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Chapter 17
DOMESTIC POLICY: THE
ECONOMY AND SOCIAL
WELFARE
Budget Chaos in the 104th Congress,
Compromise in the 105th
• House Republicans under the leadership of Newt
Gingrich in the 104th Congress were eager to take
on the task of cutting back on the size and role of
the federal government.
• The budget bill fashioned in the House of
Representatives was unprecedented.
• Senate Republicans forced some changes in the
bill, but they went along with most of what the
House Republicans were trying to achieve.
• Congressional Republicans were confident that
Bill Clinton would waiver under threats to close
down the government in the absence of a budget.
– Clinton refused to be intimidated; he vetoed temporary
measures in November and the full budget bill in
December.
– After each veto, the federal government shut down,
with only essential services permitted to operate.
• Republican leaders were unprepared for the
firestorm of criticism.
The battle had electoral consequences in 1996.
– Democrats increased their numbers in the House and
Bill Clinton was reelected to the presidency.
– The GOP leadership entered into serious bipartisan
negotiations with Clinton in the opening months of the
105th Congress.
– A landmark compromise emerged from the
negotiations, one that promised a balanced budget by
2002 and was actually accomplished in 1998.
• The annual decision about the budget is one of the
most important things that the president and
Congress do.
Why Government Is Involved in the
Economy And Social Welfare
• Economic management
– Governments in all modern capitalist societies
play a substantial role in the management and
direction of their economies.
– Government responsibility for the national
economy is so widely accepted that national
elections are often decided by the voters’
judgment of how well the party in power is
carrying out this duty.
• Social welfare
– A social welfare state is a society with a set of
government programs that protect the minimum
standards of living of families and individuals.
– All rich democracies have social welfare states.
Economic Policy
• Goals of economic policy
– Economic growth is sought by economic
policymakers.
– Low unemployment historically was associated
with economic growth.
– Economic recessions bring slower job growth
and rising unemployment rates.
– Political leaders seek policies that dampen
inflation and provide stable prices.
– All nations try to keep a positive balance of
payments.
– The U.S. trade deficit has been in the red for
many years.
– A growing free enterprise economy produces a
range of adverse consequences (called
diseconomies).
• Air and water pollution
• Toxic wastes
• Workplace injuries and health hazards
Tools of Macroeconomic Policy
• Macroeconomic policy looks at the
performance of the economy as a whole or
broad areas of the economy, such as
employment.
• Fiscal policy — altering government
finances by raising or lowering government
spending, raising or lowering taxes, and
raising or lowering government borrowing
– Fiscal tools are not easy to use.
– Many issues come into play in setting fiscal
policy.
• Federal spending cannot be easily adjusted up or
down.
• Tax rates cannot be easily adjusted.
• Changes in spending and taxes take so long to
accomplish that there is danger that the policies will
be inappropriate by the time they filter into the
economy.
• Monetary policy — government policy to
influence interest rates and control the
supply of money in circulation, primarily
accomplished through the operations of the
Federal Reserve Board
• As the nation’s central bank, the Fed
oversees the banking system and sets the
nation’s monetary policy.
– Actions by the Fed affect how much money is
available to businesses and individuals in
banks, savings and loans, and credit unions.
– It influences interest rates and the money
supply.
– How the Fed sets monetary policy
• Open market operations
• Discount rate
• Reserve requirements
Managing the Economy
• Debate over the role that government
should play in managing the economy
revolves around four main alternatives:
–
–
–
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Keynesianism
Monetarism
Supply side economic policy
Industrial policy
• There is no consensus among the four
groups on how to meet economic
responsibilities.
– Keynesian and industrial policy approaches
favor a large and interventionist government.
– Monetarist and supply side theorists favor a
small and noninterventionist government.
The Federal Budget and Fiscal Policy
• Government spending
• Federal government spending in 1999
– Fourfold increase since 1960 in constant dollars
– Expansion of federal outlays as a proportion of
GDP from 18 percent to about 19 percent
Taxes
• Public discontent with taxes
• How the U.S. tax system differs from other
countries in the kinds of taxes we impose
• Complexity of Our Tax System
The Deficit and the National Debt
• The budget deficit is the annual shortfall
between what the government spends and
what it takes in.
• The national debt refers to the total of what
the government owes.
Subsidizing Business
• All governments in the rich democracies support a
variety of economic activities considered
important to society.
• In Western Europe, public ownership of
economic activities is common.
• In the United States, government support for
business enterprises is more likely to take the form
of tax incentives.
– Loan guarantees to major firms
– Subsidies to private businesses
Regulation
• Regulation refers to the issuing of rules and
regulations by federal agencies that private
businesses must follow.
