Policy Process and Economic Policy
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The document discusses key aspects of economic policy in the United States. It covers the major sources of government revenue including income taxes, payroll taxes, and corporate taxes. It also discusses major categories of government expenditures such as national defense, healthcare, Social Security, and interest on the national debt. Additionally, it identifies the key actors responsible for creating economic policy in the US, such as Congress, the President, and agencies like the CBO and OMB.
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Policy Process and Economic Policy
- 1. Copyright © 2011 Pearson Education, Inc. Publishing as Longman
- 2. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The Policy Process and Economic Policy CHAPTER14
- 3. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Ideas and Values in Public Policy Illustrate how values shape public policy in a democracy. Types of Public Policy Compare and contrast the three main types of public policies. The Public Policy Process Analyze how the policy process is shaped by political influences. Economic Basics Identify the key indicators of economic performance used by economists. Key Objectives 14.1 14.4 14.3 14.2 Click on buttons to go to the relevant slide.
- 4. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Fiscal Policy Describe the major actors responsible for creating economic policy. Revenue and Expenditures Explain the major sources of U.S. government revenue and expenditure. Monetary Policy Identify the major instruments of monetary policy. Key Objectives 14.5 14.7 14.6 Click on buttons to go to the relevant slide.
- 5. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Ideas and Values in Public Policy • Policy is the output of politics • Policy can be viewed as a series of phases in a process Illustrate how values shape public policy in a democracy.14.1 Back to Learning Objectives
- 6. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The Steps of Policymaking • The policy process model describes policymaking in five or six steps – Identifying the policy problem – Setting an agenda – Formulating a solution – Legitimizing the solution – Implementing the solution – In some versions, evaluating the solution 14.1 Back to Learning Objectives
- 7. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Values • Two terms lay at the center of policy debates and the how they are defined are connected closely to people’s views of the role of government – Freedom – Equality 14.1 Back to Learning Objectives
- 8. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Political Ideology • Classical Liberalism: A political philosophy based on the desire for limited government; the basis for modern conservatism. – Modern conservatives debate whether expansion of government and increased spending violate the true meaning of conservatism. • Modern Liberalism (Progressivism): A political philosophy based on the belief that government is the best actor to solve social, economic, and political problems. 14.1 Back to Learning Objectives
- 9. Copyright © 2011 Pearson Education, Inc. Publishing as Longman According to the process model of the policy process, the step associated with putting a policy into action would be: A. agenda setting. B. evaluation. C. formulation. D. implementation. 14.1 Back to Learning Objectives
- 10. Copyright © 2011 Pearson Education, Inc. Publishing as Longman According to the process model of the policy process, the step associated with putting a policy into action would be: A. agenda setting. B. evaluation. C. formulation. D. implementation. 14.1 Back to Learning Objectives
- 11. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Types of Public Policy • Organizing policies by issue areas helps make sense of the broad contours of both the problems and their possible solutions but may not help to understand many of the particular nuances that shape public policies • A more sophisticated approach to studying public policy involves creating policy categories that classify what policies do and how they do it Compare and contrast the three main types of public policies.14.2 Back to Learning Objectives
- 12. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Categorizing Policies by Basic Functions of Government • Political scientists have identified three basic functions of government: – Distribution – Regulation – Redistribution 14.2 Back to Learning Objectives
- 13. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Categorizing Policies by Tangible or Symbolic Benefits • Policies themselves can produce either tangible benefits for the public or merely symbolic benefits – Tangible benefits – Symbolic benefits 14.2 Back to Learning Objectives
- 14. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Which of the following represent a symbolic benefit? A. Housing subsidies for low-income families B. Designating next Tuesday “Iraqi Freedom Day” C. Pell Grants for students D. Most favored nation trading status for China 14.2 Back to Learning Objectives
- 15. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Which of the following represent a symbolic benefit? A. Housing subsidies for low-income families B. Designating next Tuesday “Iraqi Freedom Day” C. Pell Grants for students D. Most favored nation trading status for China 14.2 Back to Learning Objectives
- 16. Copyright © 2011 Pearson Education, Inc. Publishing as Longman What do you think? Do members of Congress abuse the ability to formulate distributive policy? YES. Members of Congress attach far too much emphasis to ‘bringing home the bacon’ at the risk of jeopardizing financial stability of the nation. NO. Congressional members are elected based upon their ability to provide goods and services to their local constituents, and distributive policy is one means by which they are able to do that. Back to Learning Objectives
