Download Government, the Economy, and Domestic Policy

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Chapter 15
Government, the Economy, and Domestic Policy
Focus Questions
Q1
How has the role of government in relation to the economy changed over the course of American
political history?
A1
Initially, the national government displayed a laissez-faire approach to economic policy. In the late
1700s and early 1800s, the government conducted foreign affairs, sold land, delivered the mail and
maintained a military. It wasn’t until Congress established the Interstate Commerce Commission
(ICC) in 1887 to regulate shipping rates and monitor the business practices of the railroad
companies that the national government signaled their intent to intervene in economic matters.
Soon after, Congress passed the Sherman Antitrust Act (1890) declaring monopolies illegal, the
Clayton Act (1914) regulating business mergers, and established the Federal Reserve in 1913 to
regulate banks and monetary policy. However, the Great Depression fundamentally changed the
relationship between government and the economy. In response to Hoover’s inability to confront
the rampant unemployment and the increasing number of land foreclosures and bankruptcies, the
voters elected Franklin Roosevelt president in 1932. The new Democrats in Congress and FDR’s
responses were unprecedented given their intervention in regulating the economy. Consequently,
the power of executive agencies was expanded through the creation of the National Industrial
Recovery Act and the Agricultural Assistance Act as part of FDR’s New Deal legislation. Since the
mid-1930s, the federal government has been instrumental in monitoring economic trends and
responding by implementing monetary, fiscal, and regulatory policies.
Q2
What roles do fiscal, monetary, and regulatory policy play in economic policy-making?
A2
The president and Congress employ three main “tools” to regulate economic activity and implement
public policy. These apparatuses include fiscal policy, monetary policy, and regulatory policy.
Fiscal policy deals with managing revenues (taxing) and expenditures (spending), through annual
budgets. Consequently, if revenues are greater than expenditure then the government is credited as
running a surplus. Yet, if spending is greater than tax revenues, the government is said to be
running a deficit. In addition, the government implements policies affecting the supply of money
and interest rates. This is known as monetary policy. Monetary policy is primarily the responsibility
of the Federal Reserve Board (The Fed), an independent regulatory agency. A third tool of
government is regulatory policy referring to legislation and bureaucratic rules that affect the
performance of individual businesses and the economy, in general. However, economists and
policy-makers differ as to how government should use these tools to predict economic trends and
formulate economic policies.
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Q3
What are the key institutions of economic management at the national level, and what are their
respective roles?
A3
Following the national crises of the Great Depression and the two world wars, the role of economic
policy-making has shifted from Congress to the executive branch. In turn, five agencies are
included within the executive office of the president to monitor economic trends and formulate
policy. The five agencies are the Treasury Department, the Federal Reserve Board (Fed), the Office
of Management of Budget (OMB), the Council of Economic Advisors (CEA), and the National
Economic Council (NEC). Established in 1789, the Treasury Department’s duties include collecting
revenue, paying bills, borrowing money, selling securities to cover budget deficits, and acting as a
steward between the U.S. government and international agencies including the International
Monetary Fund. The Federal Reserve Board or Fed was created in 1913 to manage the supply of
money and regulate the banking industry. The Federal Reserve System is comprised of seven
members who make up a Board of Governors and serve fourteen-year terms. The Fed manages the
nation’s money supply by establishing reserve requirements that define the portion of a financial
institution’s total deposits that must be held in cash and discount rates or the interest rate that the
Fed charges banks for loans. In addition, the Federal Reserve System also includes the Federal
Open Market Committee (FOMC) and the twelve Federal Reserve Banks. The FOMC buys and
sells U.S. government securities. The Budget and Accounting Act of 1921 created the Bureau of the
Budget in the Treasury Department that began the process of consolidating economic and budgetary
information, expertise, and influence in the Executive Branch. The BOB was later moved to the
newly established executive office of the president in 1939. The BOB was renamed the Office of
Budget and Management (OMB) in 1970 by Richard Nixon. The OMB prepares the annual
budget, analyzes legislation for its impact on the budget and provides technical analysis and
expertise. The Employment Act of 1946 created the Council of Economic Advisors (CEA). The
CEA is comprised of a three-person board that prepares the president’s annual economic report and
provides advice on the state of the economy. The CEA members are appointed by the president and
confirmed by the Senate. Finally, the National Council of Economic Council (NEC) was created via
executive order in 1993 to facilitate economic information needed by the president and coordinates
policy decisions with the president’s stated policy goals.
Q4
What roles do the president and Congress play in producing the federal budget each year?
A4
The executive and legislative branches are instrumental in formulating and approving the annual
federal budget. The process for passing the federal budget is complicated and involves a great deal
of debate, bargaining, and compromise. The process may be broken down in four stages. First, the
president submits the budget to Congress by the first Monday in February. Second, the OMB and
CBO review the budget. Next, Congress begins reviewing the budget proposal in February. The
budget is separated into eleven appropriations bills (2007). The House and Senate Budget
Committees formulate the budget resolutions, usually in April and early May. Both chambers vote
on the budget resolutions by mid-May. In June, the budget conference committee reconciles
differences in the bills. Afterwards, both chambers have floor votes on the reconciled resolutions.
