Political Economy of the United States

1. Political Economy of the United States How Economics and Politics Affect Each Other

2. I. Why study political economy? • Politics Defined: Who Gets What? – or “The authoritativeallocation of resources and values.” • Implication: Politics creates winners and losers • Key Terms: • Authority: Government has a monopoly on the legitimate use of force, so it is the only one with the authority to allocate. • Resource Allocation: Money, labor, and even commodities • Allocation of Values: Deciding between incompatible moral or ethical principles

3. B. Political Economy • Definition: The effect of politics on the economy and of the economy on politics • Economic effects of politics: • Will more government spending help the economy? • Does the law reward productive activity? • Does defense spending reduce growth? • Is dictatorship necessary for development? • Political effects of the economy: • Do people vote based on their pocketbooks? • Is economic growth the key to military dominance? • Who wins and loses when free trade pacts are signed?

4. II. A model of politics: How are resources authoritatively allocated?

5. A. Agenda-Setting • Proposing alternatives to the status quo • Status Quo: The way things are (the current system)

6. 1. Individuals

7. 1. Individuals

8. 1. Individuals -- Powerless alone

9. 2. Unorganized Groups

10. 2. Unorganized Groups -- Must be considered, but cannot set agenda

11. 3. Organized groups

12. 3. Organized groups -- Set agenda and shape citizen response

13. 4. Benefits of Organization a. Credible Commitment -- Conditional support b. Outreach -- Publicity, Money, Media Access c. Persuasion -- Information to representatives

14. 5. How to Initiate Change in the US • Representatives: The Elected • Use Money, Votes, Publicity • Math for politicians: • Anything + Money = Anything Else • b. Bureaucrats: Experts and Career Officials • Use Information, Targeted Ads • c. Appointees: Judges, Cabinet, etc. • Indirect: Target Appointers • Direct: Information, Lobbying, or Lawsuits • d. ALL: Illegal bribes, Influence Peddling, etc.

15. a. Logrolling: You scratch my back, I’ll scratch yours b. Partisanship From the early American practice of neighbors gathering to help clear land by rolling off and burning felled timber. B. Government Action1. Legislation

16. 2. Bureaucratic Change a. Enforcement of laws • Example: Equal employment opportunity for women b. Regulation • Example: Wireless Internet

17. 3. Judicial Change a. Judicial Review: Power of courts to review laws • Examples: Income tax, child labor, regulatory “takings,” and the “switch in time that saved nine” b. Economic regulation: Chevron deference

18. C. Citizen Response • The Media • Economic Ideology: Generally “conservative” – both owners and reporters critical of deficits, taxes, wasteful spending, limits on trade and immigration, etc. • Citation Bias: Fox (Right), Other Broadcast Networks (Left)

20. C. Citizen Response • The Media • Economic Ideology: Generally “conservative” – both owners and reporters critical of deficits, taxes, wasteful spending, limits on trade and immigration, etc. • Citation Bias: Fox (Right), Other Broadcast Networks (Left) • Effect of Bias: Remarkably small, due to self-selection by voters

21. 2. Economic Voting • Prospective voting: Voting based on expectations of policy/outcomes Examples: • McKinley 1896: “The Full Dinner Pail” • 2008: From Obama and McCain

22. b. Retrospective Voting • 1932: FDR against Hoover • 1952: Eisenhower asks, Who Raised Prices? • 1984: The Train: Retrospective success • 1992: How Ya Doin’? Retrospective Failure IN GENERAL: Retrospective economic voting overwhelms prospective economic voting

23. Economic Voting: Presidential Elections, 1948-2008 Bush 2004 % of two-party vote for incumbent party Gore 2000 McCain 2008 % change in per capita real disposable income (p. 109) in election year

24. 2008

25. 3. Behavior • Protest: “Bonus Marchers,” “Battle of Seattle,” “Tea Parties” • Non-compliance: Tax Evasion, Failure of “WIN” Campaign

26. III. The Federal Budget: An Overview Who pays? Who gets what?

27. A. Revenues: Microeconomic Effects (Who pays?) 1. Tax code is best place for political favors. Why? a. Permanence -- Tax law remains unless someone repeals it. Spending requires reauthorization every year. b. Less visible -- Public doesn’t understand tax code

28. 2. Class differencesa. Progressive taxes (Wealthy pay higher % of income) • Income Tax: Tax on earned income. Does not apply to investments. • Capital-Gains Tax: Tax on investment income. • Estate Tax: Tax on wealth over $2 million ($4 million if married) after death (2009 figures)

29. b. Regressive taxes (Poor pay higher % of income) • Excise Taxes: Tobacco, Alcohol, Gasoline, etc.

31. b. Regressive taxes (Poor pay higher % of income) • Excise Taxes: Tobacco, Alcohol, Gasoline, etc. • State Taxes: • Sales tax (poor consume larger fraction of income) • Property tax: Effect on rent tends to make tax regressive (poor pay larger share of income for housing)

32. State and Local Taxes: Regressive

33. b. Regressive taxes (Poor pay higher % of income) • Excise Taxes: Tobacco, Alcohol, Gasoline, etc. • State Taxes: • Sales tax (poor consume larger fraction of income) • Property tax: Effect on rent tends to make tax regressive (poor pay larger share of income for housing) • Payroll Taxes (depends on definition): Social Security and Medicare taxes. Paid only on the first $90,000 of wages. Not paid on investments or on wages over $90,000 (2005 figure).

34. c. Flat Taxes • Also known as Proportional Taxation • Definition: Everyone pays same % of income, regardless of source • US System • Consists of progressive and regressive taxes • Federal taxes > State taxes • Only moderately progressive: Middle income range is nearly “flat” • If progressive taxes become flat taxes, overall system becomes regressive

36. Is the US Tax System Flat?

37. d. Which federal taxes are most important?

38. B. Spending: Who gets what?

39. 1. Categories of Spending • Discretionary – About 1/3 of the budget • Mandatory – About 2/3 of the Budget

40. a. “Mandatory” Spending • Some laws commit Congress to spend money in the future. These programs get funding each year if Congress does nothing: • Social Security • Medicare • Medicaid • Income Security • Interest

41. Mandatory Income Security, 2002:

42. Mandatory Spending Increases Every Year…

43. …partly due to new benefits…

44. …but mostly due to an aging population…

45. …and increasing health care costs.

46. Net Interest Increases as Deficits Increase – But Interest Rates are Unpredictable • 1998-2007 data and 2008-2010 projections

47. b. Discretionary Spending i. Must be renewed by Congress or funding ceases ii. Defense is largest discretionary expenditure

48. iii. Defense Spending: Stability and Change

49. iv. USA vs. Everyone Else (2007) USA: $586.25 billion in FY 2007 ($666 b in 2008) China Russia Japan UK France Italy India Israel Iran North Korea Germany S. Arabia S. Korea Syria Next 50 0 50 100 150 200 250 300 350 400 450 500 550

50. C. Programs of Interest • These are already included in the earlier figures BUT • These programs have generated public and Congressional debate out of proportion to their budgets