- 17. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The Public Policy Process • Like all models, it is a generalization—a simplified representation of reality • Process implies separate actions that lead to a final goal Analyze how the policy process is shaped by political influences.14.3 Back to Learning Objectives
- 18. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Identifying the Problem • What constitutes a problem? • Who identifies problems? – Pluralists argue anyone can identify a problem and bring it to the attention of a policymaker – Elitists posit that only the affluent and well connected identify problems and are able to have policymakers address them 14.3 Back to Learning Objectives
- 19. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Setting an Agenda • The ability to exclude an item from the agenda, for whatever reason, is a powerful way to control what government does • The process of crafting an agenda cannot begin until formal decision makers place the problem on the nation’s formal or institutional agenda • Sometimes a focusing event propels issues onto the agenda • Getting an issue onto the agenda doesn’t assure a solution 14.3 Back to Learning Objectives
- 20. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Formulating and Legitimizing Policy • Formulating policy – Laws – Decisions – Rules • The power of the presidency in shaping policy • Legitimizing policy 14.3 Back to Learning Objectives
- 21. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Implementing Policy • Discretion given to the individuals who implement policy • Legislative oversight – Reauthorization – Investigation • Judicial oversight • Grass-roots mobilization or cultural change 14.3 Back to Learning Objectives
- 22. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The set of problems that governmental decision makers are actively working to solve is called A. the public agenda. B. the legislative agenda. C. the docket. D. the institutional agenda. 14.3 Back to Learning Objectives
- 23. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The set of problems that governmental decision makers are actively working to solve is called A. the public agenda. B. the legislative agenda. C. the docket. D. the institutional agenda. 14.3 Back to Learning Objectives
- 24. Copyright © 2011 Pearson Education, Inc. Publishing as Longman • There are two primary types of economic policy – Fiscal policy – Monetary policy • Both can affect growth, employment, and inflation and, often the goals of each clash • Economists focus on (1) inflation, (2) unemployment, (3) GDP (4) the balance of trade, and (5) the budget deficit or surplus to gauge the economy’s performance. Economic Basics Identify the key indicators of economic performance used by economists. 14.4 Back to Learning Objectives
- 25. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Inflation • Inflation: An increase in prices over time. – In the 1970s, inflation emerged as a major concern of federal economic regulators, who prescribed “tight money” policies to try to keep it in check. • The inflation rate is measured by the Consumer Price Index (CPI), a figure computed by the Department of Labor. • The Fed must also guard against deflation— dropping prices. 14.4 Back to Learning Objectives
- 26. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Unemployment • The unemployment rate measures the percentage of Americans who are out of work. • A “good” unemployment rate is around 5 percent. – In the 1980s, many economists considered 5 percent to be full employment, only to have unemployment drop below that figure in the late 1990s and again in 2005 and 2006. – By the end of 2009, the unemployment level was 10 percent. 14.4 Back to Learning Objectives
- 27. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Gross Domestic Product • Gross domestic product (GDP)—the value of all the goods and services produced in a nation— measures the size of the American economy. • A good growth target for GDP for the U.S. economy is between 3 and 4 percent. • The growth rate commonly reported in the media is the “real GDP” rate—GDP adjusted to account for the effects of the CPI, so that actual economic growth does not falsely include the rate of inflation. 14.4 Back to Learning Objectives
- 28. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Balance of Trade • The balance of trade measures the difference between imports and exports. • The United States has been running a significant trade deficit for years. • The U.S. trade deficit in goods fell from $840.3 billion in 2008 to $517 billion in 2009. – This represents a 38.5 percent reduction and is explained, in part, by a reduction in demand for imports due to the recession. 14.4 Back to Learning Objectives
- 29. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The Budget Deficit • The budget deficit is the amount by which, in a given year, government spending exceeds government revenue. • The rare circumstance when revenue outstrips expenditures is called a budget surplus. • The net sum of the budget deficit minus the surplus is the national debt. – About $12.98 trillion by early 2010. • The CBO estimates that the budget deficit was $1.36 trillion in 2010, will fall to $471 billion in 2015, and rise to $683 billion by 2020. 14.4 Back to Learning Objectives
- 30. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Status of the Dollar • An important factor in the strength of the American economy • Recently, the status of the dollar as the world’s reserve currency has come under scrutiny • Between 2002 and 2009, the dollar lost about a third of its value against major currencies 14.4 Back to Learning Objectives
- 31. Copyright © 2011 Pearson Education, Inc. Publishing as Longman A major concern affecting the view of the resilience of the US economy is 1. tariffs. 2. outsourcing of jobs. 3. reliance on foreign oil. 4. None of these. 14.4 Back to Learning Objectives
