The Economy & The National Budget. Objectives Compare and contrast different economic models, and...

The Economy & The National Budget

ObjectivesObjectives• Compare and contrast different economic models, and

identify specific features of the U.S. model.• Describe how the U.S. government’s role in the

economy expanded and the nation became a leading economic power.• Identify the key people and factors involved in

attempting to make coherent and effective U.S. economic policy.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

2

ObjectivesObjectives• Analyze how government influences U.S. economic

policy, and discuss the potential conflicts and concerns that can result.• Describe the factors that led to the Great Recession of

2007-2009, and explain how the U.S. political system responded to the crisis.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

3

Government and the Economy

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

4

• Nations have different political systems, as well as different economic systems.

• The relationship between these two systems may vary across countries.

• The U.S. system is one of many.• Most countries have mixed economies: Government

actions shape the behavior of individuals and firms in markets.

• In the U.S., government seeks to stabilize overall economic conditions, regulate behavior to achieve economic or social goals, provide necessary services, and help both citizens and businesses.

Comparing Economic SystemsComparing Economic Systems• Mercantilism• During the 1700s, this economic theory dominated.

Treated colonial products, trade, and markets as a way to enrich the mother country.• Promotion of trade surplus. Colonies an economic asset:

source of raw materials and market for British goods.• Laissez-faire• View that originated with 18th-century French economists

that government should play a minimal role in the economy.• Adam Smith: Wealth of Nations

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

5

Comparing Economic SystemsComparing Economic Systems• Capitalism• Derived from many of the ideas of laissez-faire economics.• This economic system is distinguished by its reliance on self-

interested decisions of producers and consumers exchanging items of value in a market of supply and demand largely free of government direction.

• Socialism• Arose in the 20th century as the major economic system to

challenge free-market capitalism.• Developed as a way to correct many excesses of capitalism,

in which the government acts as both an owner of enterprises and as a distributor of goods and services.• Nationalization of industries, often utilities, railways and

airlines.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

6

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

7

Comparing Economic Systems

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

8

• While countries such as the U.S. developed a laissez-fair capitalist economy, other countries adopted the command economy model.

• Command economy: Soviet-style where government officials exercise broad control to decide the allocation of resources, levels of production, and prices of goods.• Doubts emerged about command economies as other types

outpaced them in terms of success.• Mixed economy: government officials share power with markets

in deciding or influencing how resources are allocated in society.• Australia• China moving in this direction

Government & the U.S. EconomyGovernment & the U.S. Economy• What does the U.S. government do in relation to its

economy?• Economic stabilizer

1. Maintains a steady rate of economic growth that produces new jobs and higher productivity to keep pace with population growth;

2. Prevents unemployment from rising to damaging levels;3. Avoids rising prices that seriously erode the buying power

of citizen’s earnings and savings – in other words, prevents uncontrolled inflation.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

9

Government & the U.S. EconomyGovernment & the U.S. Economy• Regulator• Economic regulation: efforts by government to

establish and maintain fair competition in markets to help consumers• Anti-trust policies: designed to prevent collusion among

businesses that would suppress competition in order to produce unnaturally high prices.

• Social regulation: laws and rules created to prevent corporations from engaging in practices that result in undesirable outcomes for society, such as air and water pollution or unsafe working conditions.• Consumer protection: laws and rules designed to protect

citizens from unsafe products and unfair business practices.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

10

Government & the U.S. EconomyGovernment & the U.S. Economy• Service Provider• In the U.S. the government, rather than the private

sector, provides many services.• Defense, education, justice, police and fire protection,

highway construction, sanitary services, and mail delivery• Some private companies compete with the government:

private schools, UPS, and FedEx• Government still principal provider of these services.• Government has been reducing its efforts in these areas

in order to enhance quality and reduce costs, but still dominate.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

11

Government & the U.S. EconomyGovernment & the U.S. Economy• Social Helper• U.S. government promotes the social welfare of its

citizens.• Intervenes to provide opportunities to the poor and

to meet social needs.• Social security and Medicare for older Americans;

loan guarantees to students for college, small businesses and farmers, and home buyers.

