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Chapter 18 Economic Policy WHO GOVERNS? 1. Who in the federal government can make our economy strong? 2. Who was responsible for the recession? TO WHAT ENDS? 1. Why does the federal government ever have a budget deficit? 2. How do you end a recession? Copyright © 2011 Cengage The Politics of Economic Prosperity Majoritarian politics=people don’t want an unhealthy economy Pocketbook Issues=unemployed=dem/inflation=rep. • National level=unemployment • Individual level What Politicians Try to Do • Unemployment=want it low • Inflation=low • Interest rates Copyright © 2011 Cengage Figure 18.1 Federal Budget Deficit (or Surplus) Source: Budget of the U.S. Government, FY 2009 updated by OMB’s Mid-Session Review, July 2009 © 2003, AAAS. Reprinted with permission Copyright © 2011 Cengage The Politics of Taxing and Spending Voters want • Prosperity • Lower taxes • Less debt • New/continued programs Objectives are inconsistent Copyright © 2011 Cengage During the recession, people, including middle class workers, line up at the unemployment office. p. 490 Source: Yellow Dog Productions/ Getty Images Copyright © 2011 Cengage Economic Theories and Political Needs Monetarism=inflation occurs when too much money is chasing too few goods Keynesianism=gov’t puts $ into economy during recession, takes out during inflation Economic Planning=gov’t plans wages, price controls, investments of economy Supply-side Tax Cuts=lower taxes and fewer regulations will stimulate the economy Copyright © 2011 Cengage Copyright © 2011 Cengage The Machinery of Economic Policy Making The Fed • Monetary policy – alters the supply of money and interest rates Ben Bernanke, Chairman of the Federal Reserve, speaks to a congressional committee. p. 495 Source: Mark Wilson/ Getty Images Congress • Fiscal policy – uses tax and spending laws Globalization • Growing integration of the economies and Copyright © 2011 Cengage societies of the world Corbis/Corbis Sygma Bettmann/Corbis Milton Friedman Karen Vismara/ Black Star Arthur B. Laffer John Maynard Keynes Bettmann/Corbis Copyright © 2011 Cengage John Kenneth Galbraith Copyright © 2011 Cengage Spending Money Conflicting interests • Majoritarian politics • Client politics • Interest group politics Public Opinion=gov’t spending too much/not taxing too little Politicians’ appeals=1. vote for me I will cut spending/2. vote for me I will keep your favorite programs Copyright © 2011 Cengage The Budget Budget Fiscal Year – October 1 through the following September 30 (federal) Budget resolution – A congressional decision that states the maximum amount of money the government should spend Entitlements - A claim for government funds that cannot be changed without violating the rights of the claimant Copyright © 2011 Cengage Reducing Spending Congressional Budget Act of 1974 Balanced Budget Act of 1985 (Gramm-Rudman Act) • Sequester – automatic spending cuts Budget Enforcement Act of 1990 • Limits on discretionary spending Copyright © 2011 Cengage Figure 18.2 Federal Outlays in 2008 Source: Office of Management and Budget, Mid-Season Review, 2009. Copyright © 2011 Cengage Figure 18.2 Federal Revenues in 2008 Source: Office of Management and Budget, Mid-Season Review, 2009. Copyright © 2011 Cengage Figure 18.3 Social Security and Medicare Cost as a % of GDP p. 498 Copyright © 2011 Cengage Source: Trustees’ Report, 2009. Levying Taxes Majoritarian politics (What is good for the country) • Modest tax burden • Minimize cheating Client politics (how much is in it for me) • Loopholes Rise in the Income Tax • Sixteenth Amendment=1913 income tax • Tax Reform Act of 1986=low rates/smaller deductions (good for ind. Bad for businesses) • Tax increase of Copyright 1993=Clinton tax raise 39% © 2011 Cengage • Tax cuts of 2002 (Pres. Bush) Figure 18.4 Tax Burdens in Democratic Nations (Taxes as a Percentage of Income of a Family with Two Children) Source: Statistical Abstract of the United States, 2003, Table 1344. Copyright © 2011 Cengage Figure 18.5 Federal Taxes on Income, Top Percentage Rates 1913-2002 Source: Updated from Congressional Quarterly Weekly Report (September 18, 1993), 2488. Copyright © 2011 Cengage WHAT WOULD YOU DO? MEMORANDUM To: Elizabeth Gilbert, chairperson, Council of Economics From: Edward Larson, White House speechwriter Subject: Flat tax proposal The President would like your advice on whether to endorse a flat tax. His likely opponent is pushing this issue. Copyright © 2011 Cengage WHAT WOULD YOU DO? Arguments for: 1. A flat tax is fair because it treats all income groups the same. We could leave the lowest income group with no taxes. 2. With a flat tax, we could eliminate almost all deductions and loopholes from the tax code. 3. Countries with a flat tax, such as Lithuania, have achieved great economic prosperity. Copyright © 2011 Cengage WHAT WOULD YOU DO? Arguments against: 1. A flat tax is unfair because it treats all income groups the same. The rich should be taxed more heavily. 2. Many tax deductions, such as the one for home mortgages, are desirable. 3. We could eliminate undesirable tax loopholes without creating a flat tax. Copyright © 2011 Cengage WHAT WOULD YOU DO? Your decision: Support? Oppose? Copyright © 2011 Cengage Tribune Media Services, Inc. All rights reserved. Reprinted by permission. p. 502 Copyright © 2011 Cengage