AP Government

1. AP Government Unit 4 – Public policy Economic policy

2. Basics of public policy • Policy formed directly by 5 collaborators: • President • Policy origination • Oversees implementation (at top level) • Congress • Policy origination • Legislation development

3. Basics of public policy • Policy formed directly by 5 collaborators: • Court system • Legal interpretation – refines meaning of laws • Adjudicates disputes • Public vs. Government • Areas of gov. vs. each other • Public vs. public

4. Basics of public policy • Policy formed directly by 5 collaborators: • Bureaucracy (the “4th branch of gov”) • Takes direction from higher officials • Only part of federal government at grassroots • State governments • Implement many federal policies • Spend federal $ with mandated instructions

5. Basics of public policy • Policy formed indirectly by outsiders: • Interest groups • Technical knowledge – legislative authorship • Campaign contributions • Main source of grassroots involvement

6. Basics of public policy • Policy formed indirectly by outsiders: • Media – if an issue public is knowledgeable of • Agenda setting • Often not overly technical • Political parties • Foreign governments & interests

7. Basics of budgetary policy • Budget • Policy document allocating annual revenues & expenses • Deficit • If annual expenses > annual revenues • Surplus • If annual revenues > annual expenses

8. Basics of budgetary policy • Debt • Accumulation of many annual deficits • Sum of money borrowed in previous years

9. Largest sources of revenue • Income tax (Individual & Corporate) • #1 source of federal revenue • Progressive tax • Social insurance tax (FICA) • Social Security – 6.2% up to $106,800 limit • Medicare – 1.45% with no limit • Regressive tax

10. Taxation and policy • Tax loopholes • Exclusions allowing specific groups of people or corps to lower their tax burden • Tax expenditures • Revenue losses created by loopholes

11. How does gov borrow money? • Answer #1: Treasury Dept sells bonds • Must compete with other investments • Interest rate set by Federal Reserve • Owes interest on prior borrowing • Borrows to pay for interest on prior borrowing

12. How does gov borrow money? • What if annual tax revenue = regular annual expenditures? • Debt still grows • Must borrow to pay interest on prior years • Debt remains stable only if: Revenues = Expenditures + Interest

13. How does gov borrow money? • Answer #2: Borrow from trust funds • Social Security revenues in trust fund • ¾ of fund paid out right away to retirees • Treasury Dept borrows remainder for current spending • Acts as very low interest loan (interest only covers inflation)

14. How does Social Security work? • Workers pay in, retirees get paid • 62 – reduced benefits • 65 – normal benefits • 70 – maximum benefits • Other recipients: • Disabled • Widowed • Children of retired, deceased, disabled

15. When will it be bad? (maybe) • If laws don’t change (they probably will) • 2017 – expenditures > revenues • Accumulated assets begin to drop • 2040s – accumulated assets run out • Must cut benefits or raise taxation for program to continue

16. 2 categories of expenditures • Discretionary spending • Payments renewed annually in budget • OMB proposes budget • Congress reviews/changes • President signs into law

17. 2 categories of expenditures • Mandatory spending • Payments required by prior law – not newly passed in budget, but accounted for • Interest on prior borrowing • Entitlements– spending guaranteed to people who meet eligibility requirements • SS, Medicare, Medicaid, food stamps, etc.

21. Basic economic policy • Capitalism • System in which individuals & corps are principal economic actors • Socialism • System in which government is principal economic actor • Rarely does either exist in its pure form

22. Basic economic policy • Mixed economy • Econ system influenced by government: • Regulator • Consumer • Subsidizer • Taxer • Employer • Borrower

23. Government regulation • Securities & Exchange Commission • Regulatory board – oversees stock market • Most major companies are stock-issuing corporations – actions regulated by SEC • Requires regular financial disclosures

24. Other economic regulations • Minimum wage • Directly applies only to interstate commerce • States may have different minimum wage (or none at all) for intrastate companies

25. Other economic regulations • National Labor Relations Board • Oversees collective bargaining between unions & ownership • Unions declining in influence • Manufacturing jobs leaving US • Corporate influence increasing in US

26. Other economic regulations • Occupational Safety & Health Admin • Workplace safety • US Citizenship & Immigration Services • Regulation of legal worker status

27. Inflation vs. unemployment • One of the main arguments in econ • In short run they generally have an inverse relationship • Generally if U, then PL, vice versa • Conservatives: inflation is the priority • Liberals: unemployment is the priority

28. Phillips Curve

29. Unemployment • Bureau of Labor Statistics publishes unemployment rate: • % of workforce out of work but looking • Workforce: people 16-65 who want a job • No early retirees, no stay-at-home parents, no kids, no discouraged workers

30. Inflation • Bureau of Labor Statistics publishes Consumer Price Index (inflation rate): • Comparison of current price of various items to a previous year

31. Efforts to influence economy • Monetary policy • Federal Reserve changing interest rates & manipulating money supply to fix economy • Fiscal policy • Government using taxation and/or spending to fix economy

32. Monetary policy • Fed is independent of political control • 14 year terms • Federal Open Market Committee sets federal funds rate – prevailing interest rate • Interest rates influence investor activity

33. Interest rates and the economy • If IR, people don’t want to invest in bonds – unattractive investment • Public sells bonds – $ in circulation • Easier for individuals & businesses to borrow and spend – investment  • Unemployment , but inflation

34. Interest rates and the economy • If IR, people want to invest in bonds • People buy bonds - $ in circulation • Less $ available for individuals & businesses to borrow & invest • Unemployment , but inflation 

35. Fiscal policy – Liberals • Keynesian (demand-side) economics • John Maynard Keynes • Fix economy by  government spending • Intended for emergency situations •  demand – people spend more $ • spending = unemployment = incomes = gov is paid back with taxes

36. Fiscal policy – conservatives • Supply-side economics (Reaganomics) • Ronald Reagan • investment by taxes on wealthy • $ “trickles down” to unemployment

37. Laffer Curve