- 32. Copyright © 2011 Pearson Education, Inc. Publishing as Longman A major concern affecting the view of the resilience of the US economy is 1. tariffs. 2. outsourcing of jobs. 3. reliance on foreign oil. 4. None of these. 14.4 Back to Learning Objectives
- 33. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Fiscal Policy • The game of politics is all about deciding who gets what, and part of that involves deciding who pays for what • On-budget and off-budget expenditures are how the national budget is often discussed Describe the major actors responsible for creating economic policy. 14.5 Back to Learning Objectives
- 34. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Major Actors • Budgets are created through interactions between Congress and the president, but there are several other major actors in the realm of fiscal policy – Congressional Budget Office (CBO) – Office of Management and Budget (OMB) – Council of Economic Advisors (CEA) – National Economic Council (NEC) 14.5 Back to Learning Objectives
- 35. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Key Congressional Players • House and Senate Appropriations committees • House and Senate Budget Committees • House Ways & Means Committee • Senate Finance Committee 14.5 Back to Learning Objectives
- 36. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The body responsible for helping Congress analyze long- term fiscal implications of the executive’s budget is the A. Congressional Budget Oversight Committee. B. Council of Economic Advisors. C. Congressional Budget Office. D. Office of Management and Budget. 14.5 Back to Learning Objectives
- 37. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The body responsible for helping Congress analyze long- term fiscal implications of the executive’s budget is the A. Congressional Budget Oversight Committee. B. Council of Economic Advisors. C. Congressional Budget Office. D. Office of Management and Budget. 14.5 Back to Learning Objectives
- 38. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Revenue and Expenditures – The federal budget can best be understood by thinking about its two primary parts: (1) revenue; and (2) expenditures. – Revenue entails all financial resources that the government collects from sources. – Expenditures include all of the funds spent by the government. Explain the major sources of U.S. government revenue and expenditure. 14.6 Back to Learning Objectives
- 39. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Revenue • In 2009, the U.S. government collected about $2.15 trillion in revenue • This revenue comes from – Income taxes – Payroll taxes – Corporate taxes – Customs duties and other miscellaneous taxes 14.6 Back to Learning Objectives
- 40. Copyright © 2011 Pearson Education, Inc. Publishing as Longman 14.6 The Federal Revenue Budget Federal government revenue comes primarily from individual income tax and payroll taxes for Social Security and Medicare. Back to Learning Objectives
- 41. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Revenue (cont’d) Income Taxes •Taxes on income make up just over 7.5 percent of GDP • There are six different tax brackets 14.6 Back to Learning Objectives
- 42. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Revenue (cont’d) Payroll Taxes •Social Security taxes make up 6.5 percent of GDP •They take the form of a payroll tax, split in half between the employees and their employers •1.45 percent is paid into the Medicare trust fund 14.6 Back to Learning Objectives
- 43. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Revenue (cont’d) The Tax Burden •Analysis of household income and tax burden by the CBO shows that – The top 10 percent of earners pay almost 50 percent of taxes – The bottom 20 percent pay only about 1 percent •Most American workers pay more per year in payroll taxes than they do in income taxes 14.6 Back to Learning Objectives
- 44. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Revenue (cont’d) Corporate Taxes •Corporate tax collection amounts to only about 2 percent of GDP •Taxes on corporations generate about 15 percent of the federal government’s revenue •The United States has one of the highest effective corporate tax rates in the industrialized world, with a top tax rate of 35 percent 14.6 Back to Learning Objectives
- 45. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Revenue (cont’d) Other Taxes •Excise taxes •Customs duties •Inheritance taxes •Miscellaneous receipts 14.6 Back to Learning Objectives
- 46. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Revenue (cont’d) Tax Analysis •Finding the optimum tax rate is difficult – The Laffer Curve •No one likes paying taxes, but the government needs a source of revenue to fund even the most minimal services •Major reform initiatives fall under one of two basic concepts – A flat tax – National sales tax 14.6 Back to Learning Objectives
- 47. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Expenditures • According to Congressional Budget Office estimates, the budget deficit for 2010 is expected to be around $1.3 trillion or 9.2 percent of GDP • Government expenditures continually expand, in part because levels of “current services” have become the baseline for most government programs 14.6 Back to Learning Objectives
- 48. Copyright © 2011 Pearson Education, Inc. Publishing as Longman 14.6President Obama’s 2011 Proposed Budget (in billions) Back to Learning Objectives
- 49. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Expenditures (cont’d) Social Security •Established in 1935 during the Great Depression as a self-financed program •Covered employees of industrial and commercial firms •Cost of living adjustments were added in the 1950s and these became automatic and annual after 1975 •Social Security Trust Fund 14.6 Back to Learning Objectives
