Take Five… When and why has our government grown?
COSTS vs. BENEFITS Cost = any burden that a group must bear Benefit = any satisfaction that a group will enjoy from a policy
Take Five… What does the “perception of costs” mean?
COSTS vs. BENEFITS Costs and Benefits can be widely distributed or narrowly concentrated Widely-distributed costs: Income tax, Social security tax Narrowly-concentrated costs: Factory air emission standards Widely-distributed benefits: Social Security benefits, national defense Narrowly-concentrated benefits: farm subsidies
4 Types of Policies Widespread Costs Narrow Costs Interest Group Ex. Tariffs Client Politics Ex. Pork Barrel Project Narrow Benefits Entrepreneurial Ex. Consumer Product Safety Majoritarian Ex. Soc. Sec., Nat Defense Widespread benefits
4 types of Policies Majoritarian: Widely distributed costs and widely distributed benefits EX: Social Security, National Defense Interest Group: narrowly concentrated costs and narrowly concentrated benefits: EX: Tariffs on imports and exports
4 types of Policies Client: Widely distributed costs and narrowly concentrated benefits EX: Pork barrel pet projects for Senators states (Alaska’s Bridge to nowhere) Entrepreneurial: narrowly concentrated costs and widely distributed benefits: EX: Consumer product safety legislation
Government, Politics, and the Economy • Introduction • Capitalism: • An economic system in which individuals and corporations, not the government, own the principle means of productions and seek profits. • Mixed Economy: • An economic system in which the government is deeply involved in economic decisions through it role as regulator, consumer, subsidizer, taxer, employer and borrower. • Multinational Corporations: • Businesses with vast holdings in many countries.
Taxing and Spending Progressive taxes: a tax where the tax rate increases with increased wealth Regressive taxes: a tax that places a higher burden on those with lower income
Taxing and Spending Sources of Federal Revenue: Individual Income taxes: 49% Social Insurance (payroll) taxes: 33% Corporate taxes: 10% Excise taxes: 3% Borrowing: varies depending upon deficit Other: 4%
Taxing and Spending Discretionary Spending: Government has a choice in how money is spent Nondiscretionary: Government must spend the money for programs or commitments previously made Where the money is spent Direct benefit payments to individuals (Social Security, Medicare, Medicaid) 55% National Defense 16% Interest on National Debt 10% Nondefense discretionary Spending 19%
Take Five… What is an entitlement? Give an example.
Taxing and Spending Entitlements Automatically spent (without annual review of other programs) Ex: Social Security, Medicare, Federal Pensions, Interest on National Debt 2/3 of federal budget. Problem becomes that Congress and the President cannot control much of spending.
Taxing and Spending Budget Process Agencies prepare their budget needs and submit to President’s Office of Management and Budget (OMB) OMB makes recommendations to President President submits budget to Congress Congressional Budget Office (CBO) checks President’s budget Ways and Means committee in house review taxes and revenues. Appropriations committees review spending Agencies lobby for money Majority vote in both houses passes budget President signs or vetoes bill (no line-item veto)
Managing the Economy 2 types of Economic Policies Fiscal Policy: taxing and spending (budget). Handled by Congress and the President Monetary policy: regulation of the money supply by the Federal Reserve Board (the Fed). Adjustments of Interest rates
Take Five… Name one solution to “fix” the US budget woes of the past.
Managing the Economy Economic Theories: 1. Keynesian economics: Government can manipulate the health of an economy through spending.
Managing the Economy Economic Theories: 2. Supply-side economics: Cuts in taxes will produce business investment that will offset loss of $ due to lower taxes. 3. Monetarism: Money supply is the most important factor for determining the health of the economy
Take Five… How has the US government regulated foreign trade in the past? Has it been effective?
Managing the Economy Trade Policy Trade deficits (US imports more goods from other nations than it exports) have led to calls for protectionism Recent push for Free trade GATT NAFTA
Government Regulation Rules imposed by government on business to achieve a desired goal Antitrust policies 1890s-1910s to counter ill effects of capitalism Creation of regulatory agencies like FTC, FCC and SEC
Take Five… Take a guess….what is the world’s largest corporation?
Government, Politics, and the Economy • Economic Policy at Work: An Illustration • Wal-Mart is the world’s largest company. • Government Regulation and Business Practices • Securities and Exchange Commission regulates stock fraud. • Minimum wage: The legal minimum hourly wage for large employers. • Labor union: An organization of workers intended to engage in collective bargaining. • Collective bargaining: Negotiations between labor unions and management to determine pay and working conditions.
