Download Public Policy – Economic

Rosie Abe
Alexa Diaz
Darya Famininy
Neil Hendel
Anya Khan
AP US Government and Politics Period 2
Economic Policy
Vocabulary Terms
1) Battle in Seattle
2) Budget deficit
3) Budget resolution
4) Budget surplus
5) Congressional
Budget Act
6) Congressional
Budget Office
7) Council of
Economic Advisers
8) Demand-side
economics
9) Earmarks
10) Entitlements
11) Eurodollars
12) Free-rider
problem
On November 30, 1999, activists gathered to protest globalization. The
World Trade Organization Ministerial Conference of 1999 was planning
a new launch of trade negotiations, but ultimately failed due to poor
organization and the large street protests.
Occurs when the government spends more money than it takes in.
An annual decision made by Congress to establish various budget totals
including spending and revenue levels.
Occurs when the government takes in more than it spends.
Law passed in 1974 that governs Congress to annually adopt a budget
resolution. This creates fiscal policy that is not signed by the President.
A federal agency in the legislative branch that estimates the spending for
Congress.
The Council of Economic Advisors (CEA) was established by the
Employment Act of 1946. The three members of the CEA serve as the
President’s chief economic advisers, assisting the President with the
development and implementation of our nation’s economic policy.
Demand-side economics is an economic theory that advocates use of
government spending and growth in the money supply to stimulate the
demand for goods and services and therefore expand economic activity.
Demand-side economics advocates a large role for the federal
government in the economy in order to ensure economic stability. See
also: Keynesianism.
Earmarks are funds provided by the Congress for projects or programs
where the Congress circumvents Executive Branch merit-based or
competitive allocation processes, or specifies the location or recipient,
or otherwise curtails the ability of the Executive Branch to manage
critical aspects of the funds allocation process.
Entitlements are transfer payments from a government agency (e.g.,
Social Security) to individuals with specified characteristics or
circumstances, such as age, disability, or poverty.
Eurodollars are deposits in banks outside the United States but
denominated in dollars. Eurodollar transactions account for much of the
activity in the money market.
The free-rider problem refers to the lack of incentives for people to
reveal their true preferences for public goods once these goods are
provided, and occurs when goods that are nonexclusive can be used at a
zero price by people who contribute nothing to cover costs. It is the
question of how to prevent free riding from taking place (or at least limit
its negative effects).
13) Federal Reserve
System
14) Fiscal
conservative
15) Fiscal policy
16) Fiscal year
17) Globalization
18) Industrial policy
19) Keynesianism
The Federal Reserve System (aka Federal Reserve or the Fed) serves
most importantly as the nation's central bank. It is a partnership of
public government and private banks. The System consists of a seven
member Board of Governors, twelve Reserve Banks located in major
cities throughout the United States, and thousands of member banks.
Banks must join the Federal Reserve in order to obtain a federal charter.
The seven members of the Board of Governors are appointed by the
President and confirmed by the Senate to serve 14-year terms of office.
The primary responsibility of the Fed is the formulation of monetary
policy and controlling the money supply through open market
operations (buying and selling of bonds), reserve requirements, and
discount rates. The Fed also distributes and destroys money, clears
checks, and other mundane activities.
Fiscal conservatism refers to the fiscal policy that advocates a smaller
government hand in the economy. Free trade, deregulation of the
economy, and lower taxes are all normally associated with fiscal
conservatism.
Fiscal policy is the use of government spending and taxing to influence
the economy.
A fiscal year (FY) is the period of time for which federal government
appropriations are made and federal books are kept. Runs from October
1 to September 30.
Globalization refers to the reduction and removal of barriers between
national borders in order to facilitate the flow of goods, capital, services
and labor between nations.
Industrial policy reflects the public’s concern for the declining health of
certain industries. Industrial policy would have the government
planning or subsidizing investments in industries that need to recover or
in new industries that could replace them.
Pertaining to the economic theories of John Maynard Keynes. Mainly
focused on the government’s job to balance demand. In Keynesianism,
the key is to create the right level of demand by pumping money into the
economy, or taking money out of the economy. Keynes had the policy
of maintaining high employment and controlling inflation by varying the
interest rates, tax rates, and public expenditures.
A relationship put forward between tax rates and tax receipts indicating
that rates above a certain level actually produce less revenue because
they discourage taxable endeavors and vice versa.
20) Laffer Curve
Ex.
The tax rate at 0%= 0 revenue
The tax rate at 100% =0 revenue
21) Monetarism
22) Monetary policy
23) Petrodollars
24) Price and wage
control
25) Reaganomics
26) Supply-side
economics
27) Tax-and-spend
liberal
28) Tax Reform Act
of 1970
29) Treasury
Department
30) US Trade
Representative
31) WTO
A theory holding that economic changes in the money supply determine
the direction of a nation's economy and are most often caused by
increases or decreases in the money supply. It argues that excessive
expansion of the money supply is inherently inflationary, and that
monetary authorities should focus solely on maintaining price stability.