- 50. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Expenditures (cont’d) Defense •The nation’s largest on-budget appropriations are for defense •Many factors lead to the high costs of maintaining the armed forces – Operations and support – Development, testing and procurement of weapons systems 14.6 Back to Learning Objectives
- 51. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Expenditures (cont’d) Income Security •Safety net for the most vulnerable – Earned Income Child Credit (EIC) – Child Tax Credit – Supplemental Security Income (SSI) – Unemployment compensation – Food stamps – Temporary Aid to Needy Families(TANF) – Women, Infants, and Children (WIC) 14.6 Back to Learning Objectives
- 52. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Expenditures (cont’d) Government Medical Care •Medicare – General population over 65 years of age and the disabled •Medicaid – Poor, children and pregnant women, but also includes the elderly who have exhausted their life savings 14.6 Back to Learning Objectives
- 53. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Interest and Other Spending • Interest on the debt for 2011 is estimated at $251 billion, almost 7% of the total budget goes to pay interest on the debt • All other cabinet level agencies receive budget allocations for the programs they are responsible for implementing • The size of the debt is only one factor when it comes to interest payments 14.6 Back to Learning Objectives
- 54. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The nation’s largest on-budget appropriations are for A. Social Security. B. defense. C. education. D. Medicare. 14.6 Back to Learning Objectives
- 55. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The nation’s largest on-budget appropriations are for A. Social Security. B. defense. C. education. D. Medicare. 14.6 Back to Learning Objectives
- 56. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Monetary Policy • In the simplest terms, monetary policy involves the management of the supply of money in circulation within the U.S. • Keeping the balance right by managing monetary policy is the job of the Federal Reserve Board of Governors and its Federal Open Market Committee Identify the major instruments of monetary policy.14.7 Back to Learning Objectives
- 57. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The Federal Reserve Board • Created in 1913 by an act of Congress, the Federal Reserve System (the Fed) is our nation’s independent central bank • The Federal Open Market Committee (FOMC), the Fed’s policymaking arm using five main tools to manipulate monetary policy: – Reserve ratios – Federal funds rate – Open-market operations – Discount rate – Buying and selling foreign currency 14.7 Back to Learning Objectives
- 58. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The Fed in Action • Fed action is precarious because of the significant lag time between its action and economic results • The Fed has to be right twice – Its prediction of where the economy is headed – Determining the correct response to the circumstances it predicts will occur • It has to be right every time! 14.7 Back to Learning Objectives
- 59. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The most significant tool The Fed has in its arsenal to control monetary policy is 1. buying and selling foreign currency. 2. reserve rations. 3. federal funds rate. 4. open-market operations. 14.7 Back to Learning Objectives
- 60. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The most significant tool The Fed has in its arsenal to control monetary policy is 1. buying and selling foreign currency. 2. reserve rations. 3. federal funds rate. 4. open-market operations. 14.7 Back to Learning Objectives
- 61. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Credits 530 Martin H. Simon/UPI/Pool/Landov; 535, left to right: AP Images/Paul Sakuma; Newscom; 536, left to right: Alfred Eisenstaedt/Time & Life Pictures/Getty Images; Bettmann/Corbis; Dan Miller/Time Magazine/Time & Life Pictures/Getty Images; 537, left to right: Natalie Behring/Greenpeace/Getty Images; U.S. Coast Guard photo by Petty Officer 3rd Class Ann Marie Gorden; 540 AFP/Getty Images; 543 Hans Strand/Corbis; 544 Sarah M. Golonka/Getty Images; 545 Time Life Pictures/Getty Images; 553, top to bottom: Bloomberg via Getty Images; Jim West/Alamy; Dirck Halstead/Time & Life Pictures/Getty Imjages; Alex Wong/Getty Images; Glow Images/SuperStock; Scott Olson/Getty Images 558 Justin Sullivan/Getty Images; 560Time Magazine; 561 Time Magazine; 566 Alex Wong/Getty Images; 567 Jim Young/Reuters/Corbis; 570 Stephen Chemin/Getty Images; 573 DoD Photo by Tech. Sgt. James L. Harper Jr., U.S. Air Force; 575 Paul Burnett/The New York Times/Redux Pictures; 580 Matthew Cavanaugh/epa/Corbis; 584 David Pearson/Alamy; 587, top to bottom: Kvork Djansezian/Getty Images; Matthew Cavanaugh/epa/Corbis; Joseph Sohm/Visions of America/Corbis Back to Learning Objectives
Editor's Notes
- Social scientists and other policy specialists often think about public policy as a collection of phases in a process, as though the intricacies of the process were somehow disconnected from the political world. There is a well-worn approach to the study of the process of policy formation, usually called the policy process model, which begins with the identification of a problem and concludes with the analysis of the effectiveness of the solutions applied to that problem.
- Alternatively, Deborah Stone presents a more robust view of the policy process, criticizing the process model as lacking connection to the ways that real people and their governments make decisions about policy. She points out that policymaking is a constant struggle over the criteria for classification, the boundaries of categories, and the definition of ideals that guide the way people behave.
