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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.