The actions of a central bank, currency board, or other regulatory
committee that determine the size and rate of growth of the money
supply, which in turn affects interest rates—the use of money and bank
deposits along with interest rates to affect the economy. Monetary
policy is known as expansionary policy (increases total supply of money
in the economy) or contractionary policy (decreases total money
supply).
Ex. Expansionary—help unemployment rates decrease in a recession,
lower interest rates.
Ex. Contractionary—Raise interest rates in order to stop inflation.
Petrodollars are surplus revenues in dollars accumulated by petroleumexporting countries, used mostly for foreign loans or investments.
Collective governmental effort to control the incomes of labor and
capital, usually by limiting increases in wages and prices. The term
often refers to policies directed at the control of inflation, but it may also
indicate efforts to alter the distribution of income among workers,
industries, locations, or occupational groups.
Also called supply-side economics, Reaganomics cuts taxes and
reduces government regulation to give business the incentive to expand
production. It is opposite to Keynesian in that the emphasis is on
business (supply) rather than consumer (demand).
According to supply-side economics, less government intervention in
the economy is key in managing the economy. Relies on cutting taxes
for corporations, based on the idea that corporations will expand their
businesses and create more products and jobs.
Is the pejorative term which conservatives use against Keynesian
economics.
A reform act during early Reagan and late Jimmy Carter presidencies; it
established a minimum tax on individual and corporations.
Founded in 1789, the Treasury Department’s main goal is to collect
taxes, maintain federal finances, and produce coinage. Some of the
organizations in the treasury include IRS (Internal Revenue Service),
and United States Mint.
Is the government agency which is responsible for the recommendation
of the Trade Policy for the President of United States. The current US
Trade Representative is Ron Kirk.
The world trade organization is an international organization that deals
with regulation of trade between participating countries. Founded in
1995 through the Marrakesh Agreement and Succeeded GATT (General
Agreement on Tariff and Trade). There are currently 153 members
which make up 95% of the world trade. The WTO’s headquarters is in
Geneva, Sweden.
Questions
1) Show how voters have contradictory attitudes regarding their own and others’
economic benefits.
Most voters would like to have lower taxes, less debt and new programs; however, these
three actions are inconsistent with one another. In order to fund new and old programs, the
government needs money from the consumers- this means taxes. One of the main sources of
revenue the government receives is through taxes. With this money, the government can
create new programs, and lower the country’s debt. However, most voters don’t want to
increase their taxes and end up unbalancing the system. Also, voters support programs and
institutions that help them directly, such as education. However, once the voters children
have graduated from a public school, they don’t want to improve the rest of the school
system. This also creates inconsistency from the voters since everyone looks out for
themselves and their interests rather than the country’s as a whole.
2) List and briefly explain the four competing economic theories discussed in the
textbook.
-Monetarism
o Monetarists believe that inflation occurs when there is too much money and few goods.
o Government should have a steady and predictable increase in the money supply at a rate
about equal to the growth of the country’s productivity.
o Beyond that, government should leave the free market alone.
-Keynesianism
o Create the right level of demand
o If demand is little, the government should put more money into the economy by
spending more than it has from taxes and creating public programs.
o If demand is too big, the government should take money out by increasing taxes.
o Believe in an active government.
-Planning
o Government should plan some part of the country’s economic activity.
o Price and wage controls: big corporations can raise prices due to weak competition, labor
unions can increase wages
o Government should regulate maximum prices during inflation since that can be charged
and wages can be paid.
-Supply Side Tax Cuts
o Less government interference
o Cutting taxes will increase people’s incentive to work, save money and spend it.
o More spending leads to more jobs and less taxes will promote more spending.
3) Explain Reaganomics in terms of its goals and its effects on the US economy.
"Reaganomics", was an anti-inflationary and investment promoting system which would
stimulate business and give every American more money to go around. The nation eagerly
anticipated a successful decade. The fundamental idea behind Reaganomics ran contrary to
orthodox economic thinking. It has been generally accepted that an increase in demand will
produce an increase in supply to meet the needs of the public. Reagan's administration turned
this theory on its head, saying that if a supply were created, demand would follow. If
industries were to produce more, the public would discover a need for the product. The plan
included tax cuts for big business, allowing them to increase production. By cutting income
taxes and giving Americans more money to spend, the plan would promote industry and
revitalize the economy. The wealthy of America would benefit the most from income tax
cuts and would spend their money, creating new jobs which would, in turn, aid the lower
class. Defense spending would also promote industrial growth and create more jobs. This
was the famed "trickle down" portion of Reagan's plan.
The chief problem Reaganomics faced, and the reason it failed to meet its overall goals
was that it was internally inconsistent. Reagan's administration professed a desire for a
seriously pared down federal government, but never lived up to the promise. Without
decreasing government spending along with taxes, Reagan was unable to achieve all of his
economic goals and the nation was plunged into a deficit.
4) List the four major federal government agencies involved in setting economic policy,
and explain the role of each.
-Council of Economic Advisors:
Composed of three professional economists (plus staff), the CEA is seen by other
executive agencies as the advocate of the opinion of professional economists, even
though the members of the CEA tend to share the president’s view of the economy.