- Some say that freedom exists to the extent that we can do what we wish; others see freedom only in the absence of someone or some force limiting what we can do. The British political theorist Sir Isaiah Berlin called the first version positive liberty or freedom, because people tend to express it as the ability to do something. Berlin labeled the second version negative liberty or freedom, because the measure of freedom, usually expressed as the freedom from some outside force, is based on how few limits there are on its enjoyment. Like freedom, equality is divisible into two meanings, one based on equality of process and the other based on equality of outcomes
- The ideas of someone who holds the positive view of equality and the negative view of freedom have a strong resemblance to classical liberalism , an ideology of the eighteenth and nineteenth centuries that today we call conservatism. In many ways, modern conservatism is a view of politics built on faith in the free market to regulate the economics of a society. Modern conservatives see government’s main role as setting basic policies to see that people have equal opportunities, but government’s activity must stop there so that it does not limit personal liberty. In opposition to this present-day conservative ideology stands modern liberalism , or what is now often called progressivism. Liberals or progressives, who tend to favor equal outcomes and share faith in the positive version of freedom, favor a more activist government. They see government as a powerful force needed to overcome inequality and expand the amount of freedom available to all citizens.
- Policy Categories: A way of classifying policies by their intended goal and means of carrying out that goal.
- A government distributes a society’s resources, such as wealth, services, or other things of value, when it gives benefits to specific groups in that society. When undertaken by a legislature, such distribution is often given the negative label “pork barrel” spending, because it seems designed to benefit the legislator who proposed it. Regulation takes place when a government uses legislative, military, or judicial power to stop an action by a person, organization, or group or when it mandates other behaviors or actions. Redistribution resembles distribution in many ways, but instead of a specific group benefiting from the actions of government, a much larger segment of society benefits.
- A tangible benefit such as federal assistance for victims of hurricanes and other natural disasters, is something that the recipients will experience in a material way A symbolic benefit does not offer concrete, material results; it provides a theoretical solution to a problem.
- Policy process model is not truly linear, with all parts flowing in one direction. Nor is it truly cyclical, with each part necessarily following from the preceding part.
- Whether an issue is a problem depends, for the most part, on who is advocating each position. Well-organized groups with the resources of money, larger memberships, and connections are more likely to gain access to decision makers to persuade them to see things their way. Disorganized collections of people, even those representing very large segments of the population, may not sway decision makers, simply because their message is not as well focused. Pluralists argue that our system of open government, with its multiple points of access to policymakers, allows people without resources like money and connections to still have their voices heard. Others argue that policymaking is really driven by elitism—that only people with power and money will get access to the decision makers.
- Many groups and organizations use rules that exclude or severely limit any action on—or even discussion of—items not listed on the agenda. An institutional agenda: is a set of problems that governmental decision makers are actively working to solve. Citizens’ actions can also propel problems onto the formal agenda. Agenda setting in the absence of a major crisis is largely determined by the organization and resources of individuals and coordinated interests. People and groups who can best articulate their position or who have what it takes to gain access to policymakers (such as money for reelection campaigns, the support of group members, or well-connected lobbyists) will usually succeed in getting their problem on the agenda. Even issues that affect small slices of the population, that lack political, economic, or social clout, or that are difficult to address may first grab lots of attention, but they usually fall off the agenda because of the cost and inconvenience associated with solving them or the inability of the affected parties to keep the decision makers’ attention.
- Formulating policy means crafting solutions to identified problems but how the problem is defined will frame the acceptable solutions. Solutions can come in many forms. Rule-Making Authority is the lawmaking power delegated to the executive branch agencies or departments. As long as the federal agencies follow the process for making rules prescribed by Congress, those rules are as powerful as if the laws were made by Congress itself. The power of the presidency not only to formulate policy by executive order but also to shape the policymaking by Congress deserves special attention. Although the presidency is receptive to each of the pathways of political action, it is still not as responsive to our needs as Congress is because of the structure of the office and other institutional factors. A government’s policymaking actions can confer legitimacy on the policies it makes. Legitimacy implies fairness, formal rules and the ability to see the process in action help ensure fairness. When legitimacy is established, people are willing to accept policies—even if they dislike them. Legitimacy is different from coercion, which is the threat or actual use of force or punishment to secure compliance with a policy. Consent rests on our belief in the legitimacy of the entire process of governing, including the formulation of policy.
- Once policies have been created, someone actually has to do something with them. As its name implies, the executive branch of government is charged with executing or implementing the policies made by a legislature, the courts, or the executive branch itself. Members of Congress use the opportunity of reauthorization hearings to get feedback about how (and how effectively) the policy is being carried out. If the results are unsatisfactory, Congress can influence the executive branch to implement the policy more effectively by threatening to cut off or reduce funding. Congress has the authority to call officials of the executive branch before its committees to answer questions about alleged problems with implementation. Investigations can be launched, based on information gleaned during the reauthorization process, from other hearings, from contacts with constituents, from media reports, from court proceedings, or from many other sources. The courts also exercise a form of oversight. Unlike legislatures, courts do not control the funding of programs directly, but the cases that come before them, either at the trial level or on appeal and the decision rendered by a court can direct the agency or department to change its administration of a policy. Grassroots mobilization and cultural change can also influence the willingness of legislatures to respond or citizen and group activism through channels such as amicus curiae briefs filed by interested parties to pass along their suggestions concerning specific cases may be the impetus for the courts to act.
