1. ECONOMIC POLICY
and
PUBLIC POLICY

2. Economic Theories Monetarism Keynesianism
Inflation occurs when too much $ is chasing too few goods
Government needs to have a steady, predictable increase in the money supply at a rate about equal to the growth in the economy’s productivity
Beyond that gov’t should leave matters alone and let the free market operate
Keynesianism
Gov’t must manage the economy by spending more money when in recession and cutting spending when there is inflation
Key is to create the right level of demand
No need for a balanced budget from year-to-year, what matters is the performance of the economy

3. Economic Theories Economic Planning Supply-side
Gov’t plans, such as wage and price controls or the direction of investment, can improve the economy
Gov’t should plan the country’s economic activity
Supply-side
Lower taxes and fewer regulations will stimulate the economy
Increases peoples’ incentive to work, save, and invest
Investments--> jobs
Tax rates will be lower, but total national income will be higher

4. The Roots of Government Participation in the Economy
For the first 100 years of our nation, most economic issues were controlled by the states not the national government.
The national government's roles were limited to
public lands policies
public works projects
and the encouragement of business through the use of taxes and tariffs.
The states were quite active in promoting and regulating private business activities.
They built the Erie Canal, roads, and railroads. States licensed, regulated, and inspected many factories and businesses.

5. Industrialization
Following the Civil War, the US moved from an agrarian to and manufacturing based economy. As the US industrialized many large-scale factories were created.
This shift lead to many national economic problems.

6. Industrialization National problems such as…
fluctuations between periods of economic prosperity and economic downturn
Industrial accidents
Disease outbreaks
Labor conflict
Unemployment and the exploitation of workers
were too large and complex for state governments alone.

7. Laissez-Faire Doctrine
A French term meaning “to allow to do, to leave alone.”
It is a hands-off governmental policy that is based on the belief that governmental regulation of the economy is wrong.

8. The Progressive Era (1901-1917)
The Progressive Movement was a middle class reform movement designed to change the political, economic, and social system of the United States.
In general, Progressive reformers wanted to rein in corporate power and make it more responsive to society and the democratically elected government.

9. The Great Depression / New Deal
The Great Depression (a catastrophic worldwide economic downturn) began with
a stock market collapse
followed by rising unemployment
dropping prices
falling production
and financial panic.
President Hoover announced that there was nothing wrong and the economy was fundamentally sound. Panic ensued.
FDR called for and Congress enacted a "New Deal" for Americans. This legislation allowed for strong government participation in the economy to relieve the nation’s economic distress.

10. The Post-World War II Era
As WWII came to an end, many policymakers worried that the conversion from a wartime to a peacetime economy might trigger yet another great depression.
With the passing of
The Employment Act and the
The Taft-Hartley Act
(to deal with unemployment) the US government became deeply involved in maintaining high levels of employment.

11. Economic Policy U.S. Economic Goals (1946) -
full employment
economic growth
wage and price stability

12. Stabilizing the Economy
Since FDR and the Great Depression, the government has taken a participatory approach to macroeconomic problems.
The US government primarily uses two instruments to effect the economy…
Monetary policy
Fiscal policy

13. Fiscal Policy expenditures John Maynard Keynes (1883-1946)
Fiscal Policy - manipulating the federal revenues (taxes) and federal spending to achieve economic goals.
Exercised by Congress, President, Congressional Budget Office, Council of Economic Advisors, and the OMB
Tools: taxing and spending
Total production = total income= total
expenditures

14. Fiscal Policy
Following the economist John Maynard Keynes government spending has been used to offset a decline in private spending and help maintain
levels of spending
production
employment.
Fiscal policy involves taxation and government spending policies to influence the overall operation of the economy.
John Kennedy was the first president to actively use fiscal policy. He deliberately ran a deficit in order to fuel economic growth.

15. Fiscal Policy
Our economy passes thru 4 distinct phases-- expansion, crisis, recession, and recovery-- gov’t action can modify these.
Inflationary pressures are always strong during prosperity and full employment and a reduction in spending will relieve these pressures.
Recessions are the result of lower demand and measures to increase spending will help.

