Download Chapter 18 ECONOMIC POLICY

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.