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PUBLIC POLICY
Take Five…
When and why has our
government grown?
The Great Depression (1930s)
The Cold War (1950s)
Terrorism
COSTS vs. BENEFITS
• Cost = any burden that a group must
bear
• Benefit = any satisfaction that a group
will enjoy from a policy
Take Five…
What does the “perception of
costs” mean?
COSTS vs. BENEFITS
• Costs and Benefits can be widely distributed
or narrowly concentrated
Widely-distributed costs: Income tax, Social
security tax
o Narrowly-concentrated costs: Factory air emission
standards
o Widely-distributed benefits: Social Security
benefits, national defense
o Narrowly-concentrated benefits: farm subsidies
o
4 Types of Policies
Narrow Costs
Narrow
Benefits
Widespread
benefits
Interest Group
Ex. Tariffs
Entrepreneurial
Ex. Consumer Product
Safety
Widespread Costs
Client Politics
Ex. Pork Barrel Project
Majoritarian
Ex. Soc. Sec.,
Nat Defense
4 types of Policies
• Majoritarian: Widely distributed costs
and widely distributed benefits
o
EX: Social Security, National Defense
• Interest Group: narrowly concentrated
costs and narrowly concentrated
benefits:
o
EX: Tariffs on imports and exports
4 types of Policies
• Client: Widely distributed costs and
narrowly concentrated benefits
o
EX: Pork barrel pet projects for Senators
states (Alaska’s Bridge to nowhere)
• Entrepreneurial: narrowly concentrated
costs and widely distributed benefits:
o
EX: Consumer product safety legislation
Economic Public Policy
Government, Politics, and the Economy
• Introduction
– Capitalism:
• An economic system in which individuals and corporations, not the
government, own the principle means of productions and seek profits.
– Mixed Economy:
• An economic system in which the government is deeply involved in
economic decisions through it role as regulator, consumer, subsidizer,
taxer, employer and borrower.
– Multinational Corporations:
• Businesses with vast holdings in many countries.
Taxing and Spending
• Progressive taxes: a tax where the tax
rate increases with increased wealth
• Regressive taxes: a tax that places a
higher burden on those with lower
income
Taxing and Spending
• Sources of Federal Revenue:
o
o
o
o
o
o
Individual Income taxes: 49%
Social Insurance (payroll) taxes: 33%
Corporate taxes: 10%
Excise taxes: 3%
Borrowing: varies depending upon deficit
Other: 4%
Taxing and Spending
• Discretionary Spending: Government has a
choice in how money is spent
• Nondiscretionary: Government must spend
the money for programs or commitments
previously made
• Where the money is spent
o Direct benefit payments to individuals (Social Security,
Medicare, Medicaid) 55%
o National Defense 16%
o Interest on National Debt 10%
o Nondefense discretionary Spending 19%
Take Five…
What is an entitlement? Give
an example.
Taxing and Spending
• Entitlements
Automatically spent (without annual review
of other programs)
o Ex: Social Security, Medicare, Federal
Pensions, Interest on National Debt
o 2/3 of federal budget. Problem becomes
that Congress and the President cannot
control much of spending.
o
Taxing and Spending
• Budget Process
o Agencies prepare their budget needs and submit to
President’s Office of Management and Budget (OMB)
o OMB makes recommendations to President
o President submits budget to Congress
o Congressional Budget Office (CBO) checks President’s
budget
o Ways and Means committee in house review taxes and
revenues. Appropriations committees review spending
o Agencies lobby for money
o Majority vote in both houses passes budget
o President signs or vetoes bill (no line-item veto)
Managing the Economy
• 2 types of Economic Policies
o
Fiscal Policy: taxing and spending (budget).
Handled by Congress and the President
o
Monetary policy: regulation of the money supply
by the Federal Reserve Board (the Fed).
Adjustments of Interest rates
Take Five…
Name one solution to “fix”
the US budget woes of the
past.
Managing the Economy
• Economic Theories:
1. Keynesian economics: Government
can manipulate the health of an economy
through spending.
Managing the Economy
• Economic Theories:
2. Supply-side economics: Cuts in taxes
will produce business investment that will
offset loss of $ due to lower taxes.
3. Monetarism: Money supply is the most
important factor for determining the health
of the economy
Take Five…
How has the US government
regulated foreign trade in
the past? Has it been
effective?
Managing the Economy
• Trade Policy
o
Trade deficits (US imports more goods from
other nations than it exports) have led to
calls for protectionism
o
Recent push for Free trade
 GATT
 NAFTA
Government Regulation
• Rules imposed by government on
business to achieve a desired goal
• Antitrust policies 1890s-1910s to
counter ill effects of capitalism
• Creation of regulatory agencies like
FTC, FCC and SEC
Take Five…
Take a guess….what is the
world’s largest
corporation?
Government, Politics, and the Economy
• Economic Policy at Work: An Illustration
– Wal-Mart is the world’s largest company.
– Government Regulation and Business Practices
• Securities and Exchange Commission regulates stock fraud.
• Minimum wage: The legal minimum hourly wage for large employers.
• Labor union: An organization of workers intended to engage in
collective bargaining.
• Collective bargaining: Negotiations between labor unions and
management to determine pay and working conditions.
Government, Politics, and the Economy
– Wal-Mart and the World Economy
• Wal-Mart epitomizes America’s imbedding in the world
economy.