• History of American regulation
– Progressive Era regulation
– New Deal regulation
– The new social regulation
Deregulation
• By the end of the 1970s, the mood of opinion
leaders had turned against regulation.
• The airline, banking, railroad, and trucking
industries were deregulated under President
Carter.
• President Reagan pursued a policy of regulatory
relief.
• President Clinton reversed many Reagan-Bush
era policies but continued to use anti-regulatory
rhetoric much of the time.
The Future of Regulation
• The regulatory state is likely to expand in the
future
– Most regulatory policies are supported by the public.
– New problems will probably stimulate public demands
for government intervention.
• Making economic policy: the main players
– Political linkage factors
– Governmental factors
Social Welfare
• An outline of the American welfare state
– Social welfare in the United States is provided
by a complex mix of programs.
– The programs are diverse and generally
supported by the public, though some remain
controversial and unpopular.
• Types of programs
– Distinctions can be made based on methods of
dispensing benefits.
• Social insurance programs
• Means-tested programs
– Some welfare state programs are entitlement programs.
• Payments made automatically to people who meet
eligibility requirements
• Debate about controlling entitlements as the way to
gain control over the federal budget.
The Cost of the Social Welfare State
• A substantial amount of money is spent on
what the U.S. budget calls social welfare.
• In 1999, outlays for Social Security,
Medicare, Medicaid, and means-tested
entitlement programs came to almost 48
percent of the federal budget.
• Implications of the spending pattern
Social Security and Other Social Insurance
Programs
• Social insurance programs that guard against loss
of income due to old age, disability, and illness are
the largest, most popular, and fastest-growing
parts of the American welfare state.
• There are a number of social insurance programs
that are designed to meet different contingencies.
Components of Social Insurance
• Old Age, Survivors, and Disability
Insurance (OASDI), usually referred to as
Social Security
• Medicare
• Unemployment Insurance
Do Social Insurance Programs
Work?
• Successes
• Problems
• Public assistance (welfare)
– Public assistance accounts for only a small
part of the annual federal budget, but it is the
subject of widespread criticism and resentment.
– Most Americans see welfare as a contradiction
of cherished cultural values.
• Components of public assistance (means-tested
federal programs designed to assist low-income
Americans)
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–
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Food stamps
Medicaid
Supplemental Security Income (SSI)
Head Start — the only widely popular means-tested
social welfare program, but it reaches only about 20
percent of those who are technically eligible
Welfare Block Grants
• The United States’ way of providing public
assistance to the needy changed dramatically with
passage of a new welfare block grant program
in 1996.
• The new welfare system
– Ends the status of welfare assistance as a federal
entitlement
– Requires recipients to work to support themselves
within two years of going on welfare
– Limited to a total of five years of support
How the American Welfare State Is
Different
• All modern capitalist countries have social welfare
states.
• Welfare states range from low-benefit, targeted
types (minimal or liberal welfare states) to highbenefit, universal types (developed or social
democratic welfare states).
• The United States is very close to being at the
minimum end of the spectrum
• Comparison of the United States to Social Welfare
States in the Organization of Economic
Cooperation and Development (OECD)
– The U.S. welfare state developed later than the
others.
– Ours is one of the smallest of the welfare states.
– The elderly do considerably better than the
young in the American welfare state.
– The American welfare state is less
redistributive.
– The American welfare state requires less of
private employers.
– The American welfare state does not include
universal health care.
Are the Western European welfare states
becoming more like us?
• Competitive pressures are forcing even very rich
nations to become more concerned about high
taxes and budget deficits.
• Several nations with highly developed welfare
states have stopped the growth of social welfare
spending as a proportion of their GDP.
• The vast majority of people in Western Europe
support the welfare state and are willing to fight to
keep it.
Why the American Welfare State Is Different
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Constitutional rules
Racial and ethnic diversity
Political culture
Business power
Weak labor unions
Economic Policy, Social Welfare, and
Democracy
• Economic and social welfare policies in the
United States reflect both democratic and
non-democratic factors.
• There seems to be a fairly close fit between
what the majority of Americans want and
what the federal government does.
• Economic policies are formulated by presidents
and members of Congress who are sensitive to the
wishes of the electorate.
• Monetary policy is fashioned by a Federal Reserve
Board that is largely insulated from the pressures
of democratic politics.
• The primary components of social welfare in the
United States were only enacted because of
pressure from the public on political and economic
leaders.
• The kind of welfare state that we have is
also attributable to the prominent role
played by business and by interest groups
representing the professions and the elderly.
• Popular sovereignty is served in the
general outlines of economic and social
welfare policy, but the details favor special
interests.