Government, Politics, and the Economy • Wal-Mart and the World Economy • Wal-Mart epitomizes America’s imbedding in the world economy. • The proportion of U.S. GDP accounted for by international trade is 30%. • Wal-Mart takes full advantage of “comparative advantage.” • Offshore outsourcing is a key concern of the new global economy.
Government, Politics, and the Economy • “It’s the Economy, Stupid”: Voters, Politicians, and Economic Policy • Economic trends affect who the voters vote for. • Economic conditions are the best predictor of voters’ evaluation of the president. • Republicans worry about inflation. • Democrats stress importance of unemployment.
Government, Politics, and the Economy • Two Major Worries: Unemployment and Inflation • Unemployment rate: Measured by the BLS, the proportion of the labor force actively seeking work, but unable to find jobs. • Inflation: The rise in prices for consumer goods. • Consumer Price Index: The key measure of inflation that relates the rise in prices over time.
Government, Politics, and the Economy • Unemployment: Joblessness in America, 1960-2002 (Figure 17.1)
Government, Politics, and the Economy • Inflation: Increases in the Cost of Living, 1960-2002 (Figure 17.2)
Take Five… What causes inflation?
Policies for Controlling the Economy • Monetary Policy and “the Fed” • The manipulation of the supply of money in private hands – too much cash and credit produces inflation. • Money supply affects the rate of interest paid. • Main policymaker is the Board of Governors of the Federal Reserve System – the “Fed.”
Policies for Controlling the Economy • The Feds instruments to influence the supply of money in circulation: • Sets the federal funds rate • Buys and sells government bonds • Through the use of these actions, the Fed can affect the economy.
Take Five… Why is it so difficult to control the economy?
Why it is Hard to Control the Economy • Some think politicians manipulate the economy to win reelection. • But there are problems with that: • Things like the budget are prepared in advance of when they go into effect. • Some benefits are automatically renewed (SS) • Capitalism can also affect the economy. • Government is more important in setting the rules of the game.
Arenas of Economic Policymaking • Business and Public Policy • Corporate Corruption and Concentration • Increased incidence of bankruptcy and scandals. • Increased number of corporate mergers • Antitrust policy: A policy designed to ensure competition and prevent monopoly.
Understanding Economic Policymaking • Democracy and Economic Policymaking • Voters expect more of politicians that they can control. • Sometimes economic theory and democratic theory may be at cross purposes. • It is difficult to make decisions that hurt groups or involve short-term pain for long-term gain. • Economic Policymaking and the Scope of Government • Liberals tend to favor more government involvement in the economy. • Conservatives tend to favor less government involvement in the economy.
Environmental Policy Key issue is the extent to which the environment should be protected and the costs of doing so. Key legislation: Clean Air acts and Clean water Acts EPA created in 1970
Take Five… What is a government subsidy? What is the purpose of it?
Government Subsidies Government Financial Support Cash (ie TANF- Temporary Assistance for Needy Families) Tax Incentives (Home mortgage interest payments are tax deductible) Credit subsidies- Veterans Administration provides Home loans Benefit in kind subsidies: Non cash benefits (foods stamps, Medicare, Medicaid)
Government Subsidies Purpose: to encourage a particular type of private sector action. EX - Homeownership is encouraged by the government, so Mortgage interest is tax deductible.
Government Subsidies Business Subsidies: Oil companies receive tax breaks to encourage oil production to make us less dependent upon foreign oil Airlines received government aid post 9/11 to help offset lost revenue. Government pays farmers to not plant certain crops to keep production down and stabilize prices
Government Subsidies Social Welfare Subsidies: Social Security (no means test, i.e. one does not have to prove that one lacks the means in order to qualify for the benefit.) Financed by FICA payroll tax Medicare (no means test) Unemployment Insurance (no means test) Temporary Assistance to Needy Families (TANF = means test) Supplemental Security Income (means test) Food Stamps (means test) Medicare federal medical coverage for people on TANF or SSI (means test)
Foreign Policy President and Congress Share powers President is commander in chief and can deploy troops, while Congress controls the money funding the military and can declare war. President makes appointment for ambassadors, but Senate approves President makes treaties, but Senate ratifies (some presidents use Executive Agreements, which do not need to be ratified to get around this)