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Chapter 18
Economic Policy-Making
Economic Policy
I. Economic Health
 A. Deficit Spending

 1.
The government spends more than it
receives almost every year (deficit).
 2. Some deficit spending is unavoidable due
to unforeseen circumstances (natural
disasters).
 3. Most Americans are opposed to deficit
spending.
 4. The national debt is the accumulation of
deficits over the years.
Figure 16.2: History of the National Debt
Economic Policy
I. Economic Health
 B. Policy Differences

 1.
The deficits have raised policy debates over
the past 35 years.
 a.
Democrats have generally favored increasing
taxes or shifting of taxes to cover the budget.
 b. Republicans have generally favored cutting
programs or reducing services.
Economic Policy
II. Economic Policy
 A. Economic Theory
 1. Monetarism - Increase the money supply
at a rate equal to economic growth and let
the free market operate.
 2. Keynesianism - When demand is low,
gov’t should pump more money into the
economy by spending more than it collects in
taxes. If demand is high, increase taxes.

Economic Policy
II. Economic Policy
 A. Economic Theory


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3. Economic Planning – Not popular in the U.S.
Views the free market as undependable and the
government should plan parts of the economy such
as wage and price controls.
4. Supply Side tax cuts - less gov’t interference,
lower taxes to create an incentive for reinvestment
and greater productivity.
5. “Reaganomics”- Combines monetarism, supplyside tax cuts and domestic budget cuts.
Economic Policy
II. Economic Policy
 B. Key Players in Economic Policy:
 1. Congress – most important, must approve
all taxes and expenditures.

Council of Economic Advisors – Part of
EOP, forecasts economic trends, supports
the view of the President.
 2.
Economic Policy
II. Economic Policy
 B. Key Players in Economic Policy:

Office of Management and Budget – Part of
EOP, estimates budget needs for the departments
and agencies.
 4. Secretary of the Treasury – key link between
the business world and the government.
 5. The Federal Reserve Board – Appointed by
the President, confirmed by the Senate. Regulates
the money supply and the price of money.
 3.
Economic Policy
II. Economic Policy
 C. Fiscal policy affects the economy by
making changes in government’s methods of
collecting money and spending.
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1. The money comes from income taxes (progressive),
social security taxes, borrowing and tariffs. (NAFTA
largely ends tariffs from Mexico and Canada).
 2. The money is spent on social security and Medicare
(entitlements), Defense and the deficit among others.
Economic Policy

II. Economic Policy
D. Monetary policy is the government’s control of
the money supply.
1. The government controls how much money is in
circulation by the amount they print and coin.
2. If too much money is out there, it tends to cause
inflation, or devalues the dollar. Too little money
in circulation and deflation occurs. The Federal
Reserve Board helps to regulate this (interest rates
and reserve requirement).
Economic Policy
III. The Budget
 A. Background
 1. The Budget is a policy document that
announces how much the government plans
to collect in taxes and spend in programs.

 2.
There was no federal budget before 1921.
Economic Policy
III. The Budget
 A. Background
 3. The Congressional Budget Act of 1974
establishes budget procedures.

 a.
The president submits the budget
 b. CBO analyzes the budget and reports to House
and Senate budget committees.
 c. Each committee submits a budget resolution to
set a total budget ceiling.
 d. Congress considers appropriations bills that fund
programs within the established limits.
Economic Policy

III. The Budget
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B. Why don’t we balance the budget?
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1. Almost two-thirds of the federal budget is tied up
in entitlements (Medicare and Social Security) -big
changes are not possible.
2. The Gramm-Rudman Balanced Budget Act (1985)
capped spending and called for automatic cuts from
1986-1991.
3. The Budget Enforcement Act of 1990 capped
discretionary spending and raised taxes. If
entitlement spending increased, discretionary
spending had to be cut or taxes increased.
Figure 16.3: When Will the Crunch Come? Projections of the Growth in
Federal Spending
Economic Policy
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III. The Budget
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C. Taxes
 1.
Income taxes are the major source of
federal revenues.
 2. The 16th Amendment authorized the
income tax.
 3. The tax burden is kept low compared to
other industrial nations.
 4. We use a progressive tax structure with
higher incomes paying a higher rate.
Figure 16.5: Federal Taxes on
Income, Top Percentage Rates

Source: Updated from Congressional
Quarterly Weekly Report (September 18,
1993), 2488.
Figure 16.4: Tax
Burdens in
Nineteen
Democratic
Nations
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Source: Statistical
Abstract of the United
States, 1998, 841.