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Daniel Ayeroff Ethan Bond Esther Gu Natalya Kan Alice Kim Brian Kim Per. 5 ECONOMIC POLICY A) VOCABULARY TERMS: 1. Battle in Seattle – Nov. 30, 1999 (“N30”): This is when massive protests broke out in Seattle when the WTO (World Trade Organization) met in Seattle, WA, as part of the WTO Ministerial Conference of 1999, where new trade negotiations were to be made. This is considered to be the second phase of the anti-globalization movement in the U.S. Among the most notable demonstrators were national and international NGOs (especially those concerned with labor issues, the environment, and consumer protection), labor unions (including the AFL-CIO), student groups, religiously-based groups (Jubilee 2000), and anarchists (some of whom formed a black bloc).The coalition was loose, with some opponent groups focused on opposition to WTO policies (especially those related to free trade), with others motivated by pro-Labor, anti-Capitalist, or environmental agendas. The opening of the meetings was delayed—tens of thousands of demonstrators lined the streets, took control of intersections, and vandalized buildings—but eventually proceeded. 2. budget deficit – the situation in which the government spends more than it takes in. 3. budget resolution – This is submitted from each budget committee—one in the House, one in the Senate—to its respective house. It proposes a total budget ceiling and a ceiling for each of several spending areas (such as health or defense). It serves as targets to guide the work of each legislative committee as it decides what should be spent in its area. 3. budget surplus – the situation in which the government spends less than it takes in. 4. Congressional Budget Act – This was passed to impose some discipline on the spending various committees. After the president submits his budget in February, two budget committees—one in the House, one in the Senate—study his overall package and obtain an analysis of it from the Congressional Budget Office. Each committee then submits to its house a budget resolution, which is used to guide the work of each legislative committee as it decides what should be spent in its area. Then Congress oversees the specific appropriations bills, informing its members whether or not the spending proposed in these bill conforms to the May budget resolution. 5. Congressional Budget Office – federal agency w/in the legislative branch of the US govt; created by the Congressional Budget and Impoundment Control Act of 1974. Main goal is to provide Congress with objective, timely, nonpartisan analyses needed for economic and budget decisions and with the information and estimates required for the Congressional budget process. 6. Council of Economic Advisers – since 1946, composed of 3 professional economists plus a small staff. Responsible for forecasting economic trends, analyzing economic issues, and helping prepare the economic report the president submits to Congress yearly. 7. demand-side economics – (aka Keynesian economics) based on ideas of British economist, John M. Keynes, promotes a mixed economy where both the state and the private sector have important roles; suggests that govt should intervene to create the right level of demand by pumping more money into economy (when demand is low) and taking it out (when demand is too great). 8. earmarks – congressional provisions directing approved funds to be spent on specific projects 9. entitlements – a claim for govt funds that cannot be abridged w/out violating the rights of the claimant (include Social Security, Medicare payments, veterans’ benefits, food stamps, and money govt owes investors who have bought Treasury bonds) 10. Eurodollars – deposits denominated in United States dollars at banks outside the United States, and thus are not under the jurisdiction of the Federal Reserve. Consequently, such deposits are subject to much less regulation than similar deposits within the United States, allowing for higher margins. 11. free rider problem – “free riders" are actors that consume more than their fair share of a resource, or shoulder less than a fair share of the costs of its production. The free rider problem is the question of how to prevent free riding from taking place, or at least limit its negative effects. 12. Federal Reserve System – central banking system of the United States. Created in 1913 by the enactment of the Federal Reserve Act, it is a quasi-public (part private, part government) banking system composed of (1) the presidentially appointed Board of Governors of the Federal Reserve System in Washington, D.C.; (2) the Federal Open Market Committee; (3) 12 regional Federal Reserve Banks located in major cities throughout the nation acting as fiscal agents for the U.S. Treasury, each with its own nine-member board of directors; (4) numerous private U.S. member banks, which subscribe to required amounts of non-transferable stock in their regional Federal Reserve Banks; and (5) various advisory councils. 13. fiscal conservative – political phrase term used in North America to attack government spending and advocate instead lower spending and a lower federal debt; it may also include higher taxes in order to lower the debt. It does not necessarily denote advocacy of free market economics as a whole, and is a distinct concept from that of neo-liberalism 14. fiscal policy – taking place within the scope of budgetary policy, refers to government policy that attempts to influence the direction of the economy through changes in government taxes, or through some spending (fiscal allowances). The two main instruments of fiscal policy are government spending and taxation. 