By late June, the proposed budget is sent to the various committees based upon jurisdiction and the
bills are reconciled to bring the budget in line with spending ceilings. By June 30, the House
completes all eleven appropriation bills. Finally, the approved bill (final budget) is presented to the
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president for approval or veto. If all parties agree, the budget is approved. The fiscal year begins
October 1 and ends September 30.
Q5
What problems afflict domestic social programs and what reforms have been proposed?
A5
Simply, the problem with social programs is that they are financially costly. Federal social
programs including Social Security and Medicare, called “entitlements,” account for 80 percent of
federal expenditures. While entitlement programs, such as Medicare, have provided millions with
affordable health coverage, the cost of providing these services is immense. Moreover, in the case
of Social Security, the current formula is fundamentally flawed because the ratio of those
contributing to those receiving the services is becoming imbalanced. In turn, there is less money
coming in (taxes) than going out (expenditures). Thus, Social Security is slowly becoming
insolvent. Second, because workers pay for these programs once they join the workforce, they
expect to receive these benefits once they retire (i.e. they are entitled to them). So, given declining
birth rates and thus less money being paid into the Treasury to support these programs, due to the
increasing number of baby boomers retiring, by 2017 it is expected that for every one person
retiring there will be, numerically, over one person receiving benefits. In turn, Social Security will
be running a deficit, as fewer people will be paying into the program than taking out. To complicate
an already bleak scenario, the surpluses of the past have been spent on other programs and therefore
the money contributed is no longer available. Further problems exist as politicians are not
addressing the inevitable deficits (because they want to win re-election), the
cost of medical
treatments and pharmaceuticals have risen, and politicians refuse to raise taxes to fund the programs
(once again, because they want to be re-elected). Various reforms have been proposed. These
include raising the age of retirement (this was done in 2002), raising taxes to fund Social Security
and Medicare, increasing the income cap on payroll taxes (this is unlikely as it is political suicide),
increasing the number of years needed to work before receiving full benefits, supplementing Social
Security with other revenues, establishing a pay-as-you-go system (this has been embraced by a few
policy-makers) and privatizing social security. Nonetheless, politicians have largely sacrificed any
meaningful reform opting instead to ignore the looming crisis for political reasons (i.e. re-election).
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Chapter Outline
The role and scope of government involvement in regulating the economy has changed over time.
I.
History of Economic Management
Initially, the national government displayed a laissez-faire approach to economic policy. In the late
1700s and early 1800s, the government conducted foreign affairs, sold land, delivered the mail, and
maintained a military. It wasn’t until Congress established the Interstate Commerce Commission
(ICC) in 1887 to regulate shipping rates and monitor the business practices of the railroad
companies that the national government signaled their intent to intervene in economic matters.
Soon after, Congress passed the Sherman Antitrust Act (1890) declaring monopolies illegal, the
Clayton Act (1914) regulating business mergers, and established the Federal Reserve in 1913 to
regulate banks and monetary policy. However, the Great Depression fundamentally changed the
relationship between government and the economy. In response to Hoover’s inability to confront
the rampant unemployment, and the increasing number of land foreclosures and bankruptcies, the
voters elected Franklin Roosevelt president in 1932. The new Democrats in Congress and FDR’s
responses were unprecedented given their intervention in regulating the economy. Consequently,
the power of executive agencies was expanded through the creation of the National Industrial
Recovery Act and the Agricultural Assistance Act as part of FDR’s New Deal legislation. Since the
mid-1930s, the federal government has been instrumental in monitoring economic trends and
responding by implementing monetary, fiscal, and regulatory policies.
A. Building the Economic Infrastructure
The early colonial governments were established under charters from England. In turn, these
entities were an extension of the Crown and served in economic capacities including selling
land, licensing businesses, and improving the infrastructure. After gaining independence from
Great Britain, the first Secretary of the Treasury, Alexander Hamilton, was adamant
that the national government pay back the debts incurred to fund the Revolutionary War. To
this end, Hamilton and other Federalists implemented tariffs on imported goods and
established the First Bank of the United States that could lend money to fund business
endeavors.
B.
The Rise of Economic Regulation
1.
The post-Civil War Union faced many problems, one of which was how to transport
commodities made in the North to the Southern states that were in dire need of
supplies. At the completion of the war, the vast majority of railroad routes and
telegraph lines ran East/West and not North/South.
2.
Also, Northern industrialists, who expanded their businesses due to the Civil War,
formed corporations or a form of business organization that allowed a group of
investors to act as a single person and limit their individual liability to the assets of the
corporate entity.
3.
Another change after the Civil War was the emergence of monopolies in which
a single person or corporation had exclusive control of a market. Monopolies existed in
various sectors of the economy including whisky, shipping, banking, oil production,
and insurance.
4.
As one would expect, the first corporate monopolies were railroads. Consequently, due
to the complaints from farmers who relied on the railroads to transport their produce,
Congress passed the Interstate Commerce Commission (ICC) in 1887 to regulate the
industry. This act of Congress is significant because it indicated the national
government’s intention to intervene in economic matters.