• None of these economic roles were set out in the Constitution but evolved over time as needs and pressures arose.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

12

Government’s Evolving Role in the U.S. EconomyGovernment’s Evolving Role in the U.S. Economy

Colonial Inheritance• North America settled as a

profit-making venture by England.

• Initial efforts in New England failed, followed by the Massachusetts Bay Company in 1630.

• Crown encouraged the production of crops and goods. Provide protection.

• Colonists resented interference with natural business of production and marketing of their goods. And resented the taxes imposed on them.

• Independence expensive.• Changing economic systems

challenging.• New Constitution did not

immediately change economic conditions, but it did set the preconditions for growth and development.

• Hamilton’s tariffs• Encouragement of

industrialization, immigration, and continental settlement.

• Transportation infrastructure• Communication infrastructure

13

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

Independence to Civil War

Government’s Evolving Role in the U.S. EconomyGovernment’s Evolving Role in the U.S. Economy

Effects of Three Major Wars

• Civil War triggered major expansion of the government’s political and economic power.• Subsidies to railroads• Oversight of immigration• Department of Agriculture• Defense industries• National Academy of Sciences

• World Wars I and II left important legacies• Regulation of the economy

Rise of Government Regulation and Relief Programs

• Interstate Commerce Commission

• Sherman Antitrust Act• Progressive Era (1895-1930)• Avalanche of political and

economic reforms• New Deal and FDR• Social security, FDIC, FSLIC,

TVA• Great Society and Johnson• Regulation during the ’70s• Deregulation during the ’80s 14

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

Government’s Evolving Role in the U.S. Economy: Rise of a Global RoleGovernment’s Evolving Role in the U.S. Economy: Rise of a Global Role• Wake of WWII, U.S. was the world’s most powerful economic

system as well as a world military power.• Bretton Woods System: established by U.S. and 40 other nations.• System of international agreements created at the end of WWII that

created a global financial and trade system dominated by the U.S. dollar.

• States agreed to maintain a steady value for their currency that could be exchanged for gold. Based on their holdings of gold reserves or a reserve currency (U.S. dollar)

• U.S. left the gold standard in 1971 (refused to any longer exchange dollars for gold); the dollar became the world’s top reserve currency.

• Rise of China has eroded American dominance, but so had the growth of free trade and rapid globilization.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

15

Fragmented Economic Decision MakingFragmented Economic Decision Making• National economic policy making begins with joint

decision making by the president and Congress.• Annual process of the federal budget

• The budget process• Office of Management and Budget: assists president in

compiling a budget that meets the requirements of law, makes recommendations about how much should be spent on public programs, lays out previous budgets and makes projections for the next five to ten years.

• Congress then has eight months to work out tax and spending decisions.• Discretionary spending• Mandatory spending

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

16

Fragmented Economic Decision MakingFragmented Economic Decision Making• The budget process continues when Congress adopts a

budget resolution.• Budget resolutions originate in the Budget Committees in the

House and Senate.• Set out broad guidelines on revenue and spending.• Gives specific amounts for the programs that fall within different

committees’ jurisdictions.• Is a concurrent resolution and therefore is not subject to a

presidential veto or a Senate filibuster.• Only a simple majority vote is needed in both houses to adopt a

budget resolution.• Must be done by April 15, but usually takes longer.• Congressional Budget Office was created to help in this process.

(1973)

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

17

Fragmented Economic Decision MakingFragmented Economic Decision Making• After the budget resolution has been approved by both

chambers, then action shifts to the standing committees.• Almost every committee participates in the budget process.• Authorizing committees must consider changes in legislation

that establishes programs.• House and Senate appropriations committees decide on

funding for the next fiscal year. • Revenue committees in the chambers make any changes

needed in tax laws.• Very fragmented process.• Goal: to adopt 12 separate appropriations bills that fund

different segments of the federal government by Sept. 30

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

18

Fragmented Economic Decision MakingFragmented Economic Decision Making• Each segment must receive a presidential signature in order

to be come law.• House moves first on appropriations decisions.• If Congress fails to meet the Oct. 1 deadline (which happens

often), Congress must approve a continuing resolution: a temporary action that allows the programs that have not yet received a new annual appropriation to continue to operate.

