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Chapter 18
Economic Policy
US Government AP
The Economy

Hard to predict how policy will
impact the economy over the long
term

Natural business cycle
The Business Cycle

Over time a
business
gains and
loses

This is
normal
The Impact of Government

Policy goal is to keep the line as
straight as possible, with steady
growth

Becomes a valence issue
The Debt
To eliminate it:
Raise taxes or Reduce spending

Or a combination of both
Enter valance—Dem’s vs Rep’s
1990’s
We had a budget
surplus
Dems
-start new programs
Had to
compromise
(did both)
Rep’s
-give a tax cut
The players in Fiscal Policy







OMB
CBO
Congress
President
Cabinet Departments
Agencies (GAO)
Interest groups
Other Players-Monetary Policy
1.
The Federal Reserve Board

Sets interest rates
Is independent
Congress
Approves taxes
Approves the budget (CBO)
Foreign policy laws (NAFTA)

2.



Triple play…….
1.
2.
3.
OMB Director
Chair of the Council of Economic
Advisors
Treasury Secretary
These 3 offices are the closest advisors to
the President on the economy
Economy and Elections
“Pocket Book” issues during an election
help/hurt incumbents (2008)
1. Unemployment
2. Inflation
3. Older voters/Fixed income
Econ and Elections II


Makes politicians tempted to look at
short term policy
Try to improve it at election time
IMPOSSIBLE TO DO
D= ↓ unemployment R= ↓ inflation
The “Perfect” Policy
1.
2.
3.
Have nice Govt. programs
Have less debt (Lower spending)
Keep taxes low
mission: impossible
5 Economic theories
1.
2.
3.
4.
5.
Monetarism
Keynesianism
Planning
Supply Side tax cuts
Reaganomics
5 theories

Each President chooses advisors
who have his point of view on
policies
Monetary policy


a.
b.
Govt. focus on the supply of money
Control the supply by:
Deposit requirements (reserve req.)
Interest rates (prime)
Fiscal Policy

a.
b.
Government spending policy
The budget
The tax rate
The Budget
1.
2.
3.
4.
5.
October 1 to September 30
Executive branch and Congress
President/OMB put it out
Congress (H/S) go over it—put
ceilings in place
Changes are usually small
Entitlements




Most of the Budget is money that
must be spent (66%)
Social Security
Medicare
Bond payments
The Budget-The End



Is out of control
Deficit spending allows the budget
to be whatever it “needs” to be
Current deficit: $15 trillion
(Growing at $1.3 million a minute today)
(your share?-$50,000)
The “Perfect” Policy
1.
2.
3.
Have nice Govt. programs
Have less debt (Lower spending)
Keep taxes low
mission: impossible
3 Things that Matter in Economic
Policy
a. The economic health of the nation
(real vs. perceived) (interest group)
(Consumer confidence)
b. The types of govt. spending (client,
interest group)
c. Taxes- rates and distribution of
benefits (majoritarian or client)