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Chapter Eighteen
Economic Policy
Theories of Economic Policy
• Taxes and spending are the major tools
with which government implements policy.
• Policymakers rely on economic theories to
explain how the market or capitalist
economy works.
• An absence of government control over
the economy is termed laissez faire.
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Theories of Economic Policy (Cont’d)
• Keynesian economic theory maintains
that aggregate demand can be adjusted
through a combination of fiscal and
monetary policies.
• Monetarists question the political utility of
Keynesian fiscal policies and favor
reliance on monetary politics.
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Theories of Economic Policy (Cont’d)
• Supply-side economics represents a
return to laissez-faire ideas of fewer
government regulations and less taxation.
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Figure 18.1: Budget Deficits and Surpluses
Over Time
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Public Policy and the Budget
• Since 1921, the president has been
responsible for drafting and submitting the
budget to Congress for approval.
• The budget states how much money
government agencies will be allowed to
spend on their programs, planned
expenditures and receipts.
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Public Policy and the Budget (Cont’d)
• The preparation of the budget is
supervised by the Office of Management
and Budget (OMB).
• The budget must then be passed by
Congress.
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Public Policy and the Budget (Cont’d)
• Attempted reforms to the budget process
have included the Budget and
Impoundment Control Act, GrammRudman balanced budget act, the Budget
Enforcement Act and finally the Balanced
Budget Act.
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Tax Policies
• Tax policies are designed to provide a
continuous flow of revenue without
requiring new annual legislation.
• Nevertheless, tax policy is often adjusted
to meet budgetary outlays, to make the tax
burden more equitable, or to control the
economy.
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Tax Policies (Cont’d)
• The tax burden has increased over time in
the United States but is still low compared
with the tax rate of major industrialized
democratic nations.
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CWW 18.2: Tax
Burdens in
Thirty
Countries
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Spending Policies
• Unlike tax policies, which usually do not
vary greatly from year to year, government
spending is subject to annual changes.
• Most federal spending has shifted to two
major categories, payments to individuals
and net interest payments.
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Figure 18.2: Federal Spending in 2005,
by Function
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Spending Policies
• The general trend of increase in the
percentage of federal spending relative to
GDP from World War II to the present is
explained by bureaucratic (incremental
and uncontrollable spending) and
political factors.
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Figure 18.3: National Government Outlays
over Time
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Figure 18.4: Government Outlays and
Receipts as a Percentage of GDP
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Economic Equality
• How have government spending and tax
policies affected economic inequality in
America?
• Transfer payments—government payments
to individuals—have had a definite effect,
increasing income equality.
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Economic Equality (Cont’d)
• Although the tax burden of the federal
income tax is progressive, the burden of
other taxes is highly regressive.
• The highly unequal distribution of income
in American society can be analyzed from
the perspective of the two models of
democracy.
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