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CHAPTER 18
Economic Policy
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
LEARNING OBJECTIVES
1.
How do you define “deficit,” “national debt,” and “gross domestic product”?
2.
What makes the politics of taxing and spending so difficult?
3.
On which programs does the federal government spend most of its money?
4.
Who in the federal government can make our economy strong?
5.
Why does the federal government ever have a budget deficit?
SUMMARY OVERVIEW
Since 1960, the government has spent more money than it takes in; the amount it spends in
excess of what it takes in each year is called the deficit and the total amount of all deficits is
the national debt. Deficits that result in debt are important economically only insofar as the
government cannot make the payments on its bonds in a currency that people regard as stable
and valuable.
Today’s debates about deficit spending and debt accumulation are so rancorous in part
because they have taken shape in the midst of a weak economy. The debates are also made
more intense by the fiscal challenges that policymakers see just over the horizon.
The American government borrows whenever it needs the money without much regard for
what it gets. Two proposals have been made to combat the nation’s debt: cutting spending
and raising taxes; neither option is seen as a viable option. Voters seem to respond more to
the condition of the national economy than to their own personal finances. However, it is by
no means clear that the federal government can or will do whatever is necessary to reduce
unemployment, cut inflation, lower interest rates, and increase incomes just to win
an election.
Most voters would like to have three things—lower taxes, less debt, and new programs. The
difficulty here is that the policies endorsed are inconsistent with one another. We cannot have
lower taxes, no debt, and higher spending on politically popular programs. If we have more
spending, we have to pay for it, either with higher taxes or with more borrowing.
Ways to improve the economy:
1.
Monetarism
2.
Keynesianism
3.
Planning
4.
Supply-side tax cuts
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part.
126
Chapter 18: Economic Policy
In our government it is not easy to implement economic reform. The machinery for making
decisions about economic matters is complex and not under the president’s full control.
Within the executive branch, three people other than the president are of special
importance—the chairman of the Council of Economic Advisors, the director of the Office of
Management and Budget, and the secretary of the treasury. The Council of Economic
Advisors is seen by other executive agencies as the advocate of the opinion of professio nal
economists, who despite their differences generally tend to favor reliance on the market. The
chief function of the Office of Management and Budget is to prepare estimates of the amount
that will be spent by federal agencies, to negotiate with other departments over the size of
their budgets, and to make certain that the legislative proposals of these other departments are
in accord with the president’s program. The secretary of the treasury provides estimates of
the revenue that the government can expect from existing taxes and what will be the result of
changing tax laws.
The Federal Reserve System (the Fed) is independent of both the president and Congress. Its
most important function is to regulate, the supply of money and the price of money. The Fed
sets monetary policy, that is, the effort to shape the economy by controlling the amount of
money and bank deposits and the interest rates charged for money.
Congress is the most important part of the economic policymaking machinery. It must
approve all taxes and almost all expenditures; there can be no wage or price controls without
its consent; and it has the ability to alter the policy of the nominally independent Federal
Reserve Board by threatening to pass laws that would reduce its power.
The federal budget is a list of everything the government is going to spend money on, with
only slight regard for how much money is available to be spent. The federal budget should be
based on first deciding how much money the government is going to spend and then
allocating that money among different programs and agencies. There is a big loophole in the
current budget process: Nothing in the process requires Congress to tighten the government’s
financial belt.
Fair tax law generally has been viewed as one that keeps the overall tax burden rather low,
requires everyone to pay something, and requires the better-off to pay at a higher rate than
the less-well-off.
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CHAPTER OUTLINE
I.
The Politics of Economic Prosperity
A.
What Politicians Try to Do
II.
The Politics of Taxing and Spending
III.
Economic Theories and Political Needs
A.
Monetarism
B.
Keynesianism
C.
Planning
D.
Supply-Side Tax Cuts
© 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Chapter 18: Economic Policy
IV.
The Machinery of Economic Policymaking
A.
The Fed
B.
Congress
C.
Globalization
V.
Spending Money
VI.
The Budget
VII.
Reducing Spending
VIII.
Levying Taxes
A.
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127
The Rise of the Income Tax
TEACHING TOOLS
LEARNING OBJECTIVE 1: HOW DO YOU DEFINE “DEFICIT,” “NATIONAL
DEBT,” AND “GROSS DOMESTIC PRODUCT”?
Critical Thinking Question
Identify deficit, national debt, and gross domestic product (GDP). Include how the three terms
are related.
In-Class Activity
Ask the class to explain how deficit, national debt, and gross domestic product are related in our
economy.
Lecture Launcher
Discuss whether the government should continue to spend outside of its means.
LEARNING OBJECTIVE 2: WHAT MAKES THE POLITICS OF TAXING AND
SPENDING SO DIFFICULT?