- There are two primary types of economic policy Fiscal policy involves the taxing and spending decisions enacted by Congress in cooperation with the president Monetary policy concerns the money supply and is managed by the independent Federal Reserve Board (“the Fed”), the nation’s central bank Often, the goals of fiscal and monetary policy clash, because the Fed, the president, and Congress do not always share the same objectives. When economists gauge the economy’s performance, they usually focus on five figures: (1) inflation, (2) unemployment, (3) gross domestic product, (4) the balance of trade, and (5) the budget deficit (or surplus).
- Inflation measures the rate at which prices increase. The classic definition of inflation is “too many dollars chasing too few goods.” The inflation rate is measured by the Consumer Price Index (CPI), a figure computed by the Department of Labor. Calculated at regular intervals, the CPI is based on the changing costs of a specified “market basket” of goods and services. The Fed must also guard against deflation —dropping prices. Although deflation might sound good, falling prices discourage spending. If prices are going down, consumers refuse to spend today in hopes of paying less tomorrow. Consumers who sit on their wallets are not engaging in the kind of economic activity that creates jobs and a vibrant economy.
- The unemployment rate measures the percentage of Americans who are out of work. It is not a perfect measure, because it accounts only for people who identify themselves as actively seeking work, and sampling techniques are used in calculating it. A “good” unemployment rate is around 5 percent. One-hundred percent employment would be impossible; a certain number of people are always between jobs or just entering the workforce. In the 1980s, many economists considered 5 percent to be full employment, only to have unemployment drop below that figure in the late 1990s and again in 2005 and 2006. By the end of 2009, however, the unemployment level had reached 10 percent.
- Gross domestic product (GDP) —the value of all the goods and services produced in a nation—measures the size of the American economy. Generally, economic growth is good, but overly rapid economic growth can be harmful because it can feed inflation. This is where the Fed will step in to try to curb runaway growth before inflation can gain a foothold. A good growth target for GDP for the U.S. economy is between 3 and 4 percent. Rapidly developing countries such as China and India have experienced much higher growth rates. The growth rate commonly reported in the media is the “real GDP” rate—GDP adjusted to account for the effects of the CPI, so that actual economic growth does not falsely include the rate of inflation.
- The balance of trade measures the difference between imports and exports. A positive balance means that a nation has a trade surplus—it exports more goods than it imports. A negative balance of trade means a trade deficit—the country imports more goods than it exports. The United States has been running a significant trade deficit for years. The same American consumers who express their concerns about the outsourcing of American jobs also love to buy cheap imported goods. However, the U.S. trade deficit in goods fell from $840.3 billion in 2008 to $517 billion in 2009. This represents a 38.5 percent reduction and is explained, in part, by a reduction in demand for imports due to the recession.
- The budget deficit is the amount by which, in a given year, government spending exceeds government revenue. The rare circumstance when revenue outstrips expenditures is called a budget surplus . The net sum of the budget deficit minus the surplus is the national debt or the amount that the government owes. With the exception of the four years between 1998 and 2001, the United States has run a budget deficit every year since 1970. That has added up to a national debt of about $12.98 trillion by early 2010. The national debt must be financed through money that is borrowed—with interest—both at home and abroad, which makes balancing the budget that much harder with each passing year. The Congressional Budget Office (CBO) estimates that the budget deficit was $1.36 trillion in 2010.22 According to CBO estimates, the budget deficit will fall to $471 billion in 2015 and rise to $683 billion by 2020.
- Unlike much of the world, Americans take for granted that they can own property, start businesses, keep most of what they earn, working at jobs created by the private sector. If they don’t like their jobs, they can quit and find other ones. Of course, the free-enterprise system also means that there is no government guarantee that another job will be waiting for them. Critics of our system argue that employment is too precarious, that American jobs often flow to lower-paid workers overseas, and that wealth is concentrated in the hands of a relative few. Disparities between salaries of chief executive officers and low-paid workers have widened in recent years. Over the past decade, real earnings—wages that factor in the impact of inflation—have decreased for the lowest-paid fifth of American workers.
- This decision is at the heart of fiscal policy— the politics of taxing and spending. Technically, the United States has two budgets. The first is “on budget” and includes general revenue from income tax and corporate taxes, paying for things such as defense, NASA, and poverty prevention programs. The second is “off budget” and includes money from the Social Security and Medicare payroll taxes and trust funds.
- Congressional Budget Office (CBO). A research arm of Congress, was created by the Budget and Impoundment Act of 1974.The act was for all practical purposes two separate pieces of legislation. The impoundment portion dealt with reining in a power exercised excessively during the administration of President Richard Nixon. The 1974 law required House and Senate approval of presidential impoundment; otherwise, the funds would automatically be spent. Since then, impoundment has been rare. The budget portion of the 1974 act was more significant. It fundamentally changed how the budget of the United States is crafted. Before this, the White House Office of Management and Budget (OMB) had the primary responsibility for drawing up the budget. The president would present the basic document, and Congress would make adjustments. The OMB provides the president with information and guidance. The power of the veto gives the president an important role in determining the final budget, which is always a compromise. Of course, the OMB carries a little more weight when the presidency and Congress are both controlled by the same party. The CEA was created by Congress back when the initial budget document was primarily the chief executive’s responsibility in order to help the White House make budget decisions. The CEA’s three members are usually leading academic economists and are appointed by the president. In 1993, the National Economic Council (NEC) was established to advise the president on economic policy.
- The Constitution requires that all revenue bills originate in the House. Yet the 436 House members sitting together could never write a budget. Instead, appropriations and tax bills are products of committees in the Senate and the House. Each chamber has an appropriations committee, which has primary responsibility for deciding where federal money should be spent. The House Ways and Means Committee is responsible for tax bills. The Senate Finance Committee serves as its counterpart. The House and Senate also each have budget committees that review the fiscal process
- The budget of the U.S. federal government can best be understood by thinking about its two primary parts: (1) revenue; and (2) expenditures. Revenue entails all financial resources that the government collects from sources (e.g., taxes and customs duties), while expenditures include all of the funds spent by the government (e.g., salaries for government workers and benefits for Social Security recipients).
- Income tax is levied on wages, rent, interest, and profit, while payroll tax is levied on wage earnings. Income tax is a progressive tax —the more money you make, the higher the percentage you pay in taxes, up to a top rate of 35 percent. The Social Security tax, on the other hand, is a regressive tax. If you make enough money, your Social Security tax burden drops. At first glance, payroll taxes seem flat—everyone pays the same rate. However, this tax is collected only on the first $90,000 of income; earnings (from salaries and self-employment) above that level are not subject to the Social Security tax. So, the tax burden for higher-income earners is felt more heavily through income taxes, while those with lower incomes are hit harder by payroll taxes.
- How can an increase in the unemployment rate affect tax revenues?
- As you earn more money in a given year, you move into a higher marginal tax bracket—marginal meaning the tax rate you pay on the last dollar you earn that year. The tax codes are so complicated and deductions are so difficult to understand that it is almost impossible for many taxpayers to calculate their own taxes.
- Critics argue that the CBO analysis is flawed because it measures income, not wealth. Capital gains, such as the increase in the value of stock someone owns, are taxed at a lower rate than earned income. Profits from stock and real estate transactions are taxed only when they are sold, so capital gains can accumulate for years without generating any government revenue. As a result, the wealthy—especially the nonworking wealthy—escape taxation on the vast majority of their assets.
- The U.S. corporate tax system also has numerous write-offs, often targeted to specific industries that result from successful lobbying, which are intended to elicit certain corporate behavior. Corporate income tax revenues depend, of course, on whether companies make a profit.
- Other taxes include excise taxes, customs duties, inheritance taxes, and miscellaneous receipts. Excise taxes levied on fuel, alcohol, and tobacco are paid by the producer and are folded into the price of the product. Customs duties are taxes on foreign-made goods imported into the United States and, like excise taxes, are part of the consumer’s final price. Inheritance taxes are on the asset value of a person’s estate. Miscellaneous receipts include income earned by the Federal Reserve in its day-to-day operations
- Laffer reasoned that if the tax rate is zero, government revenue is zero. Laffer maintained, however, that government revenue will also be zero if the tax rate is 100 percent. Laffer sketched out a graph, now known as the Laffer curve, to demonstrate that there exists some rate of taxation above which government revenue drops. A sufficiently high tax rate, Laffer concluded, discourages productivity. Laffer was one of the chief proponents of supply-side economics, the theory that cutting taxes would help the economy, thereby ultimately increasing government revenues. The flat tax would allow a standard deduction plus exemptions with income taxed at 17% over the exempted amount. Business would also be taxed at 17%. Alternatively, under a national sales tax, the federal government would collect a surcharge on purchases of all goods and services. Because such a sales tax would, by its nature, be regressive each household would receive a rebate check at the beginning of each month, equal to 23 percent of poverty-level income based on family size and this would replace both income and payroll taxes.
- When politicians talk about balancing “the budget,” they are generally referring to the current services budget. So, even if spending increases from one year to the next, government officials can claim that they have cut the budget, as long as the rate of increase is below the current services projection.