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5.
C.
Soon after, Congress passed the Sherman Antitrust Act (1890) declaring monopolies
illegal, the Clayton Act (1914) regulating business mergers, and established the Federal
Reserve in 1913 to regulate banks and monetary policy.
The Growth of the Welfare State and Macroeconomic Regulation
1.
The Great Depression changed the views of many Americans concerning the role of
government in relation to the economy. At the height of the Depression:
a.
25 percent of the American working-age population was unemployed.
b.
The Gross National Product was cut in half between 1929 and 1933.
c.
Over 4,000 banks and many factories closed.
2.
The election of Franklin Roosevelt to the presidency in 1932 prompted expansive
governmental intervention in economic and social matters. The new Congressional
Democrats and Roosevelt initiated a number of New Deal programs intended to pull
the country out of the economic recession.
a.
The Public Works Administration (PWA) was designed to employ people for
large construction projects.
b.
The Civilian Works Administration (CWA) and the Works Progress
Administration (WPA) hired a number of the unemployed to construct buildings.
c.
The Civilian Conservation Corps (CCC) employed people to work on public
lands and build state and federal parks.
d.
The National Industrial Recovery Act (NIRA) placed quotas on the
production of certain commodities to keep prices high, benefiting farmers.
3.
Prior to the Depression, most Americans believed in the Protestant work ethic that with
a little hard work and a moderate lifestyle, anyone could lead a good and productive
life. Conversely, those individuals who were poor were morally deficient and most
likely lazy: It was their own fault that they were poor!
4.
A major consequence of the Great Depression is many Americans realized larger
economic issues led to unemployment and poverty.
5.
In 1946, Congress passed the Employment Act to “promote maximum employment,
production and purchasing power” and established the Council of Economic Advisors
in the executive office of the president, which established the federal government and
the president at the lead of formulating economic policy.
II.
Perspectives on Modern Economic Management
The president and Congress employ three main “tools” to regulate economic activity and
implement public policy. These apparatuses include: fiscal policy, monetary policy, and
regulatory policy. Fiscal policy deals with managing revenues (taxing) and expenditures
(spending), whereby if the former is greater than the latter then the government is credited be
running a surplus. If the latter is greater than the former, the government is said to be running a
deficit. In addition, the government implements policies affecting the supply of money and interest
rates. This is known as monetary policy. A third tool of government is regulatory policy referring to
legislation and bureaucratic rules that affect the performance of individual businesses and the
economy in general. However, economists and policy-makers differ as to how government should
use these tools to buttress an optimal economy.
A. Traditional Conservatism
Traditional conservatives advocate a laissez-faire approach in economic matters including
lowering taxes, limited government regulation, and balanced budgets. In a nutshell,
traditional
conservatives advocate government should not spend more money than it gains from
taxes
and tariffs. Moreover, by keeping taxes low, unemployment will decrease because
businesses will have more money to expand and hire more workers.
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B.
Keynesianism
The twentieth-century economist, John Maynard Keynes, rejected the laissez-faire approach
of the traditional conservatives. Instead, Keynesianism advocates countercyclical spending by
government. At first blush, Keynesian economics seems counter-intuitive. This theory
advocates that government spending should increase in economic hard times and decrease
during more prosperous times. The government was to increase spending in hard times to
supplement the lack of private demand, thereby boosting the economy. Once out of the
recession, Keynesian economics theory states government spending should be curtailed.
C.
Supply-side Economics
Advocates of supply-side economic policy argue that lower taxes and limited government
regulation improve the business climate, encourage new investment, and expand output.
Basically, this economic paradigm states that more people working will lead to more
consumption. In turn, businesses are able to expand and hire more workers who pay taxes and
the cost of government programs will decrease. Finally, deficits will indicate government
spending should be reduced.
D. Monetarism
Monetarists advocate that by manipulating the supply of money the economy can be
managed. A proponent of modern monetarism, Milton Friedman viewed this approach as
superior to the others because monetarism can respond immediately to changes in the
economy where fiscal approaches cannot.
E.
The New Economy
Mixing fiscal, monetary, and regulatory policies have been illustrative of the economic
policies under Presidents Clinton and Bush (43). The basic idea of the New Economy is to
reduce deficits to lower interest rates and increase investment. Once these deficits are
eliminated, the surplus can be used for tax cuts, to reduce the national debt, or provide
necessary job training programs or money for improving public education. Unfortunately,
government deficits have increased due to the War on Terror, which has limited the
government’s options. Nonetheless, there is substantial evidence that the economy has
expanded at unprecedented rates since the 1990s.
III.
Institutions of Economic Policy-Making
Primarily due to the Great Depression, a growth in international trade agreements, and military
emergencies in the twentieth century, economic policy-making has shifted from Congress to the
executive branch. In turn, five agencies are included within the executive office of the president
concerned with economic policy-making. The five agencies are the Treasury Department, the
Federal Reserve Board (Fed), the Office of Management of Budget (OMB), the Council of
Economic Advisors (CEA), and the National Economic Council (NEC).