• Supplemental appropriations: spending decisions that are outside of the regular budget process.• Wars in Afghanistan and Iraq under Bush.• Obama has made these war expenses part of the annual

budget.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

19

National Priorities and BurdensNational Priorities and Burdens• The budget prioritizes the purposes of government and

allocates the burdens to different segments of society.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

20

TaxationTaxation• Who pays for government?• The largest share comes from individuals who pay income

taxes and have payroll taxes withheld from their paychecks.

• Corporate income taxes provide a substantially lower portion of overall federal revenue than that paid by individuals.

• Other fees and excise taxes generate most of the remainder.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

21

TaxationTaxation• Our tax system is very complex.• Tax loopholes: special treatment given to groups of

taxpayers in the tax laws that help lower or eliminate their tax burden.

• Progressive tax rates: citizens who have higher incomes and can afford to pay more for government services pay a higher tax rate on their income.

• Regressive tax rates: taxation in which the share of citizen’s income paid in taxes declines as income increases.

• Proportional tax rates: taxation in which citizens pay the same flat tax rate regardless of income level.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

22

TaxationTaxation• In U.S. we have a mixture of

regressive and progressive taxes. • Sales taxes – regressive• Progressive taxes, such as those found

in Sweden, tend to reduce income inequalities

• Major difference across nations is the tax rate levied.• Single tax rate applied to all citizens

regardless of their personal wealth – “flat tax”

• Multiple rates depending on citizens’ incomes. Sweden tax rates range from 0 to 57%.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

23

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

24

InequalityInequality• Taxation can reduce or increase income inequality.• Economists have developed a way to measure inequality: GINI

coefficient.• 0 = everyone earns the same income or 1 = a single person earns all the

income. The higher the coefficient, the greater the nation’s income inequality.

• Americans in the top 1 percent of income take in 25% of the nation’s total income.

• Top 1 percent control 40% of nation’s total wealth.• Progressive tax structure one way to reduce income inequality.

25

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

26

Budget DeficitsBudget Deficits

• When revenues fall short of expenditures in a given year, the country runs a budget deficit.

• The cumulative total of these annual deficits is the national debt.• Budget deficits have persisted in the U.S. since 1940.• Bill Clinton left office with a budget surplus. Short-lived legacy.• Tea Party

27

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

28

Domestic Economic PoliciesDomestic Economic Policies

• Government uses policies, fiscal and monetary, to guide the economy, but these policies are crafted by different institutions with different institutions with differing interests.• Congress and president: Most attention is focused on trying to

limit unemployment.• Federal Reserve: focus on the threat of inflation.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

29

Interest Group ReformInterest Group Reform• Restriction of Activities• Usually related to campaign activities and lobbying activities• 2007 Honest Leadership and Open Government Act used to strengthen

earlier act, Lobbying Disclosure Act (1995)• No revolving door for one to two years• Federal crime for lobbyist to provide gifts or meals to government officials and

staff• Bars former senators who are now lobbyists from walking onto the Senate

floor or going to the Senate gym

• Increasing Transparency• Continued registration and disclosure of lobbyists and their activities• Must submit report of their activities four times a year; detailing all

campaign contributions and all meetings with officials.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

30

Fiscal Policy

• Congressional and presidential efforts to stabilize the economy through the taxing, spending, and borrowing decisions are now part of the annual budget policy.• States make fiscal policy as well, but generally limited

to balanced budgets, whereas the federal government may run a budget deficit.• Economic justifications for running deficit:• Gross domestic product declines: recession (decline in

economic activity for two consecutive quarters or at least six months) or depression (decline over sustained period that totals 10 percent or more).

