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Big Questions of Public Policy * How does the government decide which problems to fix? * How do the big institutions of government affect public policy? * What are the costs, benefits, and politics of making public policy? What are the political effects of this data? Public Policy What is Public Policy? Public Policy = how to solve a “public” problem - the process of policy coming into being and evolving over time Making Public Policy in 5 Steps 1. The National Agenda - getting on the radar 2. Policy Formulation - determining the remedy 3. Policy Adoption - choosing the remedy 4. Policy Implementation - regulating the policy 5. Policy Evaluation - assessing policy Setting the Political Agenda • The political agenda: something that is important to lots of people –Healthcare for all? • Getting on the agenda: - major event occurs - Trend in statistics - interest group awareness - media awareness • Should policy be made radically or incrementally? When Obama Entered Office… Institutions Affect Public Policy • Congress makes laws; President enforces laws – Both help decide policy agenda • Court decisions require enforcement assistance school desegregation, abortion – Often tackle issues ignored by legislature/executive • The bureaucracy works with interest groups, Congress, president, – Iron Triangles – Issue Networks Other Influences on Public Policy • Groups may react if their issues are being ignored – Current ex’s: Tea Party, Immigration Reform • States are laboratories for future national policies – Federalism – Block Grants Costs, Benefits, Politics Effect on Policy * In order to make a policy decision, policymakers must assess the following items: • Cost: any burden, monetary or non-monetary, that affect a group/people by a policy • Benefit: any satisfaction, monetary or nonmonetary, that affect a group/people by a policy • Politics = who actually benefits/pays and who ought to benefit/pay - getting items on the policy agenda - helping one group over another group The POLITICS of Making Public Policy • Majoritarian politics: benefits for all & costs for all – Ex: Military spending • Interest group politics: benefits for a few & costs for a few – Ex: General Motors & car factory workers • Client politics: benefits for a few & costs for all – Pork-Barrel Projects “Earmarks” – Ex: “Bridge to Nowhere” in Alaska • Entrepreneurial politics: Benefits for all & costs for a few – Ex: food safety regulations, environment safety Classifying and Explaining the Politics of Different Policy Issues Economic Policy What words, concepts, laws, powers, etc. have we learned about this year that are connected to economic policy? Big Questions of Economic Public Policy * How does the government measure the economy? * How does the government use fiscal policy & monetary policy to create economic policies? * How does political ideology affect the economic decisions of policymakers? Review: What is a Mixed Economy? Mixed Economy: * Combination of: Market Economy & Command Economy **We have economic choices (market), with some govt. regulation and monitoring (command) The US Government’s Influence on the Economy * Government’s 3 Goals for the US Economy: (1) Keep production levels growing (2) Maintain steady prices (3) Encourage everyone to have a job * US Govt. measures each economic goal monthly * US Govt. creates policies “to help” the economy meet each goal: - Congress & President = Fiscal Policy - The Federal Reserve = Monetary Policy No Magic Wand Exists to “Fix” the Economy! Measuring the Economy * In Sports we have different statistics that tell us how well a player or team is performing. Based upon this data, we as fans are able to judge if a player or team is excelling or struggling. * In economics, we have statistics that tell us how well the country’s economy is performing. These statistics include: GDP, CPI, and the Unemployment rate. Based upon these statistics, the government is able to take actions (fiscal policy & monetary policy) to help the economy meet each goal. Measuring the Health of our Economy 1. Gross Domestic Product (GDP) = measures the total value of all new goods & services produced in the USA 2. Consumer Price Index (CPI)= measures how much money people spend on consumer goods - Measures changes in inflation (increase in the price of goods) - Too much money in circulation can lead to HIGH levels of inflation look at Zimbabwe 3. Unemployment Rate: measures the percentage of people who want a job, but can’t find one Global GDP Leaders, (2011 IMF) How Inflation Works? 1. Did you have to spend more or less over time to get the same amount of gasoline? 2. Did the value of a dollar gain or lose purchasing power over time? What determines the price of Gasoline? Source: http://www.eia.gov The Business Cycle: measures the long term health of the economy National Business Activity, 1880-Present Definition Prosperity Economy GDP Data High is booming! CPI Employment (inflation) Data Data Slowly Rising BIG labor demand (low unemployment) Recession Economy Slowing Slowing Down is slowing Depression Economy Really is in bad LOW shape Really LOW Slowing labor demand Really LOW demand (high unemployment) The Politics of Prosperity • Many voters often look at how their own economic situations have changed when they choose candidates retrospective voting – Are poor/prosperous economic conditions the result of our elected/unelected politicians? – How much affect can the government have on manipulating the economy? How to Keep the Economy Stable? Fiscal Policy & Monetary Policy Fiscal vs. Monetary Policy What the Heck Happened to the Economy in 2008?!?!?! As you view the video, answer the following questions. 1. Describe the causes of the economy’s drastic decline in 2008. 2. How is the economy still feeling the impact of the 2008 events? 