Chapter 18 Economic Policy US Government AP

The Economy Hard to predict how policy will impact the economy over the long term Natural business cycle

The Business Cycle Over time a business gains and loses This is normal

The Impact of Government Policy goal is to keep the line as straight as possible, with steady growth Becomes a valence issue

The Debt To eliminate it: Raise taxes or Reduce spending Or a combination of both Enter valance—Dem’s vs Rep’s

1990’s We had a budget surplus Had to compromise (did both) Dems -start new programs Rep’s -give a tax cut

The players in Fiscal Policy OMB CBO Congress President Cabinet Departments Agencies (GAO) Interest groups

Other Players-Monetary Policy The Federal Reserve Board Sets interest rates Is independent Congress Approves taxes Approves the budget (CBO) Foreign policy laws (NAFTA)

Triple play……. OMB Director Chair of the Council of Economic Advisors Treasury Secretary These 3 offices are the closest advisors to the President on the economy

Economy and Elections “Pocket Book” issues during an election help/hurt incumbents (2008) Unemployment Inflation Older voters/Fixed income

Econ and Elections II IMPOSSIBLE TO DO Makes politicians tempted to look at short term policy Try to improve it at election time IMPOSSIBLE TO DO D= ↓ unemployment R= ↓ inflation

The “Perfect” Policy mission: impossible Have nice Govt. programs Have less debt (Lower spending) Keep taxes low mission: impossible

5 Economic theories Monetarism Keynesianism Planning Supply Side tax cuts Reaganomics

5 theories Each President chooses advisors who have his point of view on policies

Monetary policy Govt. focus on the supply of money Control the supply by: Deposit requirements (reserve req.) Interest rates (prime)

Fiscal Policy Government spending policy The budget The tax rate

The Budget October 1 to September 30 Executive branch and Congress President/OMB put it out Congress (H/S) go over it—put ceilings in place Changes are usually small

Entitlements Most of the Budget is money that must be spent (66%) Social Security Medicare Bond payments

(Growing at $1.3 million a minute today) The Budget-The End Is out of control Deficit spending allows the budget to be whatever it “needs” to be Current deficit: $15 trillion (Growing at $1.3 million a minute today) (your share?-$50,000)

The “Perfect” Policy mission: impossible Have nice Govt. programs Have less debt (Lower spending) Keep taxes low mission: impossible

3 Things that Matter in Economic Policy a. The economic health of the nation (real vs. perceived) (interest group) (Consumer confidence) b. The types of govt. spending (client, interest group) c. Taxes- rates and distribution of benefits (majoritarian or client)