Download Chapter 17 DOMESTIC POLICY

Chapter 17
DOMESTIC POLICY:
THE ECONOMY AND
SOCIAL WELFARE
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Whatever Happened to the Budget Surplus?
• In early 2001, the budget surplus was predicted to
be $230 billion in 2002, growing to $5.6 trillion
over 10 years.
• But instead, the budget for 2002 was $106 billion
in debt, growing to a projected $1.6 trillion over
10 years.
• This turnaround represents the most dramatic
reversal of the fiscal health of the nation in more
than 50 years.
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What caused this turnaround?
• Economic woes
– recession
– stock market collapse
– jobless recovery
• Cost of “war on terror”
– Afghanistan
– Iraq
– homeland security
• Massive tax cuts
• Medicare prescription drug benefit
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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.
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• 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.
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Economic Policy
• Goals of economic policy
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Economic growth
Avoid inflation
Maintain positive balance of payments
Avoid negative externalities
• pollution
• workplace injuries
• health hazards
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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
– difficult to use
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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
• 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.
– Open market operations
– Discount rate
– Reserve requirements
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The Debate About the Proper Role of Government in the
Economy
• Keynesianism
• Monetarism
• Supply-side economic policy
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The Federal Budget and Fiscal Policy
• Government spending
– War is associated with dramatic increases in federal spending.
– The relative spending level of the federal government increased
steadily from the early 1930s-1980s.
• 2004 budget
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19.4% national defense (up from 16.4% in 2001)
65% human resources (up considerably from 1980)
5.5% physical resources (down considerably from 1980)
7% interest on national debt (down from 15.9% in 1996)
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Taxes
• Public discontent with taxes
• Yet relatively low tax burden compared to other
rich democracies, and remarkably little change in
tax burden in recent decades
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Taxes
• Federal government
– depends mostly on income taxes, which are only mildly
progressive
– other federal taxes, such as Social Security, are regressive
– recent tax cuts for the rich will make the distribution of
wealth more unequal
• State governments depend mostly on sales taxes
• Local governments depend mostly on property taxes
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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.
• Benefits and dangers of national debt
• Rise of national debt typically associated with war
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Regulation
• Regulation refers to the issuing of rules and
regulations by federal agencies that private businesses
must follow.
• Why government regulates
– free market economy creates negative externalities
– businesses turn to government for protection against
competitors
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Regulation
• History of American regulation
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Progressive Era regulation
New Deal regulation
The new social regulation
Deregulation
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The Future of Regulation
• Despite recent deregulation, the regulatory state is
here to stay
– Most regulatory policies are supported by the
public.
– New problems will probably stimulate public
demands for government intervention.
– Businesses will continue to turn to government for
regulation when it suits their interests.
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Social Welfare
• Social insurance
– benefits based on contributions
– Social Security
• Means-tested
– distributed on the basis of need
• Food stamps
– entitlement programs
• Medicare
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Social Security
• Formally known as Old Age, Survivors, and
Disability Insurance (OASDI)
• Funded by payroll tax
• Due to an aging population, Social Security
will run a deficit unless reforms are made.
• Democrats favor small reforms.
• Republicans favor a major overhaul.
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Medicare
• Entitlement program for retirees and the
disabled
• Prescription drug benefit begins 2006
• One of the most costly federal programs
• Payments are a recurring problem
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Do Social Insurance Programs Work?
• Successes
• Problems
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Means-Tested Programs (Welfare)
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Unpopularity of previous AFDC program
Food Stamps
Medicaid
Supplemental Security Income
The Earned Income Tax Credit
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Welfare Block Grants
• Temporary Assistance to Needy Families (TANF) replaced AFDC
in 1996
• The new welfare system
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ends the status of welfare assistance as a federal entitlement
is administered by the states
is largely funded by federal block grant to the states
requires recipients to work to support themselves within two years
of going on welfare
– has a limit of five years of support
– requires that unmarried teenage parents must stay in school and live
with an adult
– requires that states continue to provide Medicaid to eligible
residents
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Welfare Block Grants
• Results
– pro
• welfare roles have diminished in every state
– con
• About 20% of those who left the welfare roles between 1997-2001
returned to them.
• Because pay for entry-level positions is so low, very few former
welfare recipients have been able to rise above the poverty line.
• When economic hard times returned in 2001, even entry level jobs
became scarce, and former welfare recipients who had used up
their five years suffered serious difficulties.
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How the American Welfare State
Compares with Others
• All modern capitalist countries have social welfare states.
• Welfare states range from low-benefit, targeted types
(minimal or liberal welfare states) to high-benefit,
universal types (developed or social democratic welfare
states).
• The United States is very close to being at the minimum
end of the spectrum.
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• Compared with other rich democracies, the
American welfare state:
– is much less costly
– covers fewer people
– favors the elderly
– is less redistributive
– requires less of private employers
– does not include universal healthcare
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Why the American Welfare State Is Different
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Constitutional rules
Racial and ethnic diversity
Political culture
Business power
Weak labor unions
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