3. Write down something interesting that you learned that you did not already know? Fiscal Policy vs. Monetary Policy Fiscal Policy Def: Taxing & Spending policies Tools Involved: Budget-making (taxing & spending) Who is the boss? Congress & President involved Speed of Policy: Quicker way to affect the economy Monetary Policy Def: Manipulating the money supply of the economy controlling inflation Tools Involved: - Cut/Raise Interest Rates - buy/sell securities encourage or discourage the borrowing of money Who is the boss? “The Fed” - Independent of Politics Speed of Policy: Slower way to affect the economy Politicians and the Economy •Elected officials are tempted to take a short-term view of the economy and satisfy the self-regarding voter “Politics 101” •Government can’t magically improve the economy – Each economic/political ideology has their own theories on helping the economy Ideology and the Economy • Ideology plays large role in shaping policy choices • Democrats tend to want the government to play an active role to improve the economy • Republicans tend to want the government to play a minimal role to improve the economy • BOTH parties desire – high GDP – low unemployment – steady inflation Party ID and Attitudes Toward Government Spending Blue = Democrat Red = Republican Fiscal Policy * Fiscal Policy = Congress & President use taxing and spending policies to keep the economy booming while making voters happy! * Fiscal Policy is made via the budget 2012 Budget Proposal 2012 Federal Budget Proposal The Politics of Taxing and Spending • Majoritarian politics yields conflicting recommendations: lower taxes, less debt • Meaningful tax cuts are politically difficult – Who should get their taxes cut? – new programs tend to be more popular with politicians how will they be funded? • Different Fiscal Policy philosophies exist… Fiscal Policy Theories… •Keynesianism: When demand in the economy is too low, the government should pump money into the economy by spending more than it collects in taxes running a deficit – Democrats often favor this approach – Republicans often dislike this approach Fiscal Policy Theories… • Supply-Side Tax Cuts: the economy will improve with less govt. interference, therefore the govt. should lower taxes & regulations – Lower taxes would create incentives for private investment and purchasing – Greater economic productivity will then produce more tax revenue – Voodoo Economics? Fiscal Policy Theories… Reaganomics: refers to the ideas promoted by President Reagan in the 1980s A. Deregulation remove laws/rules/regulations that restrain industries B. Increase military spending led to large deficits & the increase in national debt C. Cut tax rates (income & capital gains) D. Lower inflation (technically the Fed’s job) ** Overall Effect: Stimulated economy— unemployment decreased, business activity increased, but deficits increased What Should the Government do if the Economy is in a Recession? If the Economy is in a recession… The Economy should recover and expand! Fiscal Policy Fixes: Taxes & Govt. Spending Overall Govt. Goal in a Recession: INCREASE the amount of money going into the US economy to stimulate growth! The Effect of More Money in the US Economy * In a recession, the GOVT. puts more $$ circulation: 4. Stores hire more people The cycle will REPEAT itself until the amount and value of money deflates. 3. Stores & businesses make more money 1. People have more money 2. People spend money at stores & businesses What fiscal policy decisions do you think the US government should have made between 2008-2009? Monetary Policy Balancing the Money Supply *Fact: The amount of money in an economy is important because it affects the level of spending, employment, prices and economic growth. Too much spending can lead to inflation (low value of a dollar) Too little spending can lead to unemployment causing the production of goods to decrease *Therefore: The Government needs tools to keep inflation steady and keep employment high! Monetary Policy Definition: manipulating the amount of money in circulation to alter credit markets, employment, and the rate of inflation. –Federal Reserve System makes monetary policy –Monetary Policy Philosophies: The Fed can either increase/reduce the money supply: • Increasing the rate of growth is loose monetary policy • Reducing the rate is tight monetary policy The Federal Reserve • Members are appointed by the president, confirmed by the Senate – serve a nonrenewable fourteen-year term – Can be removed for cause • Somewhat independent of both the president and Congress – Why is this a good thing? Loose v. Tight Monetary Policy LOOSE Monetary Policy -Fed encourages MORE spending of money TIGHT Monetary Policy -Fed encourages LESS spending of money - Goal is to stimulate economy - Goal is to lower inflation by by putting more dollars into removing dollars out of circulation circulation The Fed’s Most Important Power * The Fed announces changes to monetary policy by raising or lowering the federal funds rate, a government-controlled INTEREST RATE for funds that banks borrow from each other: * The lower the interest rate more lending is encouraged - LOOSE monetary policy * The higher the interest rate less lending is encouraged - TIGHT monetary policy • Why does the Fed have the power of controlling interest rates versus Congress or the President? What is the opinion of this cartoonist? * The work of the FOMC (Federal Open Market Committee) buy/sell government securities (Government IOUs) 1. If the Fed buys securities— puts $$ into circulation more $$ is borrowed & spent; encourages economic growth - loose monetary policy 2. If the Fed sells securities— takes $$ out of circulation less $$ is borrowed & spent; encourages lower inflation - tight monetary policy Another Power of the Fed What Should the Government do if the Economy is in a Recession? If the Economy is in a recession… Monetary Policy Fixes: Reserve Requirement & Discount Rate & Interest Rates (Buying Securities) The Economy should recover and expand! Overall Govt. Goal in a Recession: INCREASE the amount of money going into the US economy to stimulate growth! What monetary policy decisions do you think the US government should have made between 2008-2009? Monetary vs. Fiscal Policy * Monetary policy is slow, but the Fed can make a policy change more quickly than fiscal policy actions * Monetary policy cannot force people to borrow money in a recession * Monetary policy is more powerful against inflation * Fiscal policy is more effective against recessions, because the government does the borrowing itself (rather than hoping private institutions will borrow money) The Effect of More Money in the US Economy 4. Stores hire more people 1. People have more money The cycle will REPEAT itself unless something bad happens to the economy 3. Stores & businesses make more money 2. People spend money at stores & businesses Fiscal Policy Fixes: Taxes & Govt. Spending Monetary Policy Fixes: Reserve Requirement & Discount Rate & Interest Rates (Buying Securities) * In a recession, the GOVT. puts more $$ circulation: The Effect of LESS Money in the US Economy 4. Stores hire less people 1. Harder for people to get money The cycle will REPEAT itself until the amount of money deflates and the value increases. 3. Stores & businesses make less money 2. People borrow & spend less money at stores & businesses Fiscal Policy Fixes: Taxes & Govt. Spending Monetary Policy Fixes: Reserve Requirement & Discount Rate & Interest Rates (Sell Securities) * During High Inflation, the GOVT. wants less $$ circulation: