1. Chapter 18
Economic Policy

2. Learning Objectives
How do you define “deficit,” “national debt,” and “gross domestic product”?
What makes the politics of taxing and spending so difficult?
On which programs does the federal government spend most of its money?
Who in the federal government can make our economy strong?
Why does the federal government ever have a budget deficit?
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3. Introduction WHO GOVERNS? TO WHAT ENDS?
Who in the federal government can make our economy strong?
Who was responsible for the recession?
TO WHAT ENDS?
Why does the federal government ever have a budget deficit?
Do most Americans trust government to protect their economic interests?
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4. Introduction
Deficit: the result of when the government in one year spends more money than it takes in from taxes
National debt: the total deficit from the first presidency to the present
Gross domestic product: total of all goods and services produced during a given year
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With just a few exceptions, the government has spent more money than it takes in every year since at least 1960.

5. Federal Budget Deficit (or Surplus), FY1960–2013 in Billions of Constant FY2005 Dollars (President’s Proposals)
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Source: Office of Management and Budget, Historical Tables.

6. The Politics of Economic Prosperity
Majoritarian politics
Pocketbook issues
National level
Individual level
What Politicians Try to Do
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How do Republicans and Democrats generally differ in their approach to economic policy?

7. The Politics of Taxing and Spending
Voters want
Lower taxes
Less debt
New/continued programs
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Tea Party activists protest in Washington after a government audit reveals that the Internal Revenue Service (IRS) targeted for special scrutiny applications by politically conservative groups for tax-exempt status.

8. Economic Theories and Political Needs
Monetarism
Keynesianism
Planning
Supply-Side Tax Cuts
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In general, conservative economists tend to support monetarism and supply-side economics,
while liberal economists are more likely to embrace Keynesianism and planning.

9. The Machinery of Economic Policymaking
Executive branch (president and “troika”)
The Fed (monetary policy)
Congress (fiscal policy)
Globalization
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The troika includes the chairman of the Council of Economic Advisers (CEA), the director of the Office
of Management and Budget (OMB), and the secretary of the treasury.

10. The Machinery of Economic Policymaking
Tools of the Fed
Buying and selling government securities
Money supply
Alters interest rates
Tools of Congress
Approves all taxes
Approves most expenditures
Wage/price controls
Can alter Federal Reserve policies
Key committees
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11. Spending Money Conflicting interests Public opinion
Majoritarian politics
Client politics
Interest group politics
Public opinion
Politicians’ appeals
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12. The Budget The U.S. Budget: What is it? Before 1921: no federal budget
In theory
In practice
Before 1921: no federal budget
Fiscal Year – October 1 through the following September 30 (federal)
Congressional Budget Act of 1974
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13. Reducing Spending Congressional Budget Act of 1974
Balanced Budget Act of 1985 (Gramm-Rudman Act)
Sequester – automatic spending cuts
Budget Enforcement Act of 1990
Limits on discretionary spending
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14. Federal Outlays in 2012 Federal Revenues in 2012
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Figure 18.2
Source: Adapted from Office of Management and Budget, Historical Tables.

15. Social Security and Medicare Cost as a % of GDP
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Figure 18.3
Source: Trustees’ Report , 2009.

16. Levying Taxes Majoritarian politics Client politics
Modest tax burden
Minimize cheating
Client politics
Loopholes
The Rise of the Income Tax
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17. Federal Taxes on Income, Top Percentage Rates, 1913-2013
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Figure 18.4
Source: Internal Revenue Service, Tax Tables, 2013.

18. Tax Burdens in Democratic Nations
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Source: U.S. Bureau of the Census, reporting data from Organization for Economic Cooperation and Development (OECD), Comparative Table 1361, 2010.

19. Growing Debt Threatens America’s World Standing
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20. Growing Debt Threatens America’s World Standing
Taking a closer look:
How does rising U.S. debt affect the average worker?
Why does China want the U.S. economy to succeed?
What are the political liabilities of significant debt?
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