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Economic Policy in the U.S.

Economic Policy in the U.S. Key Terms. Budget deficit Budget surplus Entitlements Sequester Office of Management and Budget Congressional Budget Office Progressive Tax Regressive Tax Federal Reserve System. Warm up.

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Economic Policy in the U.S.

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  1. Economic Policy in the U.S.

  2. Key Terms • Budget deficit • Budget surplus • Entitlements • Sequester • Office of Management and Budget • Congressional Budget Office • Progressive Tax • Regressive Tax • Federal Reserve System

  3. Warm up • If there is a budget surplus in the U.S., what should be done with the money? • How should the U.S. deal with a large deficit?

  4. In General……. • The government gets most of its money from individual income taxes • The government spends most of its money on Entitlement programs (social security, medicare, medicaid) • There is disagreement between the parties on budget deficits and budget surpluses

  5. Most Americans don’t like having a deficit but they disagree about how to fix it • Some feel taxes should be raised to create more revenue • Others want to cut spending • 1999 deficit went away because of overall U.S. economic growth and therefore more tax receipts. This led to debates about what to do with the money. • Social Security is an area that both parties agree needs to be maintained but they disagree on how to do it • Economists have poorly predicted deficits and surpluses in U.S. economy

  6. TAXES • Fiscal year runs Oct. 1- Sept. 30 • Power to tax is in Art. 1, sec. 8 • Limits on taxes • Must be for public use • May not tax exports • Must be equally apportioned among states • Indirect taxes must be same rate • Gov. may not levy fed. Tax on things the state does but can levy fed. Tax on non-governmental things the state does

  7. Current Federal Taxes • Income Tax • 16th Amendment • Individual returns are largest source of revenue for gov. • Progressive tax- rich pay more taxes • Individual rates vary from 10%- 40% • Most people withhold as they go

  8. Other Taxes • Corporations • Social Insurance • Social security • Medicare • Unemployment • These are usually deducted from paychecks and everyone pays the same rate (regressive tax) • Excise Taxes

  9. Other Revenues • Nontax revenues • Interest • Sale/lease public lands • Collector’s stamps • Profit U.S. makes from coins • Borrowing • We operate on deficit financing • Congress must authorize it • It is done by the Treasury Department, which issues T-bills and bonds • No constitutional limit on amount we can borrow

  10. Spending and the Budget • Entitlements- benefits federal law requires be paid • Interest on the public debt • controllable spending= authorized by Congress • Uncontrollable spending= mandatory spending

  11. Republicans • Have been identified as a party for the rich and big businesses • Believe in trickle-down economics and low taxes to stimulate growth • Policies aim at reducing the deficit • Worry about inflation

  12. Democrats • Viewed as the party sympathetic to labor and the poor • Favor “tax and spend” policies, government programs • Generally vote for government sponsored economic stimulus packages • Worry about unemployment

  13. Why is the Government Involved in the Economy? • Markets cannot function unless some government action sets the rules for exchange and punishes those who violate the rules • Since Great Depression, the public has held the government accountable for a healthy economy • People hold government responsible for their welfare: • Maintaining law and order • Protecting private property • Creating protection for consumers • Gov. regulation protects U.S. industries • Gov. provides public goods like facilities, transportation, which help economic production

  14. What the Constitution Says…. • Article I, Section 8- Congress has power to collect taxes, pay debts, provide for common defense and general welfare of U.S. • Article 1- House has power to initiate all appropriations bills • Article 1- Congress can impose excise taxes in the form of tariffs and prohibits export taxes • Article 1- Congress has power to borrow money • Congress can appropriate only money that is budgeted • 16th amendment- income tax is only directly levied tax • Indirect taxes- gasoline, tobacco, liquor- must be uniform

  15. Key Economic Measurements: How we tell if the economy is healthy • Unemployment rate • Consumer Price Index (CPI)- measure of change in prices/ indicates inflation • Gross National Product (GNP)- total output of goods • Gross Domestic Product (GDP)- key economic indicator- monetary value of outputs

  16. Politics of Economic Prosperity • People hold politicians accountable for state of nation • Everyone wants increases in income and wealth and no one wants inflations and unemployment- leading to majoritarian politics • Pocketbook issues determine how voters vote • Voters also vote on the overall economy • Voting behavior and economic conditions strongly correlated at the national level but not at the individual level • Politicians running for reelection want to take a short term view of economy (after social security created congress voted to increase benefits every election year) • There is only so much control over the economy that politicians can have

  17. Politics of Taxing and Spending • Dilemma- everyone wants prosperity and most want gov. to increase programs, but the more it spends on programs the more it needs and the less that is available for private investment, which creates prosperity • Politically- Increasing spending is more popular than cutting taxes

  18. Spending Money • Voters consistently say they want a balanced budget and lower government spending yet they want the gov. to cover things like education, crime control, etc. • Politicians therefore often say that they will cut the deficit and reduce spending and/or they will ensure that certain programs get more money • The budget is largely a document adding up what the gov. is going to spend • Entitlements make up the largest piece of expenditure • Individual income taxes make up the largest part of revenue

  19. Monetarism • Inflation happens when there is too much money chasing too few goods. Gov. prints too much money then tries to pull it out of circulation and the cycle continues • Monetarism says that the gov. should have a predictable increase in the money supply equal to economic growth: other than that leave it alone • Conservative view

  20. Keynesianism • Key to economic health is to create the right level of demand, so this is the main task of the gov. • Keynes argued for increase in national income so consumers could spend more • If demand is too little, it should pump money into the economy and when it is too great it should take money out • Budget does not have to be balanced. Growth has to happen • Liberal because allows for gov. to sponsor social programs

  21. Planning • This is done through price and wage controls • Can also be done by government planning of industrial investments (like in Japan) • Liberal

  22. Supply-Side Tax Cuts • Market hasn’t been given enough of a chance • Less gov. interference • Conservative view

  23. Reaganomics • Goals were to reduce size of gov., stimulate econ. Growth, increase military strength • What he did: cut income taxes, spend a lot on military, reduced spending on domestic programs • This created a large deficit, rise in business activity, lowered unemployment

  24. Important People in Economic Policy Making • Chairman of the Council of Economic Advisers, director of OMB, and secretary of the treasury • CEA tends to rely on markets regardless of which president is in power as these are economics professionals

  25. The Fed • Federal Reserve System established in 1913 • 7 members appointed by the president with consent of Senate for 14 years- nonrenewable • Chairman serves for four years- renewable terms • Its function is to regulate the supply of money and the price of money • Buying and selling federal government securities • Regulating the amount of money that a member bank must keep in hand as reserves • Changing the interest charged banks (discount rate) • Federal Reserve Board • Regional Federal Reserve Banks • Member Banks • Debate over how independent from the president the Fed is

  26. Congress • This is the most important part of economic policy making since they must approve everything • Key committees: House and Senate Budget Committees, House and Senate Appropriations Committees, House Ways and Means Committee • The president has to get a lot of different people to agree to get his plan in motion (agencies within the exec. Branch, Federal Reserve Board, committees in Congress) • When Congress passes laws about foreign trade it is responding to interest group politics • NAFTA (North American Free Trade Agreement) 1993- free traders won, tariffs on commerce with Canada and Mexico largely abolished

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