Formulating and Legitimizing
Policy
14.3
• Formulating policy
– Laws
– Decisions
– Rules
• The power of the presidency in shaping policy
• Legitimizing policy
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Implementing Policy
14.3
• Discretion given to the individuals who implement
policy
• Legislative oversight
– Reauthorization
– Investigation
• Judicial oversight
• Grass-roots mobilization or cultural change
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14.3
The set of problems that governmental
decision makers are actively working
to solve is called
A.
B.
C.
D.
the public agenda.
the legislative agenda.
the docket.
the institutional agenda.
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14.3
The set of problems that governmental
decision makers are actively working
to solve is called
A.
B.
C.
D.
the public agenda.
the legislative agenda.
the docket.
the institutional agenda.
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Economic Basics
14.4
Identify the key indicators of economic performance used
by economists.
• There are two primary types of economic policy
– Fiscal policy
– Monetary policy
• Both can affect growth, employment, and
inflation and, often the goals of each clash
• Economists focus on (1) inflation, (2)
unemployment, (3) GDP (4) the balance of
trade, and (5) the budget deficit or surplus
to gauge the economy’s performance.
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14.4
Inflation
• Inflation: An increase in prices over time.
– In the 1970s, inflation emerged as a major
concern of federal economic regulators, who
prescribed “tight money” policies to try to keep
it in check.
• The inflation rate is measured by the Consumer
Price Index (CPI), a figure computed by the
Department of Labor.
• The Fed must also guard against deflation—
dropping prices.
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Unemployment
14.4
• The unemployment rate measures the
percentage of Americans who are out of work.
• A “good” unemployment rate is around 5 percent.
– In the 1980s, many economists considered 5
percent to be full employment, only to have
unemployment drop below that figure in the
late 1990s and again in 2005 and 2006.
– By the end of 2009, the unemployment level
was 10 percent.
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Gross Domestic Product
14.4
• Gross domestic product (GDP)—the value of
all the goods and services produced in a nation—
measures the size of the American economy.
• A good growth target for GDP for the U.S.
economy is between 3 and 4 percent.
• The growth rate commonly reported in the media
is the “real GDP” rate—GDP adjusted to account
for the effects of the CPI, so that actual economic
growth does not falsely include the rate of
inflation.
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Balance of Trade
14.4
• The balance of trade measures the difference
between imports and exports.
• The United States has been running a significant
trade deficit for years.
• The U.S. trade deficit in goods fell from $840.3
billion in 2008 to $517 billion in 2009.
– This represents a 38.5 percent reduction and is
explained, in part, by a reduction in demand for
imports due to the recession.
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14.4
The Budget Deficit
• The budget deficit is the amount by which, in a
given year, government spending exceeds
government revenue.
• The rare circumstance when revenue outstrips
expenditures is called a budget surplus.
• The net sum of the budget deficit minus the
surplus is the national debt.
– About $12.98 trillion by early 2010.
• The CBO estimates that the budget deficit was
$1.36 trillion in 2010, will fall to $471 billion in
2015, and rise to $683 billion by 2020.
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14.4
Status of the Dollar
• An important factor in the strength of the
American economy
• Recently, the status of the dollar as the world’s
reserve currency has come under scrutiny
• Between 2002 and 2009, the dollar lost about a
third of its value against major currencies
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14.4
A major concern affecting the
view of the resilience of the US
economy is
1.
2.
3.
4.
tariffs.
outsourcing of jobs.
reliance on foreign oil.
None of these.
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14.4
A major concern affecting the
view of the resilience of the US
economy is
1.
2.
3.
4.
tariffs.
outsourcing of jobs.
reliance on foreign oil.
None of these.
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Fiscal Policy
14.5 Describe the major actors responsible for creating
economic policy.
• The game of politics is all about deciding who
gets what, and part of that involves deciding who
pays for what
• On-budget and off-budget expenditures are how
the national budget is often discussed
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14.5
Major Actors
• Budgets are created through interactions
between Congress and the president, but there
are several other major actors in the realm of
fiscal policy
– Congressional Budget Office (CBO)
– Office of Management and Budget (OMB)
– Council of Economic Advisors (CEA)
– National Economic Council (NEC)
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Key Congressional Players
•
•
•
•
14.5
House and Senate Appropriations committees
House and Senate Budget Committees
House Ways & Means Committee
Senate Finance Committee
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14.5
The body responsible for
helping Congress analyze longterm fiscal implications of the
executive’s budget is the
A.
B.
C.
D.
Congressional Budget Oversight Committee.
Council of Economic Advisors.
Congressional Budget Office.
Office of Management and Budget.
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14.5
The body responsible for
helping Congress analyze longterm fiscal implications of the
executive’s budget is the
A.
B.
C.
D.
Congressional Budget Oversight Committee.
Council of Economic Advisors.
Congressional Budget Office.
Office of Management and Budget.
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Revenue and Expenditures
14.6 Explain the major sources of U.S. government revenue and
expenditure.
– The federal budget can best be understood by
thinking about its two primary parts: (1)
revenue; and (2) expenditures.
– Revenue entails all financial resources that
the government collects from sources.
– Expenditures include all of the funds spent by
the government.