A. The Treasury Department
Established in 1789, the Treasury Department’s duties include collecting revenue, paying
bills, borrowing money, selling securities to cover budget deficits, and acting as a steward
between the U.S. government and international agencies including the International Monetary
Fund.
B.
Federal Reserve Board
1.
The Fed was created in 1913 to manage the supply of money and regulate the banking
industry. The Federal Reserve System is comprised of seven members who make up a
Board of Governors and serve fourteen-year terms. Two members of the Board of
Governors serve as the Chair and Vice-Chair and are appointed by the president
and
confirmed by the Senate. They serve four-year terms.
2.
The Fed manages the nation’s money supply by establishing:
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a.
Reserve requirements that define the portion of a financial institution’s total
deposits that must be held in cash.
b.
Discount rates or the interest rate that the Fed charges banks for loans.
3.
In addition to the Federal Reserve Board, the Federal Reserve System also includes the
Federal
Open Market Committee (FOMC) and the twelve Federal Reserve Banks.
The FOMC buys
and sells U.S. government securities.
C.
Office of Management and Budget
The Budget and Accounting Act of 1921 created the Bureau of the Budget in the Treasury
Department that began the process of consolidating economic and budgetary information,
expertise, and influence in the executive branch. The BOB was later moved to the newly
established executive office of the president in 1939. The BOB was renamed the Office of
Budget and Management in 1970 by Richard Nixon. The OMB prepares the annual
budget, analyzes legislation for its impact on the budget and provides technical analysis and
expertise.
D. Council of Economic Advisors
The Employment Act of 1946 created the Council of Economic Advisors (CEA). The CEA
is comprised of a three-person board that prepares the president’s annual economic report and
provides advice on the state of the economy. The CEA members are appointed by the
president and confirmed by the Senate.
E.
National Economic Council
Created by executive order in 1993, the National Council of Economic Council
(NEC) consolidates economic information needed by the president and coordinates policy
decisions with the president’s stated policy goals.
IV.
Fiscal Decision-Making: Budgets, Taxes, and Spending
The budget for the 2007 fiscal year was $2.27 trillion. In turn, the annual budget reflects the
government’s programs, obligations, and responsibilities. The budget enumerates expenditures and
revenues. Concerning revenues, the budget establishes how much money is to be raised, through
what kind of taxes and fees, and on whom they will be enacted. Regarding expenditures, the budget
reflects how the revenue will be spent, on what and whether more money is needed to fund the
programs.
A. Budget Preparations
The federal budget is prepared in two major phases:
1.
The process begins in the executive branch.
a.
The president prepares the budget for submission to Congress with the help of
the OMB and other executive branch departments.
b.
The process begins with consultations between the executive agencies, the
OMB, and the president.
c.
The OMB analyzes the input and requests of the agency and those of the
president.
1)
The OMB conducts hearings and estimates economic conditions.
2)
The OMB and the president work closely to set guidelines for agencies to
follow.
3)
The OMB may force revisions of an agency’s budget.
d.
When the budget is finalized it is sent to Congress.
2.
In Congress, the budget is debated by members.
a.
The Congressional Budget Office (CBO) is charged with analyzing the budget
and provides recommendations. The CBO is required to report to the House and
Senate Budget Committees.
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b.
revenue and
c.
d.
e.
f.
The various standing committees (in 2007 there were eleven) submit their
expenditure projections to their respective budget committees.
A concurrent resolution is created that sets overall expenditure levels and
estimates revenue levels.
The House Appropriations Committee formulates eleven separate appropriation
bills.
Each appropriation bill is voted on separately.
If these bills breach the concurrent resolution, a process called reconciliation
takes place to bring budgetary totals in line with spending limits (ceilings).
B.
Taxing
1.
Initially, the Constitution prohibited the national government from imposing income or
property taxes. Yet, the Constitution did allow impost and excise taxes. Imposts are
taxes on imports while excises are taxes on the sale of specific goods like liquor and
tobacco. However, the ratification of the Sixteenth Amendment in 1913 permitted the
federal government to tax income.
2.
Between 1789 and 1815, import fees generated 90 percent of the federal revenue.
3.
After 1815, import fees still provided a majority of the federal revenue, however, the
cost of the Civil War prompted a temporary income tax.
a.
This was discontinued after the war ended.
b.
In 1894, the Supreme Court declared the federal income tax unconstitutional.
4.
By 1910, taxes on alcohol and tobacco provided 50 percent of the federal revenue.
5.
The ratification of the Sixteenth Amendment in 1913 imposed a direct income tax of
1 percent on incomes over $3,000 annually (the average income was $621).
6.
Leading up to America’s involvement in World War I, the federal income increased
from 15 percent in 1916 to 77 percent in 1981.
7.
Between the world wars, income and excise taxes provided about 40 percent of the
federal revenue with tariffs providing the rest.
8.
In 1942, Congress passed the Revenue Act establishing a progressive income tax.
a.
