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Chapter 18

Chapter 18. Economic Policy-Making. Economic Policy. I. Economic Health A. Deficit Spending 1. The government spends more than it receives almost every year (deficit). 2. Some deficit spending is unavoidable due to unforeseen circumstances (natural disasters).

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Chapter 18

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  1. Chapter 18 Economic Policy-Making

  2. Economic Policy • I. Economic Health • A. Deficit Spending • 1. The government spends more than it receives almost every year (deficit). • 2. Some deficit spending is unavoidable due to unforeseen circumstances (natural disasters). • 3. Most Americans are opposed to deficit spending. • 4. The national debt is the accumulation of deficits over the years.

  3. Figure 16.2: History of the National Debt

  4. Economic Policy • I. Economic Health • B. Policy Differences • 1. The deficits have raised policy debates over the past 35 years. • a. Democrats have generally favored increasing taxes or shifting of taxes to cover the budget. • b. Republicans have generally favored cutting programs or reducing services.

  5. Economic Policy • II. Economic Policy • A. Economic Theory • 1. Monetarism - Increase the money supply at a rate equal to economic growth and let the free market operate. • 2. Keynesianism - When demand is low, gov’t should pump more money into the economy by spending more than it collects in taxes. If demand is high, increase taxes.

  6. Economic Policy • II. Economic Policy • A. Economic Theory • 3. Economic Planning – Not popular in the U.S. Views the free market as undependable and the government should plan parts of the economy such as wage and price controls. • 4. Supply Side tax cuts - less gov’t interference, lower taxes to create an incentive for reinvestment and greater productivity. • 5. “Reaganomics”- Combines monetarism, supply-side tax cuts and domestic budgetcuts.

  7. Economic Policy • II. Economic Policy • B. Key Players in Economic Policy: • 1. Congress – most important, must approve all taxes and expenditures. • 2. Council of Economic Advisors – Part of EOP, forecasts economic trends, supports the view of the President.

  8. Economic Policy • II. Economic Policy • B. Key Players in Economic Policy: • 3. Office of Management and Budget – Part of EOP, estimates budget needs for the departments and agencies. • 4. Secretary of the Treasury – key link between the business world and the government. • 5. The Federal Reserve Board – Appointed by the President, confirmed by the Senate. Regulates the money supply and the price of money.

  9. Economic Policy • II. Economic Policy • C. Fiscal policy affects the economy by making changes in government’s methods of collecting money and spending. • 1. The money comes from income taxes (progressive), social security taxes, borrowing and tariffs. (NAFTA largely ends tariffs from Mexico and Canada). • 2. The money is spent on social security and Medicare (entitlements), Defense and the deficit among others.

  10. Economic Policy • II. Economic Policy D.Monetary policy is the government’s control of the money supply. 1. The government controls how much money is in circulation by the amount they print and coin. 2. If too much money is out there, it tends to cause inflation, or devalues the dollar. Too little money in circulation and deflation occurs. The Federal Reserve Board helps to regulate this (interest rates and reserve requirement).

  11. Economic Policy • III. The Budget • A. Background • 1. The Budget is a policy document that announces how much the government plans to collect in taxes and spend in programs. • 2. There was no federal budget before 1921.

  12. Economic Policy • III. The Budget • A. Background • 3. The Congressional Budget Act of 1974 establishes budget procedures. • a. The president submits the budget • b. CBO analyzes the budget and reports to House and Senate budget committees. • c. Each committee submits a budget resolution to set a total budget ceiling. • d. Congress considers appropriations bills that fund programs within the established limits.

  13. Economic Policy • III. The Budget • B. Why don’t we balance the budget? • 1. Almost two-thirds of the federal budget is tied up in entitlements (Medicare and Social Security) -big changes are not possible. • 2. The Gramm-Rudman Balanced Budget Act (1985) capped spending and called for automatic cuts from 1986-1991. • 3. The Budget Enforcement Act of 1990 capped discretionary spending and raised taxes. If entitlement spending increased, discretionary spending had to be cut or taxes increased.

  14. Figure 16.3: When Will the Crunch Come? Projections of the Growth in Federal Spending

  15. Economic Policy • III. The Budget • C. Taxes • 1. Income taxes are the major source of federal revenues. • 2. The 16th Amendment authorized the income tax. • 3. The tax burden is kept low compared to other industrial nations. • 4. We use a progressive tax structure with higher incomes paying a higher rate.

  16. Figure 16.5: Federal Taxes on Income, Top Percentage Rates • Source: Updated from Congressional Quarterly Weekly Report (September 18, 1993), 2488.

  17. Figure 16.4: Tax Burdens in Nineteen Democratic Nations • Source: Statistical Abstract of the United States, 1998, 841.

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