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CHAPTER 16
Economic Policy
IMPORTANT TERMS
*budget
A document that announces how much the
government will collect in taxes and spend in
revenues and how those expenditures will be allocated
among various programs.
*budget deficit
A situation in which the government spends more than
it takes in, thus pumping more money into the
economy.
*budget resolution
A total budget ceiling and a ceiling for each of several
spending areas submitted by the Budget Committees
in the House and Senate to their respective chambers.
These resolutions serve as targets to guide the work of
each legislative committee as it decides what should
be spent in its area.
*budget surplus
A situation in which the government takes in more
money than it spends, thus draining money out of the
economy.
Congressional Budget Act of 1974
The law that altered the procedures by which
Congress enacts the national budget. The
Congressional Budget Office was established as a
nonpartisan congressional agency. Budget committees
were created in both houses, which then submitted to
each house a resolution proposing a total budget
ceiling and a ceiling for each of several spending
areas. Once these resolutions were adopted, individual
appropriations were decided. Congress then adopted a
second resolution reconciling the budget ceiling with
individual appropriations bills.
Council of Economic Advisers (CEA)
A group of three professional economists who give
the president expert advice on the economy. Created
in 1946, it is responsible for forecasting economic
trends, analyzing economic issues, and helping
prepare the economic report the president submits
each year to Congress. Since the president selects the
CEA’s membership, its recommendations usually
reflect the ideological preferences of the president.
*economic planning
An economic theory that holds that the government
should plan at least a part of a country’s economic
activity by wage and price controls or through
industrial policy.
*entitlement
A type of federal program that provides benefits to
people who meets stipulated criteria. These
individuals are consequently “entitled” to the benefits.
Federal Reserve Board (“The Fed”)
A federal agency created in 1913 to control the
Federal Reserve System. The “Fed” is somewhat
independent of both the president and Congress. Its
most important function is to regulate the supply of
money and therefore its value.
*fiscal policy
Taxation and budget policies, and their effect on the
economy.
*fiscal year (FY)
October 1 to September 30, the period of time for
which federal government appropriations are made
and federal books are kept.
Gramm-Rudman Balanced Budget Act
A law passed in 1985 which proposed cutting the
budget until there was no longer a deficit. The deficit
was to be reduced by a specified amount each year
between 1986 and 1991. If a spending plan could not
be agreed on within those targets, federal programs
(with some exemptions) would automatically be cut
by a fixed percentage. The procedure was abandoned
in 1990.
*industrial policy
A form of governmental planning which recommends
that the government direct investments.
*Keynesianism
A liberal economic theory developed by English
economist John Maynard Keynes, who believed that
economic health depends on the proportions of
income which are saved and spent. The government’s
task is to create the right level of demand. When
demand is too low, the government should pump
money into the economy through spending on
programs. When demand is too great, the government
should take money out of the economy by increasing
taxes or cutting spending.
loopholes
Deductions, exemptions, and exclusions by which
people shelter some of their income from taxation.
Loopholes generate client politics.
*monetarism
A conservative economic theory that holds that
inflation occurs when too much money is chasing too
few goods. Since the federal government has the
power to create money, it should increase the money
supply at a rate about equal to the growth in the
economy’s productivity; beyond that, it should let the
free market operate.
*monetary policy
Money and banking policies, and their effect on the
economy.
Office of Management and Budget (OMB)
Created as the Bureau of the Budget in 1921 and made
part of the executive office of the president in 1939,
its chief functions are to prepare estimates of the
amount that will be spent by federal agencies, to
negotiate with departments on the size of their
budgets, and to make sure that the legislative
proposals of departments and agencies are in accord
with the president’s agenda.
*price and wage controls
The means of economic planning which reflect the
belief that the government should intervene in
inflationary times by regulating the maximum prices
that can be charged and the wages that can be paid.
Such controls would be imposed only on the largest
industries.
*Reaganomics
The economic program instituted by President Ronald
Reagan in 1981 which combined the theories of
monetarism, supply-side tax cuts, and domestic
budget cutting. The goal was to reduce the size of the
federal government, to stimulate economic growth,
and to increase United States military strength.
secretary of the treasury
Head of the Department of the Treasury nominated by
the president and confirmed by the Senate. The
secretary provides estimates of the revenue the
government can expect from existing taxes and the
projected revenues from changes in tax laws. The
secretary also represents the United States in its
dealings with the top bankers and finance ministers of
other nations.
*sequester
A provision of the Gramm-Rudman Balanced Budget
Act that requires an automatic, across-the-board
percentage cut in federal programs—except for certain
exempt programs—if the Congress and president
cannot agree on a spending plan within a specified
target set for that year by the law.
Sixteenth Amendment
A constitutional amendment ratified in 1913 which
authorized Congress to levy an income tax.
*supply-side theory
A conservative economic theory that maintains that
sharp tax cuts increase the incentive for people to
work, save, and invest. The greater productivity of the
economy stimulated by these increased investments
would produce more revenue for the government
despite the tax cut.
tariff
A tax on goods imported into a country.
tax expenditures
A term used by policy entrepreneurs denouncing tax
loopholes as subsidies to groups that have not been
made as appropriations through the normal annual
congressional process.
Tax Reform Act of 1986
A law that effected a major change in tax policy
resulting from the resurfacing of majoritarian politics
that demanded fairness. Instead of high rates with big
deductions, the law substituted low rates with much
smaller deductions.
uncontrollable spending
Budget outlays that are already committed and cannot
be altered for either legal or political reasons. This
spending includes contracts, payments to individuals
guaranteed by law, and interest on the national debt.
About two-thirds of governmental expenditures fall
into this category.