In 1944, taxes ranged from 23 percent on the first $2,000 earned to 94 percent on
incomes exceeding $200,000 a year.
b.
In the latter half of the twentieth century, federal revenue came from four
principal sources:
1)
personal income tax
2)
corporate income tax
3)
payroll taxes for Social Security and Medicare
4)
excise taxes.
9.
Currently, the personal income tax accounts for 80 percent of federal revenues.
10. Ronald Reagan was elected president based upon the promise to reduce taxes in order
to “grow” the economy.
a.
In 1981, Congress passed the Economic Recovery Tax Act reducing the income
tax by 25 percent over three years.
b.
Furthermore, the Tax Reform Act of 1986 collapsed tax rates into three
categories
reducing taxes on the upper bracket and removed over six million lowincome
taxpayers from the rolls.
11. Under the Clinton administration, taxes were raised on the upper income bracket.
12. The Bush administration initiated tax cuts, child tax credits, and lowered
personal income taxes.
13. In general, there are three types of taxes:
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a.
b.
c.
A flat tax is a tax that takes the same proportion of income from the wealthy as
from the poor.
A progressive tax, like the American income tax, takes a higher proportion
from the wealthy than the poor.
A regressive tax, such as a payroll tax, takes a higher proportion from low
earners than from high earners.
C.
Spending
1.
In the 1800s, federal revenues were modest and spending was as well.
a.
Unbelievable by today’s standards, federal government expenditures (spending)
did not increase between 1800 and 1860!
b.
However, the Civil War changed this. In 1870, federal expenditures were $7.76
per person (up from $2.00 per person in 1860).
2.
Because of the federal government’s intervention in the economy, the implementation
of social programs and land management programs, federal spending has increased
dramatically in the twentieth century.
a.
Yet, prior to 2002, defense spending had decreased.
b.
The increase in spending has been attributed to the burgeoning social welfare
and entitlement programs such as Social Security and Medicare. In 1960, 30
percent of federal spending went to fund mandatory or entitlement programs. Currently, about 80 percent
of federal spending is allocated to fund entitlement programs.
V.
Domestic Social Programs and Their Challengers
Domestic social programs include programs and funding for retirement, healthcare, education, to
which all Americans are entitled. Social welfare programs include Social Security and Medicare.
These programs are called social insurance programs in which prior payments into the program
establish eligibility to draw money out once meeting program requirements. Funding for these
programs come from payroll taxes (FICA). Another type includes Medicare, food stamps, and
public housing assistance. These are called means-tested programs in which eligibility is
established by low income and limited assets. These programs distribute goods and services to
those individuals who are in the lower-income bracket.
A.
workers
Social Security
1.
Social Security was enacted in 1935 in response to the detrimental effects of the Great
Depression providing the elderly financial security upon retirement.
2.
Social Security continues to be one of the most popular and largest federal entitlement
programs.
3.
When the first monthly payments were distributed in 1940, there were forty-two
paying in for every (one) retiree receiving benefits.
a.
By 1945, there ration had declined to 20:1.
b.
In 1955, it was 9:1.
c.
In 1975, the ratio plummeted to 3:1.
d.
In 2035, the predicted ratio is said to be 2:1.
4.
The future of the program is in great jeopardy because:
a.
The current surplus is being spent by the Treasury on other government
programs.
b.
Congress has opposed raising taxes because it is politically unpopular.
c.
Politicians are hesitant to reform Social Security due to the possibility that
retirees will not support their bids for re-election.
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5.
However, there are numerous ideas on how to reform, or “shore up,” Social Security.
These include:
a.
Raising the retirement age.
b.
Reducing benefits.
c.
Raising taxes.
d.
Allowing younger workers to invest money or place it into private retirement
accounts.
e.
Raising the income cap on payroll taxes.
f.
Increasing the number of years needed to work before receiving full benefits.
g.
Supplement Social Security with other revenues.
h.
Establishing a pay-as-you-go system.
B.
Medicare and Medicaid
1.
Medicare and Medicaid were established in 1965 as part of President Lyndon
Johnson’s “Great Society” social welfare program.
2.
The cost of providing healthcare has risen dramatically since the 1980s because:
a.
People are living longer.
b.
The research costs of developing new technologies and pharmaceuticals have
been passed on to consumers.
c.
The forty-seven million Americans who were uninsured in 2006 have still
demanded
medical services, which has strained the budgets of many hospitals.
3.
4.
In 2005, Americans spent $6,697 per person or a total of $2 trillion on healthcare.
Medicare is an entitlement program open to all persons aged sixty-five or older.
a.
Medicare has become a very expensive entitlement program. Currently, the
program serves about forty-three million beneficiaries at a cost of $450 billion
annually.
b.
billion,
C.
Like Social Security, it is currently running a surplus today but is quickly moving
toward a deficit by 2017 and will be broke by 2020.
c.
It is projected that Medicare will account for 15 percent of GDP by 2050!
d.
In 2003, Bush signed the new prescription drug benefit program that has just
been implemented. Currently, four million seniors are enrolled and the projected
cost of the program is $1 trillion for the first ten years.
