Chapter Eighteen Economic Policy American Government and Politics: Deliberation, Democracy, and Citizenship

Chapter Eighteen: Learning Objectives Sketch the history of economic policy and its relationship to citizenship Describe the elements of fiscal policy Explain why the tax system is so complex

Chapter Eighteen: Learning Objectives Analyze the mechanics of monetary policy Summarize the elements of regulatory policy, especially in matters of finance Understand the politics of trade policy

Chapter Eighteen: Learning Objectives Discuss how policymakers and citizens deliberate on economic policy MARK RALSTON/AFP/Getty Images

Introduction Most agree on certain economic goals Economic growth (change in GDP) Low unemployment Low inflation (general rise in prices)

Introduction Economic policy includes 1. Fiscal policy 2. Monetary policy 3. Regulatory and trade policy

A Brief History of Economic Policy Founding an economy Laissez-faire approach Government fostered economic growth through communication and transportation Creation of Banks of the United States

A Brief History of Economic Policy Civil War and Progressivism Economic policy caused rift between North and South Laws passed to create uniform national currency Progressive movement influenced economic policy

A Brief History of Economic Policy World Wars and their aftermaths Government finances difficult to track New Deal programs created annual deficit Tax withholding authorized in 1943

A Brief History of Economic Policy An age of uncertainty 1970s saw high inflation, economic stagnation, and unemployment Supply-side economics became more prevalent economic theory and Ronald Reagan was a strong supporter of this idea

Fiscal Policy: Taxes What are the costs and benefits of the federal government’s complex system of income taxes? National archives

Fiscal Policy: Taxes Types of taxes Individual income taxes Corporate payroll taxes Payroll taxes Excise and sales taxes Harley Schwadron/Reprinted by permission of

Myths and Misinformation Income tax tales A quick search of the Internet will reveal many myths about how much citizens owe on their taxes. The IRS warns against using such misinformation.

Fiscal Policy: Spending and the Budget How do the executive and legislative branches deliberate about fiscal policy? Two considerations Economic impact of fiscal policy Must consider the components of the budget

Fiscal Policy: Spending and the Budget: The Budget Process

Pledges and Promises Full faith and credit of the United States The “full faith and credit” of the federal government backs the payments on public debt. What would happen if the government failed to pay its debts?

Fiscal Policy: Limits of Fiscal Policy Limits of fiscal policy include Proposals take months to become law, so there may be a policy lag Much of federal spending is outside the appropriations process Uncertainty about future economic conditions

Fiscal Policy: Deficits, Surpluses, and the Debt Why do deficits happen? Deficits may grow because policy goals often override fiscal goals. A president may be insistent on a policy without regard to the long-term economic impact of that policy.

Monetary Policy: Organization and Policy It is the responsibility of the Federal Reserve Board (the Fed) to assist in managing the supply of money and credit. The goal of the Federal Reserve Board is economic stability.

Monetary Policy: Organization and Policy The Fed does not directly dictate interest rates, rather it has power over the federal funds rate. The Fed does not have unlimited power as it is limited by global economic conditions and federal government deficits.

Monetary Policy: Organization and Policy Source: “The Federal Reserve System,” structure/, accessed May 7, 2009.

Monetary Policy: Deliberation and the Fed A member of the Federal Open Market Committee explained that his research is not only based on hard data, but also personal accounts and anecdotal evidence. How does that approach contribute to deliberation?

Regulatory and Trade Policy What is the appropriate role for the government in policing economic activity? Do international trade agreements infringe on American sovereignty?

Regulatory and Trade Policy: Regulating the Marketplace Four goals of financial regulation 1. Protect consumers from fraud, deception, or unfair practices 2. Ensure the integrity and fairness of markets to prevent fraud and manipulation

Regulatory and Trade Policy: Regulating the Marketplace Four goals of financial regulation 3. Monitor the safety and soundness of institutions 4. Ensure the stability of the overall financial system

Regulatory and Trade Policy: Trade International trade is a source of conflict. Those that profit from exports typically support free trade and those who are concerned about foreign competition typically support protectionism.

International Perspectives Economic and political freedom According to the data presented, does there appear to be a relationship between economic and political freedom? Where does the United States rank?

Economic Debate and Deliberative Democracy Deliberation depends on knowledge of basic information and shared goals but, when it comes to economic policy, Americans often disagree about how to achieve goals. Disagreements underlie deliberations about economic policy.

Deliberation, Citizenship, and You Catching waste and abuse The federal government is encouraging citizens to report waste and abuse with government money through the Internet, toll-free phone hotlines and fax.

Summary Federal budget large part of economy, but private sector is larger United States part of global economy No one government economic policy Many ways to appraise economic policy