Critical Thinking Question
Identify the three things that voters want from economic policy; then briefly explain what makes
wanting these things so difficult.
In-Class Activity
Divide the class into four groups. Each group will report out on one of the possible methods to
reform the economy.
Lecture Launcher
Discuss why the two proposed methods of improving the economy—cutting spending or raising
taxes—receive such opposition.
© 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
128
Chapter 18: Economic Policy
Learning Objective 3: ON WHICH PROGRAMS DOES THE FEDERAL
GOVERNMENT SPEND MOST OF ITS MONEY?
Critical Thinking Question
Identify the programs upon which the federal government spends the majority of its money.
In-Class Activity
Ask the class which items they feel the government should devote its money to and then discuss
why the government devotes its money to the programs it currently does.
Lecture Launcher
Discuss why the government can get away with overspending on the programs it currently does.
(Why don’t the American people demand lessening the national debt?)
Learning Objective 4: WHO IN THE FEDERAL GOVERNMENT CAN MAKE OUR
ECONOMY STRONG?
Critical Thinking Question
Describe the role that each of the main economic agencies have in our economy.
In-Class Activity
Discuss with the class why the president doesn’t just enforce his solution to the economy.
Lecture Launcher
Discuss with the class how they think the economy can be improved (made strong).
Learning Objective 5: WHY DOES THE FEDERAL GOVERNMENT EVER HAVE A
BUDGET DEFICIT?
Critical Thinking Question
Identify, from your text, why the government is unable to lower, or abolish the budget deficit.
In-Class Activity
Discuss the factors that lead to a budget deficit.
Lecture Launcher
Discuss why the government has continued to be allowed to produce a budget deficit.
© 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
Chapter 18: Economic Policy
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129
KEY TERMS
budget
A document that states tax collections, spending levels, and the
allocation of spending among purposes.
budget resolution
A congressional decision that states the maximum amount of
money the government should spend.
deficit
The result of when the government in one year spends more
money than it takes in from taxes.
discretionary spending
Spending that is not required to pay for contracts, interest on the
national debt, or entitlement programs such as Social Security.
economic planning
The belief that government plans, such as wage and price
controls or the direction of investment, can improve the
economy.
entitlements
A claim for government funds that cannot be changed without
violating the rights of the claimant.
fiscal policy
Managing the economy by the use of tax and spending laws.
fiscal year
For the federal government, October 1 through the following
September 30.
globalization
The growing integration of the economies and societies of the
world.
gross domestic product
The total of all goods and services produced in the economy
during a given year.
Keynesianism
The belief the government must manage the economy by
spending more money when in a recession and cutting spending
when there is inflation.
monetarism
The belief that inflation occurs when too much money is chasing
too few goods.
monetary policy
Managing the economy by altering the supply of money and
interest rates.
national debt
The total deficit from the first presidency down to the present.
sequester
Automatic spending cuts.
supply-side theory
The belief that lower taxes and fewer regulations will stimulate
the economy.
WEB LINKS
Internal Revenue Service: www.irs.gov
Tax Foundation: www.taxfoundation.org

INSTRUCTOR RESOURCES
© 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.
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Chapter 18: Economic Policy
Birnbaum, Jeffrey H., and Alan S. Murray. Showdown at Gucci Gulch. New York: Random
House, 1987. Lively journalistic account of the passage of the Tax Reform Act of 1986.
Kiewiet, D. Roderick. Macroeconomics and Micropolitics. Chicago: University of Chicago Press,
1983. Argues that citizens vote on the basis of their estimate of national economic
conditions as well as their own financial circumstances.
Morgenson, Gretchen, and Joshua Rosner. Reckless Endangerment: How Outside Ambition,
Greed, and Corruption Led to Economic Armageddon. New York: Times Books/Henry
Holt, 2011. The subtitle says it all.
Samuelson, Robert J. The Good Life and Its Discontents. New York: Times Books/Random
House, 1995. A readable, intelligent account of American economic life since the Second
World War.
Schick, Allen. The Federal Budget. Washington, D.C.: Brookings Institution, 2000. Excellent
overview of how Washington allocates money.
Sorkin, Andrew Ross. Too Big to Fail: The Inside Story of How Wall Street and Washington
Fought to Save the Financial System—and Themselves. New York: Viking, 2009. The
captivating tale of how certain top Washington officials and Wall Street leaders reacted
to the near-collapse of the financial system.
Stein, Herbert, and Murray Foss. The New Illustrated Guide to the American Economy, 3rd ed.
Washington, D.C.: American Enterprise Institute, 1999. A vivid collection of graphs, all
clearly explained, that describes the American economy and government spending from
the 1950s through the 1990s.
© 2015 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in
part.