Download Chapter 17

Domestic Policy
(Economic and Social Policy)
Chapter 17
Introduction
• Public Policy Process
– The political interactions that lead to the
emergence and resolution of public policy
issues.
– Three stage process:
• Problem recognition
• Policy formation
• Policy implementation
Introduction
• Problem Recognition
– The stage of the policy process where
conditions in society become recognized
as a public policy problem
• Policy Formation
– The stage of the policy process where a
policy is formulated for dealing with a
policy problem.
Introduction
• Policy Implementation
– The stage of the policy process where a
policy is put into effect and evaluated.
Economic Policy
• Economy
– A system for the exchange of goods and
services between the producers of those
goods and services and the consumers of
them.
Economic Policy
• Gross Domestic Product (GDP)
– A statistic that measures all goods and
services produced by a nation’s economy.
Economic Policy
• Laissez-faire economics
– Holds that the owners of business should
be allowed to make their own production
and distribution decisions without
government regulation or control
– Advocated by Adam Smith in The Wealth
of Nations (1776)
– Smith argued that producers will supply a
good when there is a demand for it.
– A “free market capitalist” system
Economic Policy
• Communism
– Holds that free-market systems exploit
employees because they work for wages
below their contributions, while owners of
business reap the greatest rewards.
– A system whereby production is
collectively owned.
– “From each according to their ability, to
each according to their need”
Economic Policy
• Mixed Economies
– The most common free market economy
today.
– The main focus is on private firms and
transactions, but a substantial role is also
given to the government.
– United States is a mixed economy
– The free market is allowed to exist, but
government steps in when needed, usually
through regulation.
Economic Policy
• The Economic Policies of the United
States are broken into two distinct
types:
– Fiscal Policy
– Monetary Policy
Economic Policy
• Fiscal Policy
– Policy designed to improve the economy
through spending and taxation.
Economic Policy
• Fiscal policy originates in the economic
theories of John Maynard Keynes and
his work The General Theory of
Employment, Interest and Money
(1936).
• Keynes advocated that an economic
downturn could only be shorted by
increased government spending.
Economic Policy
• Economic Depression
– A very severe and sustained economic
downturn. Depressions are rare in the
United States, with the last one in the
1930s
• Economic Recession
– A moderate but sustained downturn in the
economy. Recessions are part of the
economy’s normal cycle of ups and downs.
– When GDP drops in size for two
consecutive quarters
Economic Policy
• Deficit Spending
– The situation when the government
spends more than it collects in taxes and
other revenues
– This can be accomplished through the
borrowing and printing of money.
– This can be used to place money in the
hands of consumers, which they will
spend, which will stimulate production,
which will create jobs and improve the
economy.
Economic Policy
• Demand Side Economics
– A form of fiscal policy that emphasizes
“demand” (consumer spending).
Government can use increased spending or
tax cuts to place more money in
consumer’s hands and thereby increase
demand.
Economic Policy
• Budget Deficit
– The situation when the government’s
expenditures exceed its tax and other
revenues.
• Public Debt (National Debt)
– The total amount of money that the
federal government owes.
– National Debt
Economic Policy
• Balanced Budget
– The situation when the government’s tax
and other revenues for the year are
roughly equal to tis expenditures.
• Budget Surplus
– The situation when the government’s tax
and other revenues exceed its
expenditures.
Economic Policy
• Supply-side economics
– A form of fiscal policy that emphasizes
“supply” (production).
– Example: Tax cut for business.
– Designed to encourage investment in
business and capital markets, creating
economic growth that results in new
employment and income. As jobs increase
so does spending, creating economic
growth.
Economic Policy
• Advocated by Ronald Reagan in his “trickle
down economics”
• Also advocated by George W Bush, who
initiated sharp cuts in the capital gains tax.
• Capital gains tax
– The tax that individuals pay on money gained
from the sale of a capital asset, such as property
or stocks.
Economic Policy
• Progressive Tax
– “The more you earn, the higher a
percentage you pay” – Income Tax
• Regressive Tax
– “The less you earn, the higher a
percentage you pay” – Sales tax
The Federal Budget Process
• Step 1: (Spring) The President consults
the advice of the Office of
Management and Budget (OMB) and
informs them of special budget
instructions for other agencies.
• Step 2: (Summer) OMB relays these
instructions and the agencies begin
preparing their individual budgets.
The Federal Budget Process
• Step 3: (September) OMB reviews the
proposed budgets of the agencies.
• Step 4: (December) OMB prepares a
final budget for the President,
including all executive agencies.
