The Policy Process and Budgeting Setting Priorities, Funding Programs

Overview What are the six major steps in the policy process? What are the key steps in creating a budget and who are the key actors at each step? How does the budget fit with our overall economic policy?

Public Policy The decisions, rules, and actions of the government that are designed to achieve certain goals Policy constrained by Political forces Budget

Policy Implementation The Policy Process Policy Deliberation Policy Enactment Policy Implementation Agenda Setting Policy Outcomes Policy Output

Policy Implementation The Policy Process Policy Deliberation Policy Enactment Policy Implementation Agenda Setting Policy Outcomes Policy Output

Policy Implementation The Policy Process Policy Deliberation Policy Enactment Policy Implementation Agenda Setting Policy Outcomes Policy Output

Policy Implementation The Policy Process Policy Deliberation Policy Enactment Policy Implementation Agenda Setting Policy Outcomes Policy Output

Policy Implementation The Policy Process Policy Deliberation Policy Enactment Policy Implementation Agenda Setting Policy Outcomes Policy Output

Policy Implementation The Policy Process Policy Deliberation Policy Enactment Policy Implementation Agenda Setting Policy Outcomes Policy Output

Policy Implementation The Policy Process Policy Deliberation Policy Enactment Policy Implementation Agenda Setting Policy Outcomes Policy Output

Policy Implementation The Policy Process Policy Deliberation Policy Enactment Policy Implementation Agenda Setting Policy Outcomes Policy Output

Budget and Economic Policy Policy process constrained by budget Budget constrained by economic policy

Setting the Budget Revenue

Revenue Sources (FY2004)

Setting the Budget Revenue Expenditures Direct spending Discretionary spending

Government Expenditures (FY2004)

Setting the Budget Revenue Expenditures Revenue – Expenditures Direct spending Discretionary spending Revenue – Expenditures Surplus Deficit

Budget Surplus/Deficit

National Debt

The Federal Budget Process President’s Budget Request Congressional Budget Resolution

President’s Budget Request Federal agencies submit requests to Office of Management and Budget (OMB) 18 month lead time Summer of 2005, agencies submitting requests for budget that will go into effect October 1, 2006 OMB Proposed budget to Congress Due by first Monday in February

Congress’s Job Congressional Budget Office report CBO makes economic forecast to predict revenues February 15 Individual committees make requests to Budget Committees Mid- to late March

Congress’s Job House and Senate Budget Committees draft “Budget Resolution” What is a “budget resolution”? How much money will govt. collect in taxes over next 5 years? How much money will govt. spend in each of 20 spending categories (“budget functions”)? President’s signature not needed Supposed to be done by April 15

Congress’s Job Appropriations Committee President’s Budget CBO Projections Budget Committees’ Budget Resolution Appropriations Committee Committee Requests

Congress’s Job Appropriations Committees House and Senate Dollars for programs Constrained by Budget Resolution President’s signature required on appropriations

Budget Deadline: September 30 Miss the deadline? Federal government runs out of “money” on October 1 Congress must pass a “continuing resolution” to prevent the government from shutting down

What Do We Take Away? Process is very long But, there is a deadline – decisions under pressure Many, many people involved – too many cooks?

Constraints on Budget Process Political constraints (which programs are popular, etc.) Macroeconomic constraints To the extent that the government affects the economy, we need our budget (taxing and spending) to reflect broader economic policy.

Economic Policy Overview Why is government involved in the economy? To what extent should government be involved in the economy? What tools can the government use to control the economy?

Why Is Government Involved in the Economy? Basic government function Define and protect property rights Maintain the peace Public expectations (post-Great Depression) Market failures Monopolies Public goods Remember – government is supposed to keep us from killing each other. Part of that involves protecting our property rights, so that we have incentives to produce and so that we don’t spend all of our time protecting our cows. Protecting property rights (especially intellectual property rights) necessarily has economic consequences. Maintain peace – if economic inequalities and uncertainties grow too large, the peace is threatened – people will riot. So to maintain peace, government must have at least minimal involvement in maintaining a healthy economy and redistributing wealth. Public expectations of the roll of the government in economy grew in the wake of the great depression – FDR stepped into the breach and bolstered the economy, now we expect the government to protect the economy (and we blame politicians for the economy going sour). Market failures – basically, we expect that the basic laws of supply and demand will result in prosperity and economic growth. But sometimes the market doesn’t work like we want it too – certain conditions make it impossible for the normal competitive economy to operate efficiently. Monopolies: where only one supplier controls an entire sector – like Microsoft controlling office software or “Bell Telephone” controlling the telephone service market in the 70s. Public goods: things that we want but that the market will not produce – things like armies, roads, etc.

Should the Government Be Involved And, If So, How Much? Beliefs about the proper level of government involvement depend on beliefs about how the economy works Three key theories Laissez-faire capitalism Keynesianism Monetarism

Laissez-faire Capitalism Based on Adam Smith’s “invisible hand” Market will work, just leave it alone Advocates minimal government involvement Focus is on overall productivity, not inequalities Was popular pre-Great Depression Regaining popularity since 1970s

Keynesianism Based on work of John Maynard Keynes Economy can be “revived” through government intervention Gross inequalities in wealth reduce demand for goods and hurt economy So goal is to make sure that the middle class and working poor have money to spend Cut income taxes on this broad segment of society Create jobs through public employment

Monetarism Key player: Milton Friedman Government cannot act quickly enough to “fine-tune” economy Instead, should focus on stability in economy by controlling the money supply to banks Became popular in late 1970s Practically, emphasis is on controlling interest rates Gives the Chair of the Federal Reserve enormous power

Ben Bernanke – Chair of the Federal Reserve Chair

Comparison of the “Big Three” Laissez-faire Capitalism Keynesianism Monetarism Primary Concern Economic Growth Economic Equality Economic Stability Govt. Role Minimal Major Moderate Govt. “Tools” None Tax rates, government spending Control money and interest rates

What Policies Can Govt. Use to Control Economy? Monetary policies Fiscal policies Regulation Subsidies and Contracting

Monetary Policies Set interest rates Control banking regulations (affects how much money banks have to “play with” and lend to consumers)

Fiscal Policies Tax Spend Tax rates determine how much money government has and, conversely, how much money consumers have to spend Progressive v. Regressive tax schemes Progressive taxes help redistribute wealth Spend Can create jobs Affect overall health of economy 15 states tax food, though half of those tax food at a lower rate than other goods

Regulation Break up monopolies (antitrust policy) Set minimum wages and work hour limits Child labor laws Safety and health requirements

Subsidies and Contracting Get people to do things they wouldn’t otherwise do by offering benefits for the behavior Subsidies (grants of cash and goods to firms or people doing things we like) Examples: NSF grants, crop subsidies, land grants to “settlers” in 1800s Contracts (opportunities for firms to do business with the government – can impose conditions!) Examples: providing contracts to new industries to help them develop, requiring firms who contract w/ govt. to engage in fair employment practices