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14.6
Revenue
• In 2009, the U.S. government collected
about $2.15 trillion in revenue
• This revenue comes from
– Income taxes
– Payroll taxes
– Corporate taxes
– Customs duties and other miscellaneous
taxes
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14.6
The Federal Revenue
Budget
Federal government
revenue comes primarily
from individual income
tax and payroll taxes for
Social Security and
Medicare.
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Revenue (cont’d)
14.6
Income Taxes
• Taxes on income make up just over 7.5 percent
of GDP
• There are six different tax brackets
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Revenue (cont’d)
14.6
Payroll Taxes
• Social Security taxes make up 6.5 percent of
GDP
• They take the form of a payroll tax, split in half
between the employees and their employers
• 1.45 percent is paid into the Medicare trust fund
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Revenue (cont’d)
14.6
The Tax Burden
• Analysis of household income and tax burden by
the CBO shows that
– The top 10 percent of earners pay almost 50
percent of taxes
– The bottom 20 percent pay only about 1
percent
• Most American workers pay more per year in
payroll taxes than they do in income taxes
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Revenue (cont’d)
14.6
Corporate Taxes
• Corporate tax collection amounts to only about 2
percent of GDP
• Taxes on corporations generate about 15 percent
of the federal government’s revenue
• The United States has one of the highest
effective corporate tax rates in the industrialized
world, with a top tax rate of 35 percent
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Revenue (cont’d)
14.6
Other Taxes
•
•
•
•
Excise taxes
Customs duties
Inheritance taxes
Miscellaneous receipts
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Revenue (cont’d)
14.6
Tax Analysis
• Finding the optimum tax rate is difficult
– The Laffer Curve
• No one likes paying taxes, but the government
needs a source of revenue to fund even the most
minimal services
• Major reform initiatives fall under one of two basic
concepts
– A flat tax
– National sales tax
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14.6
Expenditures
• According to Congressional Budget Office
estimates, the budget deficit for 2010 is
expected to be around $1.3 trillion or 9.2
percent of GDP
• Government expenditures continually
expand, in part because levels of “current
services” have become the baseline for
most government programs
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President Obama’s 2011 Proposed Budget
(in billions)
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14.6
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Expenditures (cont’d)
14.6
Social Security
• Established in 1935 during the Great Depression
as a self-financed program
• Covered employees of industrial and commercial
firms
• Cost of living adjustments were added in the
1950s and these became automatic and annual
after 1975
• Social Security Trust Fund
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Expenditures (cont’d)
14.6
Defense
• The nation’s largest on-budget appropriations
are for defense
• Many factors lead to the high costs of maintaining
the armed forces
– Operations and support
– Development, testing and procurement of
weapons systems
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Expenditures (cont’d)
14.6
Income Security
• Safety net for the most vulnerable
– Earned Income Child Credit (EIC)
– Child Tax Credit
– Supplemental Security Income (SSI)
– Unemployment compensation
– Food stamps
– Temporary Aid to Needy Families(TANF)
– Women, Infants, and Children (WIC)
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Expenditures (cont’d)
14.6
Government Medical Care
• Medicare
– General population over 65 years of age and
the disabled
• Medicaid
– Poor, children and pregnant women, but also
includes the elderly who have exhausted their
life savings
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Interest and Other Spending
14.6
• Interest on the debt for 2011 is estimated at $251
billion, almost 7% of the total budget goes to pay
interest on the debt
• All other cabinet level agencies receive budget
allocations for the programs they are responsible
for implementing
• The size of the debt is only one factor when it
comes to interest payments
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14.6
The nation’s largest on-budget
appropriations are for
A.
B.
C.
D.
Social Security.
defense.
education.
Medicare.
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14.6
The nation’s largest on-budget
appropriations are for
A.
B.
C.
D.
Social Security.
defense.
education.
Medicare.
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Monetary Policy
14.7 Identify the major instruments of monetary policy.
• In the simplest terms, monetary policy
involves the management of the supply of
money in circulation within the U.S.
• Keeping the balance right by managing
monetary policy is the job of the Federal
Reserve Board of Governors and its
Federal Open Market Committee
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The Federal Reserve Board
14.7
• Created in 1913 by an act of Congress, the
Federal Reserve System (the Fed) is our nation’s
independent central bank
• The Federal Open Market Committee (FOMC),
the Fed’s policymaking arm using five main tools
to manipulate monetary policy:
– Reserve ratios
– Federal funds rate
– Open-market operations
– Discount rate
– Buying and selling foreign currency
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14.7
The Fed in Action
• Fed action is precarious because of the
significant lag time between its action and
economic results
• The Fed has to be right twice
– Its prediction of where the economy is headed
– Determining the correct response to the
circumstances it predicts will occur
• It has to be right every time!
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14.7
The most significant tool The
Fed has in its arsenal to control
monetary policy is
1.
2.
3.
4.
buying and selling foreign currency.
reserve rations.
federal funds rate.
open-market operations.
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14.7
The most significant tool The
Fed has in its arsenal to control
monetary policy is
1.
2.
3.
4.
buying and selling foreign currency.
reserve rations.
federal funds rate.
open-market operations.
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