Janda.chapter 17 Challenge of Democracy Economic Policy
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Transcript of Janda.chapter 17 Challenge of Democracy Economic Policy
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Learning Outcomes
17.1 Compare and contrast three theories of
market economics: laissez-faire, Keynesian, and
supply-side.
17.2 Describe the process by which the nationalbudget is prepared and passed into law and the
reforms undertaken by Congress to balance the
budget.
17.3 Identify the objectives of tax policies and
explain why tax reform is difficult.
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Learning Outcomes
17.4 Identify the major areas of government
outlays and explain the role of incremental
budgeting and uncontrollable spending on the
growth of government spending.17.5 Identify the origins of the income tax, trace
the influence of government spending and taxing
policies on inequality, and examine these policies
from the majoritarian and pluralist perspectives.
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Theories of Economic Policy
Laissez-Faire Economics
Absence of government control
Strict advocates maintain government interference with
business obstructs workings of the free market Mainstream economists today favor market principles but
recognize that government can sometimes improve
market outcomes
Efficient market hypothesis has held that financialmarkets are informally efficient
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Theories of Economic Policy
Keynesian Theory
John Maynard Keynes
Business cycles stem from imbalances between
aggregate demand and productive capacity Productive capacitygross domestic product
Government could stabilize economy by controlling level
of aggregate demand
Aggregate demand can be adjusted through fiscal andmonetary policies
Low demand: government spend more money or cut taxes
Demand too great: government spend less or raise taxes
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Theories of Economic Policy
Keynesian Theory (cont.) Capitalist countries have widely adopted Keynesian
theory in some form
Employment Act in 1946, reflects Keynesian theory
Established government responsibility for economy
Tremendous effect on government economic policy
Council of Economic Advisors (CEA)
Keynes-Hayek: debate in 2012 election Obama auto industry bailout (Keynes)
Romney Let Detroit Go Bankrupt(Hayek)
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Dueling Economists on YouTube
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Theories of Economic Policy
Monetary Policy Monetarists, such as Nobel Laureate Milton Friedman,
argue that government can control the economys
performance simply by controlling the nations money
supply
Monetary policies are under control of Federal Reserve
System in U.S.
Three goals:
Controlling inflation Maintaining maximum employment
Insuring moderate interest rates
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Theories of Economic Policy
Monetary Policy (cont.) 2010 Dodd-Frank financial reform bill granted even
greater powers to the Fed to regulate large complexfinancial firms
Ways the Fed controls money supply
Sells securities, takes money out of circulation, raisinginterest rate
Buys securities, process in reverse, lowers interest rate
Sets federal funds raterate banks charge oneanother for overnight loans
Less frequently, may change its discount rate
Can change its reserve requirement
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Theories of Economic Policy
Monetary Policy (cont.)
Formally, president responsible for state of the
economy and voters hold him accountable
President neither determines interest rates (Fed does)nor controls spending (Congress does)
Feds activities are essential parts of governments
overall economic policy but lie outside presidents control
and in hands of Fed chair
Fed ChairCritical player in economic affairs
Ben BernankeStretched Feds authority during financial crisis
of 2008
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Theories of Economic Policy
Supply-Side Economics
Stimulate investment through tax cuts and less
government regulation of business
Reaganomics Economic Recover Tax Act of 1981
Tax cuts
Cuts in spending for social programs
Deregulation
Increases in defense spending
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Theories of Economic Policy
Supply-Side Economics (cont.)
How Well Did Reaganomics Work?