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

31

Fiscal Policy

Keynesian economics

• Set of countercyclical policy prescriptions proposed by British economist John Maynard Keynes at the time of the Great Depression.• Calls for government to use

taxes and expenditures to control economic recessions and expansions.

Supply-side economics

• Policies designed to stimulate producers’ economic activity by reducing tax rates and removing the costs of regulation.

33

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

The National Debt• In 2008 the U.S.’s national debt reached $10 trillion. • It had quadrupled over twenty years.

• Congress must approve government borrowing by setting a debt ceiling: the official limit set by Congress and the president on the federal government’s ability to borrow funds through the sale of Treasury bonds.• A growing debt increases the interest payments that the

government must pay to lenders. Mandatory expense. • Debt ceiling gives the Treasury Department some flexibility, and

most votes have been routine.• Not so in 2011. Controversial vote and great concern over the

mounting debt and inability to make policy to deal with it.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

34

Monetary Policy• Federal Reserve Board, an independent federal

agency created in 1913 to regulate the banking industry and set monetary policy, uses a number of techniques to shape monetary policy (terms under which money and credit are available in the market).

• Seven member Board of Governors based in D.C.• Coordinates the activities of 12 regional Federal Reserve

Banks and 25 branches in major cities.• Monitor conditions in their section of the nation’s economy and

a subgroup meets monthly to take actions that move interest rates up (contractionary policy – reduces supply of money) or down (expansionary policy- increases money supply).

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

36

Monetary Policy• The Federal Reserve is self-funding.• Insulated from political pressure.

• It provides many services for the economy.• Federal funds rate: the interest charges that banks collect

from each other for loans, which are set by a committee of the Federal Reserve Board in order to influence economic activity through monetary policy.• Every major industrial nation in the world has a central

bank comparable to the Fed.• Typically control the national currency, set national interest

rates, and support the banking industry with loans during times of financial stress.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

38

Regulation• Both the federal and state governments regulate economic activity in

the U.S.• Focus on consumer protection, prevention of monopolies and semi-

monopolies.• Federal government created a number of commissions and boards to

provide the infrastructure to foster economic growth beginning with the now defunct Interstate Commerce Commission in 1887.• Federal Trade Commission (1914)• Federal Communications Commission (1934)• Securities and Exchange Commission (1934)• Civil Aeronautics Board (1940)• National Labor Relations Board (1935)• Consumer Product Safety Commission (1972)

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

41

Limits of Domestic Economic Policies

• Today, making economic policy is complicated by interdependence among nations.• Very important that international coordination exist.• Leaders communicate regularly; but difficult job to do.• What is the purpose of this need for coordination? Can

we produce sound fiscal and monetary policy for the globe?• Globalization is relatively new and we are just starting

to understand how global markets operate.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

42

Responding to the Great Recession of 2007-2009 and Beyond• How does a highly fragmented political system

respond to a major economic crisis? • Bush and Obama sought to stimulate the economy

with massive combinations of tax cuts and spending increases that produced huge budget deficits.• Treasury Department and the Federal Reserve worked

to stabilize the banking system and save major corporations that were in deep trouble with loans to corporations and very low interest rates, and programs to reduce home mortgage default rates.• The decline slowed, but unemployment remained high.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

43

Responding to the Great Recession of 2007-2009 and Beyond• Shift emerged that went from spend to save

the economy to a focus on reduction in future expenditures.

• Emergence of the Tea Party activists and their influence on the Republican Party, especially action in the House of Representatives in 2011.

• New debate has emerged: whether the U.S. can afford Social Security, Medicare, and Medicaid or continue to function as the world’s police force – and who should pay how much for government services.

© 20

13 T

he M

cGra

w-Hi

ll Com

pani

es, I

nc. A

ll Rig

hts

Rese

rved

.

44

The Economy & The National Budget. Objectives Compare and contrast different economic models, and...

Documents

Transcript of The Economy & The National Budget. Objectives Compare and contrast different economic models, and...