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Chapter 18 ECONOMIC POLICY GOP “Spending Spree” 2004 federal spending would exceed revenues by $477 Billion! America’s long term debt is owned by 40% of foreigners BASIC ECONOMIC THEORY HOLDS: a. interest rates should be raised when the economy is growing too quickly b. interest rates should be lowered when the economy is sluggish= 2003 The President neither determines interest rates (The Federal Reserve) nor controls the spending (Congress) Market economies: USA (capitalism) Non Market economies: former USSR (communism) COMMAND Economy LAISSEZ FAIRE= natural selection of the economy (Big Gov’t stay out!) a. Adam Smith 1776 treatise- each individual is led by an invisible hand Narrow pursuits of profits serves the broad interests of society WHAT ABOUT ECONOMIC DEPRESSIONS OR INFLATION????? John Maynard Keynes to the rescue……… KEYNES a. aggregate demand= income available to everyone to spend on goods and services b. productive capacity= total value of goods and services that CAN be produced c. Gross Domestic Product (GDP) the value of the goods and services ACTUALLY produced When production exceeds demand—producers cut back on output= unemployment When demand exceeds productive capacity people are willing to pay more. Example 2005 – XBOX 360 $500 in stores , now there are none and they are $8,000.00 On EBAY KEYNES Believes: Aggregate demand can be controlled/adjusted by using 1) Fiscal & 2) Monetary policies FISCAL Policies: controlled by the president & congress by SPENDING & TAXING *Much easier to cut taxes than raise them * Gov’t. spending takes too long to enact in congress *downside is the economy is already recovered when these thing happen *Fiscal Tools are easier to use in one direction than the other 1946 CEA- Council of Economic Advisors within the Executive Office 3 economic advisors (appointed by the President approved by Senate) and a staff of 25 helps the president prepare his annual economic report ****The President neither determines interest rates (Federal Reserve) nor controls spending (Senate) MONETARY Policies: change in MONEY SUPPLY & INTEREST RATES Monetarist support a long range plan of steady growth THE FEDERAL RESERVE est. 1913 Has a board of governors- 7 members one of which is the Federal Chairman They are appointed by the president & have a 14 year tenure The Fed. controls monetary policies in 3 ways 1. change the reserve requirement (amount of cash on hand in the banks) 2. change the amount of the discount rate/interest rate banks are charged from Federal banks to borrow money 3. The buying & Selling of government securities (Treasury notes and bonds) Amount the banks charge for overnight loans *interest rates should be raised when the economy is growing too quickly *Historically, the Fed. Has adjusted rates to combat inflation rather than stimulate economic growth *These policies can pit President VS. the chair of the Fed (Alan Greenspan) KEYNES uses DEFICIT SPENDING- spend in excess and make up for it when the economy recovers SUPPLY SIDE ECONOMICS a. increase the supply of goods b. create tax cuts to stimulate investment in these goods especially among the rich and it will “trickle down” to the working people c. use less government intervention Economic Recovery Act 1981 – ERTA cut tax rates by 23% a. produced massive tax cuts b. cut funding for many social programs c. Deregulation began d. also increased military spending all of this adds up to-“REAGANOMICS” & HUGE BUDGET DEFICITS Check out charts on page 587 Compare Reagan in 1983 to Bush in 2003 What do you think will eventually have to happen? Before 1921 the budget was prepared by Congress, today it is prepared by the president The budget is prepared and submitted to Congress in January All budget requests must go through the OMB Fiscal year is October 1 – September 30 Budget Authority: how much can be spent (authorized) Budget Outlays: how much are they expected to spend Budget Receipts: how much is the Gov’t bringing in through taxes and other revenues President Clinton’s FY 2000 Budget Authority to spend $1,781 billion Outlays were only $1,766 billion Receipts of $1,883 billion = SURPLUS of $117 billion National Debt 2003 - 3.9 Trillion National Debt 2005 - 8 Trillion President Bush’s FY 2005 Authority- $2,355 Billion Outlays$2,400 Billion Receipts- $2,036 Billion =DEFICIT $364 Billion 37% owed to foreign investors! I. PREPARING the President’s BUDGET OMB and they have more than 500 persons working for them Plus, a director who attends the Cabinet meetings of the President Each agency sends a request as to how much they need OMB makes recommendations to the president POLITICS GALORE- interest groups, the president himself, and presidential advisers all want their pet projects to get all the money they request each year they ask for more money II. PASSING the BUDGET- The president’s budget must be approved by Congress This is a very cumbersome process! 