Worked as expected, except deficit
Inflation dropped:13% in 1981 to 3% by 1983
Due more to Fed chair Paul Volckers actions
Deregulated business
Unemployment increased to 9.6%
Didnt reduce budget deficit
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Public Policy and the Budget
Congressional budgeting
Congress in charge of budget until 1921
Today, President prepares budget, Congress
approves it
Budget and Accounting Act of 1921
Established Bureau of the Budget (now Office of
Management and Budget) to prepare presidents budget
to be submitted to Congress each January
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Public Policy and the Budget
The Nature of the Budget
Budget of the United States Governmentannual plan
Applies to next fiscal yearOctober 1 to September 30
Defines budget authority and outlays Receiptsexpected tax and revenues
Deficitdifference between receipts and outlays
National debtsum of all unpaid government deficits
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Public Policy and the Budget
Preparing the Presidents Budget
The Office of Management and Budget (OMB)
oversees process
OMB initiates process in spring, agencies preparebudgets in summer and submit to OMB in fall, analysts
review requests, negotiations until budget goes to printer
Proposed budget submitted to Congress
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Public Policy and the Budget
Passing the Congressional Budget
The Traditional Procedure
Tax committees
Ways and Means in the House Finance in the Senate
Authorization committees
Approximately 20 in House; Senate 15
Appropriations committees: House and Senate More powerful than authorization committees
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Public Policy and the Budget
Passing the Congressional Budget (contd)
Two serious problems in budgeting process
Spending process is complex
No one is responsible for budget as a whole
Budget committees supervise comprehensive review
process aided by Congressional Budget Office (CBO)
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Public Policy and the Budget
Passing the Congressional Budget (contd)
Congress tried twice to pass Budget Enforcement Act
(BEA) of 1990
Defined spending Mandatory spending
Discretionary spending
Previous laws paved way for Clintons Balanced
Budget Act of 1997 (BBA) Led to balanced budget and produced a surplus
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Public Policy and the Budget
Passing the Congressional Budget (contd)
Congress allowed caps on discretionary spending to
expire at end of 2002
Gramm-Rudman-Hollings Balanced Budget andEmergency Deficit Control Act in 1985
Law utter failure, deficit targets eliminated in 1990
Balanced budget amendment (BBA) introduced again
in 2011 but failed
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Tax Policies
Reform
Reform proposals influenced by interest groups
Pre-198714 income brackets
President Reagan reduced to two
Flat tax violates principle of progressive taxation
Progressive taxation allows government to redistribute
wealth and promote economic equality
Presidents G.H.W. Bush and Clinton added two morebrackets, moved to more progressive tax structure
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Tax Policies
Reform (cont.)
George W. Bush pushed Congress to pass tax cuts
Reduced revenues increased deficits
Economic downturn, homeland defense, and militaryexpenses compounded problem
Bushs last budgetover a trillion dollars deficit
Deficit continued to grow under Obama
2012, Obama campaigned to restore 39.6 tax bracketfor highest tax bracket
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Tax Policies
Comparing Tax Burdens
Tax burden on U.S. citizens has decreased since
1950s
Tax burden not large compared to other democraticnations
Almost every democratic nation taxes more heavily than
the U.S. does
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Spending Policies
Incremental Budgeting
Agencies submit budgets based on previous year
Congress rarely looks at base budget items
Few agencies ever cut back, spending continually goesup
Earmarks greatly increased until early 1990s
Congress declared moratorium on earmarks after 2010
election
Some members repackaging them as special funds
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Spending Policies
and Uncontrollable Spending
Earmarks are discretionary outlays
Most government spending is mandatory outlays and
uncontrollable without change in law authorizingprogram
Politics argue against large-scale reductions
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Taxing, Spending, and
Economic Equality
Government Effects on Economic Equality
Do government spending policies have measurable
effect on income inequality?
Government payments to individuals: transfer
payments
Dont always go to poor
Farm program: Wealthiest farmers often receive largest
subsidies
Have definite effect on reducing income inequality
National tax policies at all levels have historically
favored those with higher incomes and the wealthy
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Taxing, Spending, and
Economic Equality
Effects of Taxing and Spending Policies over
Time
Poorer citizens pay higher percentage of income in
taxes than wealthier citizens In capitalist system, some degree of inequality is
inevitable
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FIGURE 17.5 Distribution of Family Income over Time
T i S di d
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Taxing, Spending, and
Economic Equality
Democracy and Equality
U.S. prizes political equality, but economic equality not
as strong
Wealthiest 1% control 35% of nations household wealth
Distribution among ethnic groups alarming
Typical white familys annual income 1.5 times of blacks and
Hispanics
One theory - Pluralist interest group activity distortsgovernments efforts to promote equality
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Taxing, Spending, and
Economic Equality Democracy and Equality
String of Gallup polls from 1985 to 2008:
Clear majority said distribution of wealth not fair and favor
some redistributionbut not through heavy taxes on rich
Favor national sales tax or weekly lottery
Sales tax, flat tax = regressive effect, promoting inequality
Lottery also contributes to wealth inequality
Poor more willing to chance income than rich
Majoritarians argue most Americans dont understandinequities of national tax system
Economic policy determined through pluralist politics
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