5.
Medicaid, on the other hand, is a means-tested program run jointly by the federal and
state governments to cover the health needs of the poor.
a.
In 2005, it served about fifty-one million people at a cost of more than $300
$183 billion of which were federal funds.
b.
State governments, who are constitutionally forbidden to accrue deficits, have
been especially hard hit by the high cost of providing medical services.
c.
The National Association of Governors and National Conference of State
Legislatures are active in reducing healthcare costs.
d.
The Obama Health Care Reform will expand the Medicaid system as one of the
two principal means of increasing health insurance possession within the
population. The other method is through mandating coverage and providing
access to state-run cooperatives that provide managed access to insurance at a
subsidized cost to the recipients.
The Federal Role in Education
1.
Throughout most of American history education has traditionally been the
responsibility of state and local governments, and in many ways, it remains so today.
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a.
After World War II, the federal government provided the GI Bill to encourage
returning service personnel to pursue advanced education.
b.
In 1965, the Johnson administration enacted the Elementary and Secondary
Education Act as one of its anti-poverty, civil rights, and Great Society
initiatives.
c.
The American education system’s success and achievements are mediocre, at
best. This has attracted attention from presidential candidates. When
campaigning in 2000, Republican candidate George W. Bush advocated
reforming the educational system.
d.
As president, George W. Bush initiated the “No Child Left Behind” program,
that was enacted into law in 2001, requires annual testing of students in grades 3
through 8, an end to social promotions, upgrading teacher skills, and new
services and options to parents of students in failing schools.
a.
The results are mixed:
1)
Federal spending on elementary and secondary education
doubled to about $40 billion in 2003.
2)
Congress only provided 66 percent of the funding yet mandates that
states follow strict guidelines; in turn, sixteen states have decided to
abandon the program. This has led to further state budget deficits.
3)
Over 25 percent of the country’s school systems have “failed” given
the requirements and standards of the new Act.
b.
Critics have stated that local autonomy and flexibility is needed to
curtail costs as the federal government has mandated these reforms be
implemented and the standards adhered to, but only partially funds the
program.
VI.
The Dilemma of Deficits and Debt
While many state governments are constitutionally forbidden to run deficits, the federal government
is not. A budget deficit occurs when the government spends more money than it receives.
Conversely, a budget surplus occurs when the government brings in more revenue than it spends.
The accumulation of annual deficits across the years is known as the national debt. The concept of
national debt has been a political issue since the beginning of U.S. government. Alexander
Hamilton supported a modest debt while Thomas Jefferson called for all debts to be paid within
twenty years. Jefferson believed it was immoral for one generation to burden the next. From 1800
to 1930, there were ninety years in which the federal government was in surplus while only forty
years were in deficit. Yet, from 1931 through 1998, the federal budget had a surplus in only eight years
and was in deficit sixty times. Between 1970 and 1997, the federal budget was in deficit every year. The
years between 1998 and 2001 ran a budget surplus. However, due to a slowing economy, tax cuts, and the
economic ramifications of the events of 9/11, these surpluses have been transformed into deficits. The
height of budget deficits occurred in 2004 at a rate of $413 billion. In 2006, the budget deficit decreased
to $258 billion. The myopic (short-term) vision of today’s policy-makers have prompted some scholars
and economists to use the word “crisis” to describe the economic conditions facing future generations.
A. Consequences of Economic Planning
The government can use monetary, fiscal, and regulatory policies to promote economic
growth. However, there are tremendous differences on how this should be accomplished.
1.
Growth
a.
History has shown that growth appears to have been around 4.5 percent. This
means that the size of the economy doubled every sixteen years.
b.
By 1930, the America was considered the most advanced country in the world.
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c.
2.
With the beginning of World War II, the economy grew rapidly which continued
into the 1950s and 1960s.
d.
Nevertheless, foreign competition, high inflation, and rising unemployment
began to suppress economic growth in the early 1970s.
e.
Many economists have suggested contemporary industrial economies cannot
exceed a 2.5 percent growth rate without straining the labor market and igniting
inflation.
f.
Yet, the global economy and more international markets should keep inflation
low and allow for more growth.
g.
The exact growth rate desired by policy-makers is important because it will
determine how much wealth is generated by the economy.
Fairness
a.
It is well established that American economic policy affects the performance of
the national and international economy. With this in mind, it is reasonable to
inquire into the fairness of these economic policies.
1)
Taxing and spending policies have influenced the distribution of wealth
and income within American society that has primarily benefited the upper
and middle classes. In fact, growth has occurred in all economic levels
other than the lower classes.
2)
However, income distribution by race has also remained steady. Black and
Hispanic income rates have amounted to 60 percent of that of whites. Yet,
Asians and Pacific Islanders have an average income which exceeds that of
white families.
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Lecture Suggestions
Institutional/Current Events Focus: Maintaining the Safety Net for Seniors; Social Security
I.