3 Committees 1. Tax Committees- responsible for setting and or raising taxes to run the gov’t (House=Ways & Means , Senate=Finance committee) 2. Authorization Committees- authorizes spending in various agencies and departments-Today power has shifted to #3 3. Appropriations Committees – SHOW ME THE MONEY!!!! They decide which programs get the money and how much Problem- No one is responsible for the whole budget = no one takes responsibility if its bad BUDGET REFORMS 1970’s: Budget Committee Structure created the Budget & Impoundment Control Act of 1974 the Congressional Budget Office (CBO) with a staff of more than 200 would prepare alternative budgets for Congress they would also create timetables that were successful at first and then clashed with the President’s budget LET’s TRY TO CONTROL OUR SPENDING IRMA! 1980’s Gramm-Rudman two Republicans who saw Reaganomics spinning out of control passed a law to control their appetites, but congress couldn’t do it, so they passed another law to match the deficit! Congress did not have the will power to balance their budget! IRMA GOT THE CREDIT CARD AGAIN! 1990 President Bush Sr. gets the Budget Enforcement Act passed and creates “Read my Lips, No New Taxes” probably cost him the presidency A. Mandatory Spending: $ to be spent on entitlement programs – such as Social Security, & veteran’s pensions these can not be reduced unless by law “Pay as you go” any expansions of a program must be offset by cuts to other discretionary programs or raise taxes B. Discretionary Spending: money to be spent on authorized programs Such as the military President Clinton & the Republican Congress passed the Balanced Budget Act of 1997 First surplus was in 1996 ahead of schedule Backsliding in the 2000’s The Republican controlled Congress allowed the caps on discretionary spending and pay as you go requirements to expire at the end of 2002 also in 2001 tax rebates were given to citizens to stimulate the economy even the conservative WALL STREET JOURNAL predicted“taxes will go up significantly” during the next decade TAX POLICIES: The TAX CODE is complex and 6,000 pages long! We have progressive taxation on federal taxes (rich pay more) and regressive taxes on State, local and gasoline etc. taxes (poor pay more due to consumption) Before Ronald Reagan 14 tax brackets! (11%-50%) Reagan Bush Sr. Clinton George W. Bush Changes in the tax brackets 15, 28 15, 28, & 31 15, 28, 31, & 40 10, 15, 25, 28, 33 & 35 ARE OUR TAXES TOO MUCH??? Look at chart on page 595 In comparison to other countries, our tax burden is low! Federal taxes have changed little, but state and local taxes have doubled in size! The largest tax increase is in Social Security We are living longer and the old people are taking over SPENDING POLICIES Where do our taxes go? Look at page 597 in your book The National Government now spends over $2 Trillion every year! First- The largest amount 22% goes to Social Security Second – Defense spending Third- Income security: unemployment benefits, food stamps, disabled and homeless Fourth: Medicare and Health Care Fifth: NATIONAL DEBT 8% of all government spending President Bush increased military spending 22% from 2001 to 2003 TWO reasons for the trend of increased government spending 1. Incremental Budgeting a. All agencies traditionally ask for more money than the year before and more for new projects b. Few agencies ever cut back 2. Uncontrollable Spending a. Uncontrollable Outlays-----Government payments to individuals: (consumes the largest portion of the budget) Social Security national debt Medicare farm price supports public assistance Once voters get a taste of these, there is no turning back! Most voters favor maintaining these government programs Voters would like to cut foreign aid, but it only makes up 1% of the budget! TAXING, SPENDING and ECONOMIC EQUALITY Redistribution examples- the Progressive income tax and welfare programs Populists at the turn of the century called for more equitable taxation and the 16th amendment was passed in 1913 from 1964 to 1981 the richest Americans paid heavily in taxes- up to 70% TRANSFER PAYMENTS- go directly