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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 Click on buttons to go to the relevant slide. 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Key Objectives Click on buttons to go to the relevant slide. 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives Categorizing Policies by Basic Functions of Government 14.2 • Political scientists have identified three basic functions of government: – Distribution – Regulation – Redistribution Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives Formulating and Legitimizing Policy 14.3 • Formulating policy – Laws – Decisions – Rules • The power of the presidency in shaping policy • Legitimizing policy Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives Implementing Policy 14.3 • Discretion given to the individuals who implement policy • Legislative oversight – Reauthorization – Investigation • Judicial oversight • Grass-roots mobilization or cultural change Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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) Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives Key Congressional Players • • • • 14.5 House and Senate Appropriations committees House and Senate Budget Committees House Ways & Means Committee Senate Finance Committee Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 14.6 The Federal Revenue Budget Federal government revenue comes primarily from individual income tax and payroll taxes for Social Security and Medicare. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives Revenue (cont’d) 14.6 Other Taxes • • • • Excise taxes Customs duties Inheritance taxes Miscellaneous receipts Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives President Obama’s 2011 Proposed Budget (in billions) Copyright © 2011 Pearson Education, Inc. Publishing as Longman 14.6 Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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) Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 14.6 The nation’s largest on-budget appropriations are for A. B. C. D. Social Security. defense. education. Medicare. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 14.6 The nation’s largest on-budget appropriations are for A. B. C. D. Social Security. defense. education. Medicare. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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 Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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! Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives 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. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives Credits 530 Martin H. Simon/UPI/Pool/Landov; 535, left to right: AP Images/Paul Sakuma; Newscom; 536, left to right: Alfred Eisenstaedt/Time & Life Pictures/Getty Images; Bettmann/Corbis; Dan Miller/Time Magazine/Time & Life Pictures/Getty Images; 537, left to right: Natalie Behring/Greenpeace/Getty Images; U.S. Coast Guard photo by Petty Officer 3rd Class Ann Marie Gorden; 540 AFP/Getty Images; 543 Hans Strand/Corbis; 544 Sarah M. Golonka/Getty Images; 545 Time Life Pictures/Getty Images; 553, top to bottom: Bloomberg via Getty Images; Jim West/Alamy; Dirck Halstead/Time & Life Pictures/Getty Imjages; Alex Wong/Getty Images; Glow Images/SuperStock; Scott Olson/Getty Images 558 Justin Sullivan/Getty Images; 560Time Magazine; 561 Time Magazine; 566 Alex Wong/Getty Images; 567 Jim Young/Reuters/Corbis; 570 Stephen Chemin/Getty Images; 573 DoD Photo by Tech. Sgt. James L. Harper Jr., U.S. Air Force; 575 Paul Burnett/The New York Times/Redux Pictures; 580 Matthew Cavanaugh/epa/Corbis; 584 David Pearson/Alamy; 587, top to bottom: Kvork Djansezian/Getty Images; Matthew Cavanaugh/epa/Corbis; Joseph Sohm/Visions of America/Corbis Copyright © 2011 Pearson Education, Inc. Publishing as Longman Back to Learning Objectives