Dye and Sparrow
Politics in America
Chapter 16
Politics and the Economy
Dye (p577) sagely points out
that “the United States is
primarily a free-market
economy, but the federal
government strongly
influences economic activity”
In this brief overview of
political economy we will
examine how politics
impacts economics and
vice-versa
Dynamic US Debt Clock
The US Debt Problem per former
head of GAO, David Walker
Senator Coburn’s “Wastebook”
Politics and Economics
Politics
Economics
Who gets what,
when, and how
What shall be
produced, how, and
for whom
Collective decisions
Individual decisions
Economic Decision Making
Fiscal Policy
The taxing, spending,
and borrowing
activities of the
national government
(Presidents/Congress)
Monetary Policy
Decisions regarding
the supply of money
in the economy,
including private
borrowing, interest
rates, and banking
activity (Federal
Reserve System)
The Fed and Monetary Policy
The Federal Reserve
System was created
in 1913 by an act of
Congress
Its job is quite
literally to regulate
the money supply of
the United States in
order to avoid BOTH
inflation & recessions
Between the two world wars, inflation in
Germany reached such levels that the
nation’s currency was often weighed,
rather than counted, in order to speed
transactions
The Fed and Monetary Policy
Powers/Duties centers on Monetary Policy:
-Holds deposits, or reserves of banks
-Lends money to banks at discount rates that the
Fed itself determines
-Buys and sells US Govt. Treasury Bonds
-Monitors the health of the banking industry
-Since 2009 it has been buying up a ton of mortgage
backed securities (approx. $2T worth according to
the WSJ)…
Government Spending, Budget
Priorities, and Debt (Fiscal Policy)
Sources of Mandatory Spending
Entitlement programs (ie SS, Medicare, Medicaid, Food Stamps, etc)
 Indexing of benefits (ie authorized automatic increases in the above
mentioned benefits to match inflation)
 Increasing costs of in-kind benefits (ie non-cash benefits such as
reimbursing doctors/hospitals for the costs of Medicare/Medicaid)
 Interest on the national debt (ie see charts and video…The official
U.S. national debt is now approximately $12.57 trillion,
having increased by over $2 trillion in less than two years.
The interest expense for 2009 was $383 billion, or $1.05
billion/day.)

Federal Budget Priorities
Deficits Through the Years
The Tax
Burden
Tax Politics
Progressive Taxation
System of taxation in
which higher income
groups pay a larger
percentage of their
incomes in taxes than do
lower income groups
Regressive Taxation
System of taxation in which
lower income groups pay a
larger percentage of their
incomes in taxes than do
higher income groups
Proportional (flat taxation)
System of taxation in which all
income groups pay the same
percentage of their income in
taxes
Who Pays the Federal Income Tax?
Where does the $ come from and go?
You fix the national debt