15. fiscal year – 12 month period used for budget and financial calculations. Also known as financial year or budget year. The California State fiscal year begins July 1 and ends June 30 of the following year. The federal fiscal year begins October 1 and ends September 30 of the following year. 16. globalization – transformation of phenomena or ideas into global ones. In terms of economics, globalization refers to world wide integration of markets for goods, services and capital. Breakdown or almost elimination of international barriers for the free flow of information, finance and people. 17. industrial policy – government policy or intervention within the market to support or contract industries, whether it be through tax breaks, subsidies, regulations, or other methods. 18. Keynesianism – economic theory supporting demand side economics. Believes in solving a depression a government should stimulate aggregate demand through lowering interest rates and investing in infrastructure i.e. govt spending to help economy. 19. Laffer curve – graphical display that illustrates taxable income elasticity which determines optimum tax rate to maximize government revenue from taxes. 20. monetarism – a set of views concerning the determination of national income and monetary economics. It focuses on the supply of and demand for money as the primary means by which economic activity is regulated. Monetary theory focuses on money supply and on inflation as an effect of the supply of money being larger than the demand for money. 21. monetary policy – the process by which the government, central bank, or monetary authority of a country controls the supply of money, availability of money and cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. Monetary theory provides insight into how to craft optimal monetary policy. 22. petrodollars – a U.S. dollar earned by a country through the sale of petroleum. Given the general tendency for crude oil prices to rise and become more volatile in recent years, it may even be argued that crude oil trading may, in the long term, be a significant liability for the stability of the currency in which the trade is conducted. 23. price and wage control – big corporations can raise prices because the forces of competition are too weak to restrain them, and labor unions can force up wages because management finds it easy to pass the increases along to consumers in the form of higher prices 24. Reaganomics – refers to the economic policies promoted by United States President Ronald Reagan. The four pillars of Reagan's economic policy were to reduce the growth of government spending, reduce marginal tax rates on income from labor and capital, reduce regulation, and control the money supply to reduce inflation. 25. supply-side economics – An economic philosophy that holds that sharply cutting taxes will increase the incentive people have to work, save, and invest. Greater investments will lead to more jobs, a more productive economy, and more tax revenues for the government. 26. tax-and-spend liberal – someone who purposely advocates big government and strongly believes that big government will cure us from whatever ails us 27. Tax Reform Act of 1970 – established individual and corporate minimum taxes, established a new tax schedule for single taxpayers, and lowered the maximum rate on earned income from 70 percent to 50 percent. The act phased in an increase in the personal exemption amount from $600 to $750, repealed the investment tax credit, and delayed the scheduled reduction in the telephone and automobile excise taxes. 28. Treasury Department – a Cabinet department and the treasury of the United States government. It was established by an Act of Congress in 1789 to manage government revenue. It recommends and implements the economic, fiscal, and currency policies of the President; regulates exports and imports; designs, prints, and mints, all authorized mediums of exchange used by the US Government, including Currency, Coins, Stamps, and Bonds; regulates all financial institutions chartered by the United States; collects all United States Revenue; enforces all US Laws of a financial nature. 29. US Trade Representative – the United States government agency responsible for developing and recommending United States trade policy to the President of the United States, conducting trade negotiations at bilateral and multilateral levels, and coordinating trade policy within the government through the interagency Trade Policy Staff Committee (TPSC) and Trade Policy Review Group (TPRG). Current USTR is Susan Schwab. 30. WTO – an international organization designed to supervise and liberalize international trade. It deals with the rules of trade between nations at a near-global level; it is responsible for negotiating and implementing new trade agreements, and is in charge of policing member countries' adherence to all the WTO agreements, signed by the bulk of the world's trading nations and ratified in their parliaments. The WTO's headquarters are in Geneva, Switzerland. B) OBJECTIVES: 1. Show how voters have contradictory attitudes regarding their own and others’ economic benefits. People see connections between their own well-being and that of the nation, and they tend to hold politicians responsible for the state of the country. People do not simply vote their own pocketbooks. Even though the vast majority of people still have jobs during a recession, these people nevertheless say that unemployment is the nation’s biggest problem and many of them vote accordingly. By the same token younger voters, whose incomes tend to go up each year, often worry more about the inflation than do retired people living on fixed incomes, the purchasing power of which goes down with inflation. In presidential elections those people who think that national economic trends are bad are much more likely to vote against the incumbent even when their own personal finances have not worsened. In technical language, voting behavior and economic conditions are strongly correlated at the national level but not at the individual level. In ordinary language voters seem to respond more to the condition of the national economy than to their own personal finances. 