Chapter Seventeen
The Policy-Making Process
The Policy Making Process
 Political agenda~ Issues that people believe require
governmental action
 Legitimate scope of government action is generally determined
by public opinion.
What do you see as the issues that require governmental action?
What is the legitimate scope of the government?
Costs, Benefits, and Policy
 Cost: any burden, monetary or non-monetary, that
some people must, or expect, to bear from the policy
 Benefit: any satisfaction, monetary or non-monetary,
that some people must, or expect, to receive from the
policy
 Politics is a process of settling disputes over who
benefits/pays and who ought to benefit/pay.
Types of Politics:
 Majoritarian politics: distributed benefits, distributed costs (Antitrust
legislation)
 Interest group politics: concentrated benefits, concentrated costs (Union
labor)
 Client politics: concentrated benefits, distributed costs (Milk industry)
 Entrepreneurial politics: distributed benefits, concentrated costs (Sinclair,
Nader)
Figure 17.1: A Way of Classifying and Explaining the Politics of Different Policy Issues
Economic Policymaking
Chapter 18
Managing the Economy
Types of Economic Policies
Fiscal Policy: taxing and spending (budget). Handled by Congress and the
President
Monetary policy: regulation of the money supply by the Federal Reserve
Board (the Fed).
Economic Theories:
1. Keynesian economics: Government can manipulate the health of an
economy through spending
2. Supply-side economics: Cuts in taxes will produce business investment
that will offset loss of $ due to lower taxes.
3. Monetarism: Money supply is the most important factor for determining
the health of the economy
4. Economic planning: The free market is unstable and therefore the
government must plan parts of the country’s economic activity.
Funding the Government
 We authorize the government, through the Constitution and
elected officials, to raise money through taxes.
 Taxation is the primary way that the government collects money.
 Without revenue, or income from taxes, government would not
be able to provide goods and services.
The Power to Tax
 Article 1, Section 8, Clause 1 of
the Constitution grants
Congress the power to tax.
 The Sixteenth Amendment gives
Congress the power to levy an
income tax.
Limits on the Power to Tax
1. The purpose of the tax must be for “the common
defense and general welfare.”
2. Federal taxes must be the same in every state.
3. The government may not tax exports.
Tax Structures
 Proportional Taxes (PA State Tax)
 A proportional tax is a tax for which the percentage of income paid
in taxes remains the same for all income levels.
 Progressive Taxes (Federal Income Tax)
 A progressive tax is a tax for which the percent of income paid in
taxes increases as income increases.
 Regressive Taxes (Sales Tax)
 A regressive tax is a tax for which the percentage of income paid in
taxes decreases as income increases.
Spending Categories
Mandatory Spending
Money that lawmakers are
required by law to spend
Interest payments on the national
debt
“Entitlement” programs (Social
Security, Medicare and Medicaid)
Discretionary Spending
Money that government
planners can choose how
to spend.
Defense
Education
Training
Environmental cleanup
National parks and monuments
Scientific research
Land management
Farm subsidies
Foreign aid
Source of Federal Revenue
 Social Security and Medicare Taxes (21%)
 Unemployment Taxes (12%)
 Federal Income Taxes (49%)
 Corporate Taxes (10%)
 Excise Taxes (3%)
 Other (4%)
 Estate Taxes
 Gift Taxes
 Import Taxes
The President’s Message on the 2010 budget
Taxing and Spending
Entitlements: Programs where money is
automatically spent without annual review of
programs.
1. Social Security
2. Medicare
3. Federal Pensions
4. Interest on National Debt
Makes up almost 2/3 of federal budget
Problem because Congress and the President
cannot control much of spending
Budget Process
1. Agencies prepare their budget needs and submit to
President’s Office of Management and Budget (OMB)
2. OMB makes recommendations to President
3. President submits budget to Congress
4. Congressional Budget Office (CBO) checks President’s
budget
5. Ways and Means committee in House review taxes and
revenues.
6. Appropriations committee review spending
7. Agencies lobby for money
8. Majority vote in both houses passes budget
9. President signs or vetoes bill (no line-item veto)
The Federal Budget Debate
Social Welfare
Policy
Trade Policy
Trade deficits (US imports more goods from other nations
than it exports) have led to calls for protectionism.
Recent push for free trade
GATT
WTO
NAFTA
The Federal Reserve
 The Federal Reserve (“Fed”) serves as the nation’s central bank, which
is designed to oversee the banking system and regulate the quantity
of money in the economy.
 The “Fed” is a privately owned institution, authorized in 1914 by
Congress to ensure the health of the nation’s banking system.
 The Fed is run by its Board of Governors.
 Seven members appointed by the President of the United States.
 The Chairman of the Board is the most important position: presiding,
directing, and testifying about Fed policy. He is appointed by the
President and confirmed by the Senate.
 The Federal Reserve System is made up of the Federal Reserve
Board in Washington, D.C. and twelve regional Federal Reserve
Banks.
Three Primary Functions of the Fed
¬ Regulate the private banking industry to make sure banks follow
federal laws intended to promote safe and sound banking practices.
- Act as a banker’s bank, making loans to other banks and as a lender of
last resort.
® Control of the supply of money i.e. Monetary Policy.
Tools of Monetary Control
The Fed has three instruments of monetary control:
 Open-Market Operations:
 Buying and selling bonds.
 Changing the Reserve Ratio:
 Increasing or decreasing the ratio.
 Changing the Discount Rate:
 The interest rate the Fed charges other banks for loans.
Problems with controlling the monetary system:
 The Fed does not control the amount of money that households choose
to hold as deposits in banks.
 The Fed does not control the amount of money that bankers choose to
lend.