to individuals, but not always the poor! Social security, unemployment, workers compensation, food stamps, agricultural subsidies 1979-2001 government policies helped to cut the poverty rate almost in half. Progressive taxing takes more from the rich and gives more back to the poor Today the richest Americans pay about 37% of their federal taxes WHY then do some poor pay a larger share of their income in taxes than wealthier citizens? STATE & LOCAL TAXES have increasingly gone up-they are a flat tax Everyone pays social security at the same rate up to $87,000.00 The poor spend everything they earn on purchases, which are taxed and the rich can save and invest instead of spend their money There is no national tax on investments! There is no Tax on unearned income-interest on what is in the bank Capital gains taxes (money earned from selling real estate or stocks) are lower than the highest tax rate for income taxes EFFECTS of taxing and Spending policies over time: 1966 poorest 1/5 of Americans received 4% of the nation’s income richest 1/5 of Americans earned 46% of the nation’s income by 2000 the income gap between the rich and the poor had grown , even after all the money spent on social programs average American worker worked 93 more hours per year in 2000 than 1989 we are working more hours just to get by and the income gap is still growing IS A LIVING WAGE needed? Or do we sum it up to our Capitalistic society and say it’s too bad for the poor because they do have at least a chance in a million to succeed. The Wealthiest 1% of Americans own 40% of our nation’s wealth. The typical white family has an annual income 1.5 times that of both blacks and Hispanics Since we are becoming a much more pluralistic society, this model rewards those groups that are well organized and well funded. That’s one reason as to why you see the gap between the rich and the poor growing. Could a FLAT TAX solve our gap in income? Many Americans like this idea. But once again, the poor who know nothing about this support it! They don’t realize how it could hurt them financially. Every American can find loop holes in our tax system and not have to pay the percentage rate that they are in. Chapter 18 ECONOMIC POLICY Fill in GOP “Spending Spree” 2004 federal spending would exceed revenues by $__________ Billion! America’s long term ____________ is owned by __________________________ BASIC ECONOMIC THEORY HOLDS: a. interest rates should be ________ when the economy is _____________ too quickly b. interest rates should be ________________ when the economy is sluggish= 2003 The President neither determines interest rates (The Federal Reserve) nor controls the spending (Congress) Market economies: Non Market economies: LAISSEZ FAIRE= natural selection of the economy (Big Gov’t stay out!) ___________________________________1776 treatiseeach individual is led by an ___________________________ Narrow pursuits of profits serves the broad interests of society WHAT ABOUT ECONOMIC DEPRESSIONS OR INFLATION????? John Maynard Keynes to the rescue……… KEYNES A. aggregate demand= B. productive capacity= C. Gross Domestic Product (GDP) the value of the goods and services _____________________________ When production exceeds demand—producers cut back on output= ______________________ When demand exceeds productive capacity people are willing to pay more. Example 2005 – XBOX 360 $500 in stores , now there are none and they are $8,000.00 On EBAY KEYNES Believes: Aggregate demand can be controlled/adjusted by using 1) ________________________ & 2) _______________________ FISCAL Policies: controlled by the president & congress by ______________________________________________ *Much easier to cut taxes than raise them * Gov’t. spending takes too long to enact in congress *downside is the economy is already recovered when these thing happen *Fiscal Tools are _____________________________________________________ 1946 CEA- ___________________________________________within the Executive Office _____ economic advisors (appointed by the President approved by Senate) and a staff of 25 helps the president _________________________________________________ MONETARY Policies: change in _____________________________________________ Monetarist support a __________________________________of steady growth THE FEDERAL RESERVE est. ___________ Has a board of governors- _____ members one of which is the Federal Chairman They are appointed by the president & have a _____ year tenure The Fed. controls monetary policies in 3 ways 1. change the reserve