Background
Established in 1935, Social Security provides lifetime monthly benefits to retired workers, disabled
citizens, their spouses, and minor children. Initially, Social Security was considered a social needs
program intended only to provide retirement for employees in the private sector, due to the impact
of the Great Depression on the job market in 1929. The law was subsequently changed in 1939 by
extending coverage to widows, and in a few cases widowers, whose spouses died. Moreover,
compensation to dependents of public and private employees who died or retired was also provided
in the same year. Eleven years later, Social Security benefits were extended to those individuals
who were self-employed, farm workers, members of the military, clergy, and state and local
employees. In 1954, the Social Security Act of 1935 was amended further to provide disability
insurance to those individuals who could prove loss of earnings due to a physical disability. The
enactment of Medicare, which provided medical insurance to citizens aged sixty-five years and
over, further augmented Social Security’s benefits under LBJ’s Great Society social programs. Finally,
in 1972, amendments to the original 1935 Social Security Act guarantee cost-of-living-allocations
based upon rates of inflation to all citizens sixty-five years of age and older. Recently, the
retirement age was raised to sixty-seven years. Consequently, Social Security is now the largest federal
entitlement
program that guarantees payments and provides medical benefits based upon
contributions (taxes)
from the incomes of those individuals currently employed.
II.
Cause for Concern
A. The Congress and the president overwhelmingly supported the Social Security Act of 1935 to
provide greater security for workers. Ultimately, the growth of the entitlement program, as
well as other federal expenditures, illustrates how short-term political decisions have
unintended long-term effects. It is commonly accepted among presidential historians that the
1934 mid-term election provided a clear mandate for FDR and the Democratic Party to
extend government funded work programs to provide relief to the 25 percent of Americans
who were unemployed.
B.
However, an interesting political phenomenon has occurred which threatens the avuncular
governmental programs: The quantity of retirees will begin to outnumber those individuals
who are contributing to governmental entitlement programs, such as social security,
producing what Jurgen Habermas termed a legitimation crisis.
C.
Based upon the scholarship of Talcott Parsons and John Maynard Keynes, the modern
welfare state relies upon substantial inputs (taxes from those working) to fund the retirement
programs, in this case Social Security.
D. However, individuals belonging to the “Baby Boomer” generation are beginning to retire at a
much higher rate than those individuals who are currently working and subsidizing social
security.
1.
Thus, the “input” (revenue) required cannot sustain the “output” (expenditures
for retirees) necessary to fund social security and thus the
retirement system’s (institutional mechanism) utility is abridged.
2.
Furthermore, because the federal retirement system is largely underfunded, workers
who are contributing to the system perceive Social Security as a failed program and are
therefore not relying on the service for their retirement.
3.
Consequently, retirement opportunities are being determined by other sectors of
society which has led to the aforementioned legitimacy crisis further perpetuating a
negative perception of government’s ability to provide for Americans’ social needs.
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III.
Policy Options (premised on the foundation that these two entitlement programs should continue
to be funded and implemented by the federal government).
Political leaders are limited in their responses because they seek to appease both contributors
(workers) and benefactors (retirees) to gain re-election. Hence, politicians are confronted with
limited options to solve Social Security’s inadequacies. Yet, several reforms have been proposed
including raising taxes to adjust for the input/output deficits, cutting benefits to retirees, or
borrowing money to subsidize Social Security.
A. Strengthening Social Security
1.
There are specific ideas on how to reform, or “shore-up,” Social Security.
These include:
a.
Raising the retirement age.
b.
Reducing benefits.
c.
Raising taxes.
d.
Allowing younger workers to invest money or place it into private retirement
accounts.
e.
Raising the income cap on payroll taxes.
f.
Increasing the number of years needed to work before receiving full benefits.
g.
Supplementing Social Security with other revenues.
h.
Establishing a pay-as-you-go system.
2.
Also, there are proposals that combine or modify the aforementioned reforms to
buttress Social Security.
B.
Nevertheless, politicians have chosen to advance short-term gains (re-election) while
ignoring the long-term problems associated with entitlement programs by
borrowing money and subsidizing social security through deficit spending.
IV.
Conclusion
In turn, Social Security is slowly becoming insolvent. This has promoted concern as the legitimacy
of our government is at stake because many younger workers do not believe they will receive any
Social Security benefits despite the payroll tax being deducted from their paychecks for many
years. Simply, workers pay for these programs once they join the workforce and expect to receive
these benefits once they retire (i.e. they are entitled to them). Yet, given the declining birth rates
and thus less money being paid into the Treasury to support these programs coupled with the
increasing number of baby boomers retiring, it is projected that by 2017, Social Security will be
running a deficit, as fewer people will be “paying into the program” (contributing) than “taking
out” (receiving benefits). To complicate an already bleak scenario, the surpluses of the past have
been spent on other programs and therefore the money contributed is no longer available. Further
problems exist as politicians are not addressing the inevitable deficits, the fact that the cost of
medical treatments and pharmaceuticals have risen, and politicians refuse to raise taxes to fund the
program.
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Projects, Exercises, and Activities
1.
