Chapter 16 Economic Policy

THEME A - Politics and Economics 1. Monetarism - Inflation is a result of too much money chasing too few goods 2. Keynesianism -Activist government fiscal policy; 3. Planning - Planning - wage and price controls etc. 4. Supply - side tax cuts - high taxes cause inflation.

The Monetarist Position According to the monetarist position, inflation occurs when government prints too much money.

Keynesianism--government should create right level of demand Assumes that health of economy depends on what fraction of their incomes people save or spend When demand is too low, government should spend more than it collects in taxes by creating public works programs When demand is too high, government should increase taxes

Planning –free market too undependable to ensure economic efficiency; therefore government should control it Wage-price controls Industrial policy--government directs investments toward particular industries

Supply ‑ side Supply ‑ side economists advocate that government interfere less in the economy.

Supply-side tax cuts--need for less government interference and lower taxes Lower taxes would create incentives for investment Greater productivity would produce more tax revenue

THEME B - "Reaganomics" and the Deficit Reaganomics was a combination of monetarism, supply-side tax cuts, and domestic budget cutting. Compared to federal spending in the Carter Administration, during the presidency of Ronald Reagan federal spending, increased in dollars and as a percentage of GNP.

THEME B - "Reaganomics" and the Deficit The actual results involved the slowing of the federal government's spending rate (aggregate spending was not reduced), the curbing of inflation, the lowering of income taxes by about 23 percent over three years, and unfortunately, the creation of huge government, private and corporate debt. (12 trillion dollars by the end of the 1980s, $4 trillion each.) 7.5 trillion in public debt alone by 2002.

THEME C - The Budget Process The Presidents Troika consists of the following three units: 1. The Council of Economic Advisers - generally represents the promarket views of professional economists.

2. The Office of Management and Budget - has the responsibility of preparing a federal budget in accordance with the president's program. 3. The secretary of the treasury - generally represents the bankers' point of view.

Until 1974, the annual budget of the United States was pretty much the sum of what the committees in a decentralized Congress wanted to spend. The Congressional Budget Act of 1974 attempted to impose some centralization on the process.

Now budget committees in each house produce a May budget resolution that imposes ceilings on overall spending and spending in each area (such as health and defense). Cutting spending is a difficult matter, because about 3/4 of all federal spending is relatively uncontrollable, at least politically.

According to opinion polls, the public wants all of the below A balanced federal budget. Lowered governmental spending. More spending on education and many other issues. IMPOSSIBLE!

Compare Tax Burdens in 19 Democratic Nations

Revenues come from these sources Individual income taxes Social insurance payroll taxes include Social Security taxes, Medicare taxes, unemployment insurance taxes, and Federal employee retirement payments.. Corporate income taxes Excise taxes apply to various products, including alcohol, tobacco, transportation fuels, and telephone services. The Government earmarks some of these taxes to support certain activities--including highways and airports and airways--and deposits others in the general fund. The Government also collects estate and gift taxes, customs duties, and miscellaneous revenues--e.g., Federal Reserve earnings, fines, penalties, and forfeitures.

Spending The largest Federal program is Social Security, which will provide monthly benefits to over 45 million retired and disabled workers, their dependents, and survivors. Medicare, which will provide health care coverage for over 40 million elderly Americans and people with disabilities, consists of Part A (hospital insurance) and Part B (insurance for physician costs and other services).

Spending Medicaid, in provides health care services to almost 34 million Americans, including the poor, people with disabilities, and senior citizens in nursing homes. Unlike Medicare, the Federal Government shares the costs of Medicaid with the States, paying between 50 and 83 percent of the total (depending on each State's requirements)..

Spending Other means-tested entitlements provide benefits to people and families with incomes below certain minimum levels that vary from program to program. The major means-tested entitlements are Food Stamps and food aid to Puerto Rico, Supplemental Security Income, Child Nutrition, the Earned Income Tax Credit, and veterans' pensions. The remaining mandatory spending, which mainly consists of Federal retirement and insurance programs, unemployment insurance, and payments to farmers.

Spending National defense discretionary spending Non-defense discretionary spending--a wide array of programs that include education, training, science, technology, housing, transportation, and foreign aidNational defense discretionary spending Interest payments, primarily the result of previous budget deficits

Figure 16.3: When Will the Crunch Come? Projections of the Growth in Federal Spending Source: Congressional Budget Office, The Economic and Budget Outlook: An Update (July 1, 1999).

"On" and "Off" Budget From time to time, you may hear about the "on- budget" which is the budget excluding certain programs that are legally designated as "off- budget." Traditionally, the President's budget has focused on the totals for the unified budget. The unified budget encompasses all of the budgetary activities of the Government, and the unified budget surplus or deficit is the measure that best determines how much the Government has to borrow from the public (in the case of a deficit), or how much past borrowing can be repaid (in the case of a surplus).

"On" and "Off" Budget More recently, the on-budget surplus has received increasing attention. For all practical purposes, the off-budget surplus is the surplus in the Social Security program. This means that the on-budget surplus is the budget surplus excluding the Social Security surplus.2 2 Social Security is running large surpluses right now, because the payroll taxes of the relatively large "baby-boom" generation exceed the Social Security benefits paid to the relatively small generation of current retirees. These surpluses have held down the unified deficit, by offsetting part of the deficit in the on-budget accounts.

U.S. National Debt Clock See following link: debt_clock/ debt_clock/

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