The Federal Budget Process
• Step 5: (January) President submits
executive budget proposal to Congress
for approval. This budget is just a
request, and does not have to be
followed)
• Step 6: (April) Congress adopts budget
resolution (to establish overall
spending and revenue levels)
The Federal Budget Process
• Step 7: (summer) The House and
Senate Appropriations Committees and
Sub-Committees review budget items
and make recommendations
The Federal Budget Process
• Step 8: (September) Work House and
Senate versions of the appropriations
bills concludes, and conference
committees work out any differences
between the two. This final version is
sent to the President to the signed or
vetoed.
• Step 9: (October 1st) Fiscal Year
begins.
Economic Policy
• Monetary Policy
– Policy designed to improve the economy
by controlling the supply of available
money.
Economic Policy
• Federal Reserve Board ( “The Fed”)
– Has control over the money supply
– Created by the Federal Reserve Act of
1913
– Board of 7 governors appointed by the
President (subject to Senate confirmation)
for 14 year terms
– Regulates all National Banks and all State
Banks which choose to become members
of the Federal Reserve System
Economic Policy
• Affects the money supply in two ways:
– Deciding how much money is in circulation
by raising or lowering the cash reserve
member banks are required to deposit
with the Fed.
– Lowering or raising the interest rate that
member banks are charge when they
borrow from the Federal Reserve. Banks
that aren’t in the Federal Reserve System
will still usually mimic the fluctuations in
the interest rate.
Economic Policy
• Controlling inflation is a function of both
fiscal and monetary policy.
• Inflation
– A general increase in the average level of prices
of goods and services.
– Fiscally, inflation control occurs when taxes are
increased, thus reducing demand.
– Monetarily inflation control occurs when money is
removed from circulation, this reducing the
potential for demand.
Income Security Policy
• Poverty Line
– The annual cost of a thrifty food budget for an
urban family of four, multiplied by three to allow
also for the cost of housing, clothes and other
expenses.
– As defined by the federal government: $22,050
(for a family of four)
– Families below the poverty line are considered
poor and are eligible for certain forms of public
assistance.
Income Security Policy
• Transfer Payments
– Government benefits that are given
directly to individuals, as in the case of
social security payments to retirees.
– Most transfer payments are distributed
through entitlement programs.
Income Security Policy
• Entitlement Programs
– Any of a number of individual-benefit
programs, such as social security, that
require government to provide a
designated benefit to any person who
meets the legally defined criteria for
eligibility.
– Same force of law as taxes. Once a
person meets a certain criteria, they are
entitled by law to receive an entitlement.
Income Security Policy
• Social Insurance
• Public Assistance
Income Security Policy
• Social Insurance
– Social welfare programs based on the
“insurance” concept, requiring that
individuals pay into the program in order
to be eligible to receive funds from it.
Income Security Policy
• Social Security
• Unemployment Insurance
• Medicare
Income Security Policy
• Social Security was established in 1935 with the
intent of providing a type of insurance for a large
segment of the public.
• Social Security is not a pension fund.
• Workers Per Retiree
– Initially for every recipient of Social Security there were
forty workers paying into the general fund—a one-toforty ratio. Today, the ratio is more like one-to-three,
and it will get worse in future years.
Workers Per Retiree
US Life Expectancy
Income Security Policy
• Public Assistance
– A term that refers to social welfare
programs funded through general tax
revenues and available only to financially
needy.
– Available to those who qualify under a
means test.
• Means Test
– The requirement that applicants for public
assistance must demonstrate that they are
poor in order to be eligible for the
assistance.
Income Security Policy
• Food Stamps
• Subsidized Housing
• Medicaid
Income Security Policy
• Temporary Assistance for Needy
Families
– Established new work requirements for
welfare recipients and limits on the
number of years an individual can receive
assistance
Income Security Policy
• In-Kind Benefit
– A government benefit that is a cash
equivalent, such as food stamps or rent
vouchers. This form of benefit ensures
that recipients will use public assistance
in a specialized way.
Healthcare Policy
• Medicare
– A federal health insurance program that
covers US residents over the age of sixtyfive. The costs are met by a tax on wages
and salaries.
• Medicaid
– A joint state-federal program that
provides medical care to the poor. The
program is funded out of general
government revenues.
Healthcare Policy
• Universal Coverage
– “Coverage for all”
– More than 40 million Americans are
without health insurance
• National Health Insurance
– A plan under which the government
provides basic health insurance to all
citizens. In most of these plans, the
program is funded by taxes on wages or
salaries.