- In February 2010, President Obama proposed the federal budget. Budgets are an expression of an administration’s priorities and of the contemporary needs of the nation at large. It is important to note that this figure does not include mandatory federal expenditures for items such as interest on the national debt and entitlement expenditures for items such as Social Security benefits. These items make up an increasingly large portion of overall federal spending and contribute significantly to federal deficits and the national debt. Do you think the allocation of resources to secure the nation’s defense compromises our needs in health and education sectors? How do the budget data show us that policy priorities are set by domestic as well as international considerations? Explain your answer.
- During this time, more than half of the elderly lived in poverty, and the program’s goal was to provide a minimal pension for older Americans In the 1950s Congress authorized a cost-of-living adjustment (COLA), and not until 1975 did these COLA increases become annual and automatic. In the 1970s, however, Social Security started running a slight deficit. It was evident that the problem would worsen over time. Americans were getting older. There were fewer workers per retiree, and retirees were living longer. In 1983, a special commission headed by the economist Alan Greenspan generated a number of reform measures that were enacted by Congress. The central purpose of the reforms was to create a surplus, known as the Social Security Trust Fund, which would save money over the years to help bridge the gap created as the boomers retired. It did this primarily in two ways. First, the retirement age was raised: Over several years, the age for drawing full retirement benefits increased from 65 to 67. Second, the reform significantly increased payroll taxes—again, over a period of years—to the relatively high rate that now prevails. The reforms also raised the tax rate on the self-employed, so that they pay the combined rate paid by employers and employees. By the time we get to 2018, when Social Security is expected to start paying out more than it is bringing in, the fund will be worth more than $4 trillion. The problem is that the trust fund money is not sitting in a vault somewhere. It has already been spent. One reason the nation has been able to run such large deficits over the past couple of decades is that the Treasury has borrowed money from the Social Security Trust Fund, depositing an electronic IOU in its place.
- Salary and retirement benefits comprise a large portion of the U.S. military budget. In addition, the armed services provide housing and medical care for soldiers and their families, and the military employs a large number of civilian personnel. Throw in administrative costs, base construction and upkeep, training, and logistics, and more than half of the military budget goes for operations and support The second large area of defense spending includes the development, testing, and procurement of weapons systems.
- Medicare and Medicaid are two separate, often-confused programs with common origins. Both were established in the mid-1960s as part of President Lyndon Johnson’s Great Society. Since then, exploding medical costs have been one of the largest contributors to increased government spending. Medicare provides health insurance coverage for retired people (beginning at age 65) as well as for disabled younger people. The economically disadvantaged receive health services through Medicaid . Under this joint program between the federal government and the states, the federal government provides an average of 57 percent of Medicaid’s financing. Because some states provide more services than others, matching percentages vary. Most of the 42 million Medicaid enrollees are children and pregnant women, but the overwhelming amount of Medicaid funding goes to the elderly and disabled. Much of that money is spent on nursing homes, home health care, and social services for retired people who have exhausted their life savings.
- Notes held by the Social Security and Medicare trust funds also receive interest payments. One of the difficulties of creating the budget at the federal level is caused by the pervasiveness of entitlements, which are mandatory spending required by law that is not subject to the budgetary process. Entitlements account for three out of every five dollars that the federal government spends
- The Fed is accountable to Congress but is free from political pressure because of the way it is structured. The seven members of its Board of Governors are appointed by the president of the United States, but they hold staggered, 14-year terms. That makes it difficult for any president or for Congress to exert too much influence over its policies. The FOMC consists of the seven governors, the president of the New York Federal Reserve Board (who has a permanent seat), and four of the remaining 11 regional presidents, who serve on a rotating basis. The other seven presidents offer input. It uses 5 tools to manipulate monetary policy: Reserve ratios —the amount of cash that the Fed requires member banks to keep on hand in order to insure against a run on deposits. Federal funds rate— a market-driven interest rate that banks charge one another for short-term (often overnight) loans. Rates drop when there is excess money in the system; they rise when available loan money is restricted. Open-market operations, by which it manipulates the total amount of money available in the market. Most open-market operations today are carried out electronically. Discount rate— the interest rate that the Fed charges its member banks for loans. The discount rate is generally about 0.1 percent above the federal funds rate. Although the discount rate does not directly set the prime rate— the rate that banks charge their best customers—there is significant correlation between the two. Buying and selling foreign currencies in an effort to stabilize world financial markets and currency exchange rates. Although this instrument is generally not used to affect the U.S. money supply, it is sometimes used to adjust the value of the dollar relative to other currencies. The most significant of these tools are open-market operations and the discount rate
- Controlling the actual amount of money in circulation has a problem in that money is hard to define—and even harder to measure. Focusing on inflationary risk and interest rates would address the weakness in attempting to control money accessed The narrowest definition of money is cash in circulation. A broader definition includes checking and savings accounts, and certificates of deposit, but even this broader definition is perhaps inadequate in a society where credit is relatively easy to obtain and people can spend money they do not have. Alternatively, the Fed could focus on inflationary risk and interest rates would address the weakness in attempting to control money accessed through credit.