• The proportion of U.S. GDP accounted for by international
trade is 30%.
• Wal-Mart takes full advantage of “comparative
advantage.”
• Offshore outsourcing is a key concern of the new global
economy.
Government, Politics, and the Economy
• “It’s the Economy, Stupid”: Voters, Politicians,
and Economic Policy
– Economic trends affect who the voters vote for.
– Economic conditions are the best predictor of voters’
evaluation of the president.
– Republicans worry about inflation.
– Democrats stress importance of unemployment.
Government, Politics, and the Economy
• Two Major Worries: Unemployment and
Inflation
– Unemployment rate: Measured by the BLS, the
proportion of the labor force actively seeking work,
but unable to find jobs.
– Inflation: The rise in prices for consumer goods.
– Consumer Price Index: The key measure of inflation
that relates the rise in prices over time.
Government, Politics, and the Economy
• Unemployment: Joblessness in America, 1960-2002 (Figure 17.1)
Government, Politics, and the Economy
• Inflation: Increases in the Cost of Living, 1960-2002 (Figure 17.2)
Take Five…
What causes inflation?
Policies for Controlling the Economy
• Monetary Policy and “the Fed”
– The manipulation of the supply of money in private
hands – too much cash and credit produces inflation.
– Money supply affects the rate of interest paid.
– Main policymaker is the Board of Governors of the
Federal Reserve System – the “Fed.”
Policies for Controlling the Economy
– The Feds instruments to influence the supply of
money in circulation:
• Sets the federal funds rate
• Buys and sells government bonds
– Through the use of these actions, the Fed can affect
the economy.
Take Five…
Why is it so difficult to
control the economy?
Why it is Hard to Control the
Economy
• Some think politicians manipulate the economy to win
reelection.
• But there are problems with that:
– Things like the budget are prepared in advance of when they
go into effect.
– Some benefits are automatically renewed (SS)
– Capitalism can also affect the economy.
• Government is more important in setting the rules of the
game.
Arenas of Economic Policymaking
• Business and Public Policy
– Corporate Corruption and
Concentration
• Increased incidence of bankruptcy
and scandals.
• Increased number of corporate mergers
• Antitrust policy: A policy designed to ensure competition
and prevent monopoly.
Understanding Economic
Policymaking
• Democracy and Economic Policymaking
– Voters expect more of politicians that they can control.
– Sometimes economic theory and democratic theory may be at
cross purposes.
– It is difficult to make decisions that hurt groups or involve
short-term pain for long-term gain.
• Economic Policymaking and the Scope of Government
– Liberals tend to favor more government involvement in the
economy.
– Conservatives tend to favor less government involvement in the
economy.
Environmental Policy &
Social Welfare
Environmental Policy
• Key issue is the extent to which the
environment should be protected and
the costs of doing so.
• Key legislation:
o
o
Clean Air acts and Clean water Acts
EPA created in 1970
Take Five…
What is a government
subsidy? What is the
purpose of it?
Government Subsidies
• Government Financial Support
Cash (ie TANF- Temporary Assistance for Needy
Families)
o Tax Incentives (Home mortgage interest payments
are tax deductible)
o Credit subsidies- Veterans Administration provides
Home loans
o Benefit in kind subsidies: Non cash benefits (foods
stamps, Medicare, Medicaid)
o
Government Subsidies
• Purpose: to encourage a particular type
of private sector action.
• EX - Homeownership is encouraged by
the government, so Mortgage interest is
tax deductible.
Government Subsidies
• Business Subsidies:
o
o
o
Oil companies receive tax breaks to encourage oil
production to make us less dependent upon
foreign oil
Airlines received government aid post 9/11 to help
offset lost revenue.
Government pays farmers to not plant certain
crops to keep production down and stabilize prices
Government Subsidies
• Social Welfare Subsidies:
o
o
o
o
o
o
o
Social Security (no means test, i.e. one does not have to
prove that one lacks the means in order to qualify for the
benefit.) Financed by FICA payroll tax
Medicare (no means test)
Unemployment Insurance (no means test)
Temporary Assistance to Needy Families (TANF = means
test)
Supplemental Security Income (means test)
Food Stamps (means test)
Medicare federal medical coverage for people on TANF or
SSI (means test)
Foreign Policy
Foreign Policy
• President and Congress Share powers
o
o
o
President is commander in chief and can deploy
troops, while Congress controls the money
funding the military and can declare war.
President makes appointment for ambassadors,
but Senate approves
President makes treaties, but Senate ratifies
(some presidents use Executive Agreements,
which do not need to be ratified to get around this)
Take Five…
What is the War Powers Act?
What type of impact has it
had on our military?
Foreign Policy
• President and Congress Share powers
o
WAR POWERS ACT
 Response to Vietnam
 President must notify Congress within 48 hours of
deploying troops
 President must bring troops home after 60 days unless
further authorized by Congress to keep troops in hostile
situation
 Act has had little impact on the execution of our military
policy
Foreign Policy
• Presidential Support for Foreign policy:
o
o
o
o
o
o
Secretary of State
Secretary of Defense
Director of National Intelligence
CIA
NSA
National Security Council-”NSC” (coordinates
efforts that effect National Security)
 President, VP, Sec of State, Sec of Defense, CIA head,
National Security Advisor