16. Taxes Base: Income- based on ability to pay
Expenditures - everyone pays the
same
Wealth - property, estate,
inheritance

17. Taxes cont. Impact: Progressive - taxed on ability to pay (income tax)
Regressive - tax in which all people
pay the same percentage, regardless of
their income (sales tax, property tax)

18. Revenue: Income Taxes Tax Brackets 2005

19. Tax (In)Equity

20. Level: Income - federal Sales - state Property - local
Taxes cont.
Level:
Income - federal
Sales - state
Property - local

21. Tax Revenue

22. Approaching Democracy
A Bush Priority
President Bush signed into law a $1.35 trillion tax cut—the third largest since WWIII:
$300 for adults filing as single
$600 for joint returns
Called for gradual reductions in the tax rate and a new 10% tax bracket at the bottom of the income scale
This was a victory for conservatives
Democrats warned that “the policy implications…will be felt for decades to come”
Congress attached a caveat to the bill: the tax cut expires on December 31, 2010.
BERMAN&MURPHY APPROACHING DEMOCRACY ?
Questions for Reflection: What relationship exists between taxes and public policy? What conditions need to be in place for adequate social programs as well as reasonable taxation policies to coexist?

23. Expenditures

24. Expenditures
About two-thirds of what the government spends is mandatory- that is the money goes to people who are entitled to it
Entitlements include Social Security (largest expenditure), Medicare & Medicaid, veteran’s benefits, food stamps, interest on national debt, etc.
Military/Defense is 2nd largest expenditure

25. Expenditures: Defense
Each Nimitz class aircraft carrier costs about $4.5 billion, with annual operating expenses of $160 million

26. Expenditures
In 2005, interest on the national debt totaled $182 billion, almost 7 percent of the total budget
Budgets for other programs:
Department of Education: $71 billion
NASA’s budget: $16 billion
National Science Foundation: $5.5 billion
Department of Justice: $21 billion
Department of Transportation: $58 billion
Environmental Protection Agency: $8 billion

27. The Budget
Director of the OMB is responsible for initiating the budget process
After consulting w/ the president, the OMB writes the president’s budget and submits it to Congress
Sent to 3 committees in Congress: House Ways and Means Committee, Authorization committees in both houses, Appropriation committees in both houses, and the Congressional Budget Office
Process complicated, politically divisive and almost impossible to conclude

28. Long-term Budget Challenges

29. Monetary Policy
Monetary policy involves the regulation of the country's money supply and interest rates.
The primary responsibility for monetary policy rests with the Federal Reserve Board (Fed).
The Federal Reserve System was created in 1913 consists of:
the Federal Reserve Board
the Federal Open Market Committee
12 Federal Reserve Banks
~6,000 Member Banks

30. The Federal Reserve Board

31. The Federal Reserve System
The Fed is made up of seven members appointed by the president for 14 year overlapping terms with approval of the Senate.
Current Chairman: Ben Bernanke
Supposed to be politically neutral
Federal Open Market Committee (FOMC) is the Fed’s policymaking arm

32. Tools of the Fed
1.Buying and Selling Federal Gov’t Securities (bonds, Treasury notes, IOUs, etc.)
When the Fed buys securities, it in effect puts more $$ in circulation and takes securities out of circulation
More $$= interest rates drop, more money borrowed and spent
When it sells securities, it in effect takes money out of circulation, causing interest rates to rise and making borrowing more difficult

33. Tools of the Fed
2. Regulating the Amount of Money that a Member Bank Must Keep in Reserves
To back customer deposits
If it must keep a larger reserve, it lends less, loans become harder to obtain, interest rates rise
3. Change Interest Rates Charged to Banks
To borrow $$ from the Fed, to cover short-term needs
Called the discount rate
Can effect how much money banks will lend

34. The Fed in Action
The “Misery Index” is the sum of unemployment and inflation rates

35. Review - Monetary Policy
Money is an economic tool.
Borrowing through the banking system expands the money supply.
Raising and lowering interest rates also affects the money supply.
Too much money encourages inflation and too little restricts economic growth.