Pearson Education, Inc. © 2005 Chapter 17 DOMESTIC POLICY: THE ECONOMY AND SOCIAL WELFARE

Pearson Education, Inc. © 2005 Whatever Happened to the Budget Surplus? In early 2001, the budget surplus was predicted to be $230 billion in 2002, growing to $5.6 trillion over 10 years. But instead, the budget for 2002 was $106 billion in debt, growing to a projected $1.6 trillion over 10 years. This turnaround represents the most dramatic reversal of the fiscal health of the nation in more than 50 years.

Pearson Education, Inc. © 2005 What caused this turnaround? Economic woes –recession –stock market collapse –jobless recovery Cost of “war on terror” –Afghanistan –Iraq –homeland security Massive tax cuts Medicare prescription drug benefit

Pearson Education, Inc. © 2005 Why Government Is Involved in the Economy and Social Welfare Economic management –Governments in all modern capitalist societies play a substantial role in the management and direction of their economies. –Government responsibility for the national economy is so widely accepted that national elections are often decided by the voters’ judgment of how well the party in power is carrying out this duty.

Pearson Education, Inc. © 2005 Social welfare –A social welfare state is a society with a set of government programs that protect the minimum standards of living of families and individuals. –All rich democracies have social welfare states.

Pearson Education, Inc. © 2005 Economic Policy Goals of economic policy –Economic growth –Avoid inflation –Maintain positive balance of payments –Avoid negative externalities pollution workplace injuries health hazards

Pearson Education, Inc. © 2005 Tools of Macroeconomic Policy Macroeconomic policy looks at the performance of the economy as a whole or broad areas of the economy, such as employment. Fiscal policy –altering government finances by raising or lowering government spending, raising or lowering taxes, and raising or lowering government borrowing –difficult to use

Pearson Education, Inc. © 2005 government policy to influence interest rates and control the supply of money in circulation primarily accomplished through the operations of the Federal Reserve Board Actions by the Fed affect how much money is available to businesses and individuals in banks, savings and loans, and credit unions. It influences interest rates and the money supply. –Open market operations –Discount rate –Reserve requirements Monetary policy

Pearson Education, Inc. © 2005 The Debate About the Proper Role of Government in the Economy Keynesianism Monetarism Supply-side economic policy

Pearson Education, Inc. © 2005 The Federal Budget and Fiscal Policy Government spending –War is associated with dramatic increases in federal spending. –The relative spending level of the federal government increased steadily from the early 1930s-1980s budget –19.4% national defense (up from 16.4% in 2001) –65% human resources (up considerably from 1980) –5.5% physical resources (down considerably from 1980) –7% interest on national debt (down from 15.9% in 1996)

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Taxes Public discontent with taxes Yet relatively low tax burden compared to other rich democracies, and remarkably little change in tax burden in recent decades

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Taxes Federal government –depends mostly on income taxes, which are only mildly progressive –other federal taxes, such as Social Security, are regressive –recent tax cuts for the rich will make the distribution of wealth more unequal State governments depend mostly on sales taxes Local governments depend mostly on property taxes

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The Deficit and the National Debt The budget deficit is the annual shortfall between what the government spends and what it takes in. The national debt refers to the total of what the government owes. Benefits and dangers of national debt Rise of national debt typically associated with war

Pearson Education, Inc. © 2005 Regulation Regulation refers to the issuing of rules and regulations by federal agencies that private businesses must follow. Why government regulates – free market economy creates negative externalities –businesses turn to government for protection against competitors

Pearson Education, Inc. © 2005 Regulation History of American regulation –Progressive Era regulation –New Deal regulation –The new social regulation –Deregulation

Pearson Education, Inc. © 2005 The Future of Regulation Despite recent deregulation, the regulatory state is here to stay –Most regulatory policies are supported by the public. –New problems will probably stimulate public demands for government intervention. –Businesses will continue to turn to government for regulation when it suits their interests.

Pearson Education, Inc. © 2005 Social Welfare Social insurance –benefits based on contributions –Social Security Means-tested –distributed on the basis of need Food stamps –entitlement programs Medicare

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Social Security Formally known as Old Age, Survivors, and Disability Insurance (OASDI) Funded by payroll tax Due to an aging population, Social Security will run a deficit unless reforms are made. Democrats favor small reforms. Republicans favor a major overhaul.

Pearson Education, Inc. © 2005 Medicare Entitlement program for retirees and the disabled Prescription drug benefit begins 2006 One of the most costly federal programs Payments are a recurring problem

Pearson Education, Inc. © 2005 Do Social Insurance Programs Work? Successes Problems

Pearson Education, Inc. © 2005 Means-Tested Programs (Welfare) Unpopularity of previous AFDC program Food Stamps Medicaid Supplemental Security Income The Earned Income Tax Credit

Pearson Education, Inc. © 2005 Welfare Block Grants Temporary Assistance to Needy Families (TANF) replaced AFDC in 1996 The new welfare system –ends the status of welfare assistance as a federal entitlement –is administered by the states –is largely funded by federal block grant to the states –requires recipients to work to support themselves within two years of going on welfare –has a limit of five years of support –requires that unmarried teenage parents must stay in school and live with an adult –requires that states continue to provide Medicaid to eligible residents

Pearson Education, Inc. © 2005 Welfare Block Grants Results –pro welfare roles have diminished in every state –con About 20% of those who left the welfare roles between returned to them. Because pay for entry-level positions is so low, very few former welfare recipients have been able to rise above the poverty line. When economic hard times returned in 2001, even entry level jobs became scarce, and former welfare recipients who had used up their five years suffered serious difficulties.

Pearson Education, Inc. © 2005 How the American Welfare State Compares with Others All modern capitalist countries have social welfare states. Welfare states range from low-benefit, targeted types (minimal or liberal welfare states) to high-benefit, universal types (developed or social democratic welfare states). The United States is very close to being at the minimum end of the spectrum.

Pearson Education, Inc. © 2005 Compared with other rich democracies, the American welfare state: –is much less costly –covers fewer people –favors the elderly –is less redistributive –requires less of private employers –does not include universal healthcare

Pearson Education, Inc. © 2005 Why the American Welfare State Is Different Constitutional rules Racial and ethnic diversity Political culture Business power Weak labor unions