As a research assignment, have the students explore historical arguments for and against the
creation of Social Security. What were the original concerns of this program? What was the original
purpose of this program? Once the students have gathered this information, ask them to explore the
contemporary arguments for and against reforming the program. Is Social Security failing or have
the expectations of the program changed? What are the proposed reforms to Social Security? Which
ones are feasible and what would be the potential unintended consequences? Is reforming Social
Security important? If so, why? If not, why not?
2.
Organize the students into groups to analyze current public policy proposals concerning:
1.
Horizontal policy issues (policies affecting everyone)
a. Energy
b. Social Security
c. Healthcare (Medicare and Medicaid)
d. Defense
e. Education
f. Economic
g. Law enforcement
h. Environment.
2.
Vertical policy issues (affecting certain segments of society)
a. Gun control
b. Drug policy
c. Gay rights
d. Abortion
e. Subsidies to specific industries and corporations
f. Tort reform
g. Animal rights.
3.
As a class exercise or for a research paper, have the students compare and contrast a regional trade
agreement to a world (global) trade agreement. First, who negotiates these treaties? Second, what
are the benefits of each type of agreement? Third, what are some ways regional and global treaties
conflict and make it more difficult for global agreements, such as the Kyoto Protocol, to be ratified
by industrial countries?
4.
An important part of understanding legislation and court decisions is grasping the unintended
outcomes of public policy choices. In a recent court case in Massachusetts, a federal judge ordered
the state to fund a state inmate’s sexual reassignment surgery
(http://www.bostonglobe.com/metro/2012/09/04/federal-judge-rules-state-must-provide-sexreassignment-surgery-for-michelle-kosilek-who-was-convicted-murdering-his-wifeman/oLBFbviLomMd7KT0VDcuNO/story.html). Ask your students to posit the various impacts
that this decision may have as it ripples through the system. What are the intended outcomes? What
are the potential unintended outcomes?
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Additional Resources
Supplemental Readings
Bauer, Raymond A. et al. 1963. American Business and Public Policy. New York: Atherton.
Birnbaum, Jeffrey H. and Alan S. Murray. 1987. Showdown at Gucci Gulch. New York: Random House.
Cohen, Jeffrey E. 1997. Politics and Economic Policy in the United States. New York: Houghton Mifflin.
Derthick, Martha and Paul J. Quirk. 1985. The Politics of Deregulation. Washington, DC: CQ Press.
Greider, William. 1987. Secrets of the Temple: How the Federal Reserve Runs the Country. New York:
Simon & Schuster.
Habermas, Jurgen. 1975. Legitimation Crisis. Boston: Beacon Press.
Monsma, Stephen V. 2004. Putting Faith in Partnerships: Welfare-to-Work in Four Cities. Ann Arbor:
University of Michigan Press.
Moynihan, Daniel Patrick. 1986. Family and Nation. New York: HBJ.
Parson, Talcott. 1967. On the Concept of Political Power. New York: Free Press.
Pierson, Paul. 2004. Politics in Time. Oxford: Princeton University Press.
Stein, Herbert and Murray Floss. 1999. The New Illustrated Guide to the American Economy. Third
Edition. Washington, DC: American Enterprise Institute.
Stockman, David A. 1987. The Triumph of Politics: Why the Reagan Revolution Failed. New York: Avon
Books (Macmillan).
Wildavsky, Aaron. 1992. The New Politics of the Budgetary Process. Second Edition. New York:
HarperCollins.
Websites
Federal Reserve System
This website provides information about the Federal Reserve System, a regulatory agency in charge of
monetary policy.
Internal Revenue Service
This is the website for the Internal Revenue Service. Access this site for any questions regarding tax law
or policies.
Tax Foundation
This is the website for the non-partisan research group, Tax Foundation, which educates citizens about tax
policy.
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Social Security Administration
This site is the main Web page for the Social Security Administration that provides basic information on
benefits, social security taxes, contact information, and major announcements relative to retirement
issues.
TANF
This is a site sponsored by the Center on Budget and Policy Priorities that provides an overview of the
Temporary Assistance to Needy Families program that replaced AFDC in the wake of the 1996 Welfare
Reform Act. It is a good place for basic information as well as some analytical inquiry into the often
divisive issue of social welfare.
U.S. Department of Education
This is the main Web page for the U.S. Department of Education providing information on federal grants,
initiatives, and mandates regarding public education at all levels. It is a fine site to send students
interested in a career in education to for information on this area of domestic policy.
U.S. Department of Health and Human Services
This site provides access to information on social programs administered, funded, or partially
administered/funded by the U.S. government. It is a great resource site to recommend for students
studying these areas of social policy.
U.S. Department of Labor
This site is the main Web page for the Department of Labor containing access to information on the state
of the U.S. economy and federal initiatives in the area of jobs and unemployment.
U.S. Department of Commerce
This is the main Web page for the U.S. Department of Commerce which provides information on the state
of the economy and federal initiatives in the area of business and entrepreneurship.
U.S. Department of the Treasury
This site is for the U.S. Department of the Treasury and is an invaluable resource for information on the
American domestic and international economies.
© 2013 Taylor & Francis