2. List and briefly explain the four competing economic theories discussed in the textbook. 1) Monetarism- inflation occurs when there is too much money chasing too few goods (Milton Friedman); advocates increase in money supply about equal to economic growth 2) Keynesianism--government should create right level of demand - Assumes that health of economy depends on what fractions of their incomes people save or spend - When demand is too low, government should spend more than it collects in taxes by creating public works programs - When demand is too high, government should increase taxes 3) Planning- free market too undependable to ensure economic efficiency; therefore govt should control it (John Kenneth Galbraith) - Wage-price controls - Industrial policy--government directs investments toward particular industries 4) Supply-side tax cuts--need for less government interference and lower taxes (Arthur Laffer) - Lower taxes would create incentives for investment - Greater productivity would produce more tax revenue 3. Explain Reaganomics in terms of its goals and its effects on the US economy. Reaganomics are the economic policies promoted by President Ronald Reagan. The four main pillars of Reaganomics are:1)reduce government spending 2)reduce taxes 3) reduce regulations 4)control money supply; Reagan entered his Presidential term during a time of stagflation. His new policy was based on supply side economics. By enacting the main pillars of Reaganomics, the government creates an environment where people have more incentive to produce more goods and services. If the rich and corporations produced more, they would also hire more and spend more which would in turn benefit other classes (trickle down). Although the effects of Reaganomics are debated one can say it has been a successful program during Regan’s administration. GDP increased during his administration. On 8 of the 10 key economic variables examined, the American economy performed better during the Reagan years than during the pre- and post-Reagan years. Real median family income grew by $4,000 during the Reagan period after experiencing no growth in the pre-Reagan years; it experienced a loss of almost $1,500 in the post- Reagan years. Interest rates, inflation, and unemployment fell faster under Reagan than they did immediately before or after his presidency. Others contest these gains saying Reagan's tax policies pushed both the international transactions account and the federal budget into deficit and led to a significant increase in public debt which led to long term problems. 4. List the four major federal government agencies involved in setting economic policy, and explain the role of each. 1. Office of Management and Budget (OMB): Its chief function is to prepare estimates of the amount that will be spent by federal agencies, to negotiate with other departments over the size of their budgets, and to make certain as far as it can that the legislative proposals of these other departments are in accord with the president’s program. 2. Council of Economic Advisors (CEA): Created in 1946, this is composed of three professional economists and a small staff. In theory it is an impartial group of experts responsible for forecasting economic trends, analyzing economic issues, and helping prepare the economic report that the president submits to Congress each year. However, this impartiality is not quite achieved, since the president picks members sympathetic to his point of view. The CEA generally tends to favor reliance on the market. 3. Treasury Department: The secretary of the treasury is expected to argue the point of view of the financial community. The secretary provides estimates of the revenue that the government can expect from existing taxes and what will be the result of changing tax laws. He or she also represents the US in its dealings with the top bankers and finance ministers of other nations. 4. Federal Reserve Board (the Fed): the Fed’s most important function is to regulate, insofar as it can, the supply of money (both in circulation and in bank deposits) and the price of money (in the form of interest rates). The tools by which the Fed implements its monetary policy include buying and selling federal government securities, regulating the amount of money that a member bank must keep in hand as reserves, and changing the interest to charged banks that want to borrow money from the Federal Reserve System. 5. Analyze the federal fiscal policy in terms of the textbook’s four categories of policymaking politics. a) Majoritarian politics: (distributed benefits, distributed costs) In this policy, it benefits a large number of people and also a large number of people will have to bear the cost for those benefits. Controversial because of its costs, since “freeriders” have no incentive to participate in interest groups because they will receive the benefits either way. Amount spent on these policies usually fluxes on with public opinion. b) Interest group politics: (concentrated benefits, concentrated costs) Usually not known to the public, this policy benefits a relatively small group and requires a cost from another relatively small group. Monetary costs and benefits are usually the issue of the conflict fought out between the two groups. c) Client politics: (concentrated benefits, distributed costs) In this case, a large part of society pays the cost for the benefit of only a small group. Typically, the “victim” or the majority who is paying the cost for the benefit of a small group is unaware of the loss of their monetary gains due to usually the insignificant amount they pay (since there are so many people paying) or indifference or complete ignorance. Depending on the issue at hand, some of those are given support and benefits while others are not (welfare has not gotten an increase in benefits while homeless have gotten help due to public opinion). d) Entrepreneurial politics: (distributed benefits, concentrated costs) Society as a whole benefits from certain policies while only a small part of society pays those costs. Many policies of this sort are not adopted, but recently, they have been adopted with increasing frequency due to the work of people who act on behalf of unorganized majority. Voters, participants only start caring to participate in this type of process when the cost of their products and objects of use rise to the point of notice. 