Economic Policy Wilson 18A

Objective Questions Who Governs? To What Ends?  Who in the federal government can make our economy strong?  Why does the federal government ever have a budget deficit?

Federal Budgets  Deficit – spending < revenues throughout year  Debt – cumulative deficits year after year  GDP – yearly production of G/S  Have always had debt  Ratio of debt to GDP increasing  Got surplus in late ‘90s  Clinton budget showdown with House  Gingrich “Contract with America”  Booming technology and housing sector

Budget Proposals  Liberals – raise taxes  Spend surplus on programs  Conservatives – cut spending  Return surplus to taxpayers  Economic Growth and Tax Relief Reconciliation Act “Bush Tax Cuts” – 2001  Bad estimates = CBO, OMB  9/11, housing and banking crisis, recession  Extensions, some made permanent  Fiscal cliff, sequester

Politics of Prosperity  Voters tend to hold elected officials responsible for the state of the economy  Pocketbook issues  Economy as a whole or individual circumstances  More responsive to national conditions – sociotropic  Short-run POV when running for reelection  Macroeconomy is complicated  Ideological positions  Dems = unemployment  Reps = inflation

Fiscal Politics  Taxing and spending  Contradictions in voter demands  Less taxes + more spending = reduce deficits  Increasing spending more popular with voters  Attempt to raise taxes on “other people”  Monetary Policy  Federal Reserve Board  Open Market Operations  Required Reserve Ratio  Interest Rate

Theories  Monetarism – use of Fed tools to keep money supply equal to economic productivity – Friedman  Keynesianism – use of federal budget to influence total demand – Keynes  Planning – use of price controls and industrial policy to direct economy – Galbraith  Supply-side – free markets and create incentives for growth through targeted tax cutting – Laffer  Reaganomics – combined monetarism and supply-side policies for mixed results (ended up more Keynesian)