requirement (amount of cash on hand in the banks) 2. change the amount of the discount rate/interest rate banks are charged from Federal banks to borrow money 3. The buying & Selling of government securities (Treasury notes and bonds) Amount the banks charge for overnight loans *interest rates should be raised when the economy is growing too quickly *Historically, the Fed. Has adjusted rates to _______________________________ rather than stimulate economic growth *These policies can pit President VS. the chair of the Fed (Alan Greenspan) KEYNES uses DEFICIT SPENDING- SUPPLY SIDE ECONOMICS A. increase the supply of goods B. create tax cuts to stimulate investment in these goods especially among the rich and it will “___________________________” to the working people C. use less government intervention Economic Recovery Act 1981 – ERTA cut tax rates by _____% a. produced massive _____________________ b. cut funding for many social programs c. _____________________ began d. also increased military spending all of this adds up to-“__________________________” & HUGE BUDGET DEFICITS Check out charts on page 587 Compare Reagan in 1983 to Bush in 2003 What do you think will eventually have to happen? Before 1921 _________________________________________________________________ The budget is prepared and submitted to Congress in January All budget requests must go through the OMB Fiscal year is October 1 – September 30 Budget Authority: ____________________________________________(authorized) Budget Outlays: how much are they _________________________________________ Budget Receipts: how much is the Gov’t __________________________through taxes and other revenues President Clinton’s FY 2000 Budget Authority to spend $1,781 billion Outlays were only $1,766 billion Receipts of $1,883 billion = SURPLUS of $117 billion National Debt 2003 - 3.9 Trillion National Debt 2005 - ____ Trillion President Bush’s FY 2005 Authority- $2,355 Billion Outlays$2,400 Billion Receipts- $2,036 Billion =DEFICIT $364 Billion ________% owed to foreign investors! ________% owed to foreign investors! I. PREPARING the President’s BUDGET OMB and they have more than 500 persons working for them Plus, a director who attends the Cabinet meetings of the President Each agency sends a request as to how much they need OMB ________________________________________to the president POLITICS GALORE- interest groups, the president himself, and presidential advisers ___________________________________________________ ___________________________________________________ II. PASSING the BUDGET- The president’s budget must be approved by Congress This is a very cumbersome process! 3 Committees 1. Tax Committees- responsible for setting and or raising taxes to run the gov’t (House= _________________________ , Senate=Finance committee) 2. Authorization Committees- authorizes spending in various agencies and departments-Today power has shifted to #3 3. Appropriations Committees – SHOW ME THE MONEY!!!! _____________________________________________________________ ProblemBUDGET REFORMS 1970’s: Budget Committee Structure created the Budget & Impoundment Control Act of 1974 ______________________________________with a staff of more than 200 would _________________________________________________ they would also create timetables that were successful at first and then clashed with the President’s budget LET’s TRY TO CONTROL OUR SPENDING IRMA! 1980’s _____________________________________two Republicans who saw Reaganomics spinning out of control passed a law to control their appetites, but congress couldn’t do it, so they passed another law to match the deficit! Congress did not have the will power to balance their budget! IRMA GOT THE CREDIT CARD AGAIN! 1990 President Bush Sr. gets the Budget Enforcement Act passed and creates “Read my Lips, No New Taxes” probably cost him the presidency a. Mandatory Spending: ___________________________programs – such as Social Security, & veteran’s pensions these can not be reduced unless by law “Pay as you go” any b. Discretionary Spending: President Clinton & the Republican Congress passed the Balanced Budget Act of 1997 _________________________was in 1996 ahead of schedule Backsliding in the 2000’s The Republican controlled Congress also in 2001 tax rebates were given to citizens to stimulate the economy even the conservative WALL STREET JOURNAL predicted“_________________________________________” during the next decade TAX POLICIES: The TAX CODE is complex and __________________pages long! We have _____________________ taxation on federal taxes (rich pay more) and _________________taxes on State, local and gasoline etc. taxes (poor pay more due to consumption) Before Ronald Reagan _______ tax brackets! (11%-50%) Reagan Bush Sr. Clinton George W. Bush Changes in the tax brackets 15, 28 15, 28, & 31 15, 28, 31, & 40 10, 15, 25, 28, 33 & 35 ARE OUR TAXES TOO MUCH??? Look at chart on page 595 In comparison to other countries, our tax burden is low! Federal taxes have changed little, but________________________________________ ______________________________________! The largest tax increase is in _____________________________ We are living longer and the old people are taking over SPENDING POLICIES Where do our taxes go? Look at page 597 in your book The National Government now spends over $_____________________ every year! First- The largest amount _________% goes to Social Security Second – Defense spending Third- Income security: unemployment benefits, food stamps, disabled and homeless Fourth: Medicare and Health Care Fifth: ____________________________ 8% of all government spending President Bush increased military spending 22% from 2001 to 2003 TWO reasons for the trend of increased government spending 3. Incremental Budgeting a. All agencies traditionally ask for more money than the year before and more for new projects b. Few agencies ever cut back 4. Uncontrollable Spending a. Uncontrollable Outlays-----Government payments to individuals: (consumes the largest portion of the budget) Social Security national debt Medicare farm price supports public assistance Once voters get a taste of these, there is no turning back! Most voters favor maintaining these government programs Voters would like to cut___________________________________, but it only makes up 1% of the budget! TAXING, SPENDING and ECONOMIC EQUALITY __________________________ examples- the Progressive income tax and welfare programs ____________________ at the turn of the century called for more equitable taxation and the 16th amendment was passed in 1913 from 1964 to 1981 the richest Americans paid heavily in taxes- up to ______% ________________________ PAYMENTS- go directly to individuals, but not always the poor! ___________________________, unemployment, _____________________________, food stamps, and ____________________________ subsidies 1979-2001 government policies helped to cut the poverty rate almost in half. Progressive taxing takes more from the rich and gives more back to the poor Today the richest Americans pay about ________% of their federal taxes WHY then do some poor pay a larger share of their income in taxes than wealthier citizens? STATE & LOCAL TAXES have increasingly gone up-they are a __________________ Everyone pays social security at the same rate up to $87,000.00 The poor_______________________________________________________________, which are taxed and the rich can save and invest instead of spend their money There is no national tax on ________________________________! There is no Tax on unearned income-interest on what is in the bank _______________________________taxes (money earned from selling real estate or stocks) are lower than the highest tax rate for income taxes EFFECTS of taxing and Spending policies over time: 1967 poorest 1/5 of Americans received _______% of the nation’s income richest 1/5 of Americans earned ________% of the nation’s income by 2000 the income gap between the rich and the poor had grown , even after all the money spent on social programs average American worker worked ________ more hours per year in 2000 than 1989 we are working more hours just to get by and the income gap is still growing IS A _________________________________________needed? Or do we sum it up to our Capitalistic society and say it’s too bad for the poor because they do have at least a chance in a million to succeed. Today: The Wealthiest ______% of Americans own ______% of our nation’s wealth. ****The typical white family has an annual income _________ times that of both blacks and Hispanics Since we are becoming a much more pluralistic society, this model rewards those groups that are well organized and well funded. That’s one reason as to why you see the gap between the rich and the poor growing. Could a FLAT TAX solve our gap in income? Many Americans like this idea. But once again, the poor who know nothing about this support it! They don’t realize how it could hurt them financially. Every American can find loop holes in our tax system and not have to pay the percentage rate that they are in.