6. Trace the history of federal government budgeting practices up to the present day. The federal government usually spends far more money than it brings in – in fact, the fiscal budgets in 1999 and 2000 were the first since 1969 that brought in more money than was spent. In 2001, Congress passed the economic Growth and Tax relief Reconciliation Act of 2001, which cut tax rates on all income groups, increased tax credit for children, made it easier to deduct expenses, eliminated the “marriage penalty,” made it easier to save for education, and phased out the tax on estates of deceased persons. Budget decisions by the federal government have been in the vein of different economists. At times, the government has planned price and wage controls. In the 80’s, Reaganomics took hold. Supply-side economics is a key tenet of the American budget. In 1921, there wasn’t a budget at all. The budget wasn’t unified until the 1930’s, in fact. After that, congressional committees added and subtracted from the presidential proposals. The Congressional Budget Act of 1974 changed this, however. At that point, the system was changed so that once the proposal was submitted, two budget committees study the package and analyze it, creating a budget resolution. President Reagan took advantage of the Congressional Budget Act to start the controversial process of cutting federal spending. The Balanced Budget Act of 1985 changed this cutting somewhat, although it mostly failed. 7. Comment on the prospects and desirability of balanced federal budgets, both in terms of government spending and tax reform. Be specific. The desire for a balanced federal budged is clear, yet the two methods; reducing spending and increasing taxes, utilized for the balancing of federal budged both have loopholes. The first method or procedure in balancing the budget, reducing spending, failed at its first attempts with the Balanced Budget Act of 1985, which prohibited spending until the deficit has disappeared; it failed miserably as both the president and Congress continued even a more increased spending of federal budget. In the case of the second method, levying taxes, (increased rates for rich) also has major loopholes since cheating is often present and the progressiveness is not always clear. However the prospects and desirability of a balanced federal budget is needed. The advancement has come in reducing spending with the imposement of a spending cap involving a pay-as-you-go approach (if spending increases in one area, there will be cuts in another) has helped balance budget; and with the 1986 tax reform most loopholes of tax evaders were wiped out. 8. Discuss how the September 11th attacks, as well as the subsequent economic developments and government actions, have changed economic policy debates. When George W. Bush took office in 2001, the federal government was taking in through taxes much more than it was spending. This opened doors to new ways in which Washington could allocate this surplus to its citizens. However, after the terrorist attack on September 11, any talk of how to spend the budget surplus immediately disappeared. The government had to spend huge new sums on the damages—billions of dollars in aid to airlines, help for clearing up the remains of NYC’s World Trade Center buildings, and medical attention for those directly affected by the attacks were now top priority. Also, the ensuing war against the Taliban in Afghanistan required a lot of money, and the defense buildup to prevent future attacks cost many billions of dollars. Then the economy went into a recession, so that tax revenues were sharply reduced and social programs required more pending. The debate over how big the federal government should be gave way to a discussion of how to keep it big enough to accomplish all that was necessary. The 9/11 attacks, subsequent recession, and increased government spending on foreign and military policies impacted economic policy debates by suddenly introducing new factors in determining the policy-making process for the economy. 9. Explain why the president, rather than Congress, is held more accountable for the economy. It is the President that appoints members the Fed, first of all, so the President can be blamed for anything that goes wrong in the Federal Reserve. More importantly, however, it is the President who comes up with economic plans, and has the power to propose tax cuts or increases, whereas Congress merely has to approve, so it is only natural that everyone would blame the creator of a disastrous economic plan, rather than a much more complex branch of government where no single member would take responsibility for approving such an economic plan. 10. Explain why economics is so interwoven with politics and political ideology. Economics concerns how to deal with limited resources and scarcity. Politics is the process by which groups of people make decisions. Economics is seen as vital in the modern world because political decisions often concern economic matters, and government decisions are often influenced by economic events. One cannot exist without the other. When determining how to govern, economics always comes into play because people have wants but limited resources. To determine the old age question of “butter or guns” one must resort to economics in deciding the correct choice in governing the people. Political ideology comes into play when people have theories as to the best ways of implementing both political and economic choices.