-The Office of Management and Budget:
Its chief function is to prepare estimates of the amount that will be spent by the federal
agencies, to negotiate with other departments over the size of their budgets, and to make
certain that legislative proposals of these other departments are in accord with the
president’s program.
-The Secretary of the Treasury (Treasury Department):
The secretary of the treasury is often from the world of business and finance and is
expected to argue for the point of view of the financial community. The secretary
provides estimates of the revenue that the government can expect from existing taxes and
what will be the result of changing tax laws.
-The Fed:
Independent of the president and Congress, the Fed regulates the nation’s money supply,
lending to member banks, open-market operations, fixing reserve requirements,
establishing discount rates, and issuing regulations concerning those and other functions.
5) Analyze federal fiscal policy in terms of the textbook’s four categories of policymaking politics.
Federal fiscal policy impacts all other forms of policy-making because the amount of money
that the government takes in through taxes impacts the amount of money that the government
can afford to spend on its other policy’s projects. Advocates of demand-side economics
believe that the federal government should have relatively higher taxes and should spend the
revenue on social policies such as welfare, homelessness, education, etc. Since Democrats
tend to support demand-side economics, a Democratic-led federal government of higher
taxes would spend its money on environmentally “green” research, the improvement of
healthcare, and other more liberal policies. Liberal Democrats tend not to endorse tough war
strategies, and would more likely allocate money to programs other than military and foreign
affairs. Republicans who believe in a fiscal policy of low taxes and less federal government
spending would not spend money on much of the social or economic policies that Democrats
endorse. However, Republicans do believe in pursuing the war in Iraq, and would probably
allocate money for defense and the military.
6) Trace the history of federal government budgeting practices up to the present day.
There was no federal budget before 1921, and no unified presidential budget until the 1930s.
Once the president did start submitting his budget to Congress, the committees of Congress
acted on it separately, adding and subtracting from the proposed amounts. Each committee
could add to the budget, but there was never a move to subtract from other areas; the
expenditures would continue to add with each committee that wanted to spend money.
The Congressional Budget Act of 1974, changed this practice of budget creation. With
this practice, the president proposes a budget and budget committees in the House and Senate
study his package. Each committee submits a budget resolution to its house. Members of the
houses then decide whether or not the budget conforms with budget ceilings. The
committees approve of the appropriations bill and sends it to the president for signing.
Despite these practices, however, the budget cannot be changed much. Much of the
government’s spending (two-thirds) is spent on mandatory entitlements (Social Security,
Medicare, etc). Also, the Congressional Budget Act failed to work because there was
gridlock between Congress presidents and such difficulties have continued until recently.
There is still some tension between Congress and President Barack Obama, but since Obama
has so much support, he does not need to work as hard for his proposals to get passed.
7) Comment on the prospects and desirability of balanced federal budgets, both in
terms of government spending and tax reform. Be specific.
A balanced budget is desired by almost everyone in the country, but how we get to a
balanced budget is debated constantly. The global economy is going through the most
devastating crisis since the 1930s and it not only affects the US but also has an impact on the
whole world. Many people want to balance the budget, but don’t want taxes raised and
oppose many bailout and stimulus packages. In the near future we are looking at higher
taxes, many bankruptcies, and many economic packages.
Government Spending:
President's Obama stimulus package
Bailout Package
Cut 150 non-essential programs (Bush Admin)
Tax Reform:
Bush’s Tax Reductions- causing more federal deficit
Mortgage Reforms (Bush Admin)
President Obama- Tax Increase
8) Discuss how the September 11th attacks, as well as the subsequent economic
developments and government actions, have changed economic policy debates.
The events of September 11th have reshaped the debate over economic debate. Foreign
assembly, foreign trade, foreign direct investment decreased that year due to the danger and
risks. The War on Terrorism began costing billions in federal spending and tax money.
Before economic debates were about expanding globally and stimulating the economy, but
after the attacks, debates were about national security and safety.
Government Actions:
1. War on Terrorism
2. Federal Reserve System stayed opened
and ready to play its regular role in the
Economic Developments:
1. Decline in airline, tourism, insurance,
agriculture, transportation and food
2. Major companies due to fear held on
payments system, as well as providing
liquidity in times of crisis
3. Congress approved a bill to prop up the
airline industry and establish a federal fund
for victims. The cost of the mostly openended fund reached $7 billion (the average
payout was $1.8 million per family).
4. Further money was spent on domestic
security (Patriot Act)
to their money
3. Increase in stock for military
suppliers.
9) Explain why the president, rather than Congress, is held more accountable for the
economy.
The reason why the president, rather than Congress, is held more accountable for the
economy is because the president usually proposes the fiscal policy. While the Congress
approves the fiscal policy of the president, the president gets blamed whether or not his fiscal
policy is successful or not.
10) Explain why economics is so interwoven with politics and political ideology.
The reason why economics is interwoven with politics and political ideology is that
republicans and democrats support different economic demographics than each other.
Republicans usually support Reaganomics because it allows the middle class, and upper class
citizens to be taxed less, while Democrats support Keynesian because it allows the poor to
get better social benefits. Republicans see Keynesian economics as wasteful.