Chapter 16
Economic Policy
THEME A - Politics and Economics
1. Monetarism - Inflation is a result of
too much money chasing too few
goods
2. Keynesianism -Activist government
fiscal policy;
3. Planning - Planning - wage and
price controls etc.
4. Supply - side tax cuts - high taxes
cause inflation.
The Monetarist Position
According to the
monetarist position,
inflation occurs when
government prints too
much money.
Keynesianism--government should
create right level of demand
Assumes that health of economy
depends on what fraction of their
incomes people save or spend
When demand is too low,
government should spend more than
it collects in taxes by creating public
works programs
When demand is too high,
government should increase taxes
Planning
– free market too undependable to
ensure economic efficiency;
therefore government should
control it
Wage-price controls
Industrial policy--government directs
investments toward particular
industries
Supply-side
Supply-side
economists advocate
that government
interfere less in the
economy.
Supply-side tax cuts--need for less
government interference and lower
taxes
Lower taxes would create
incentives for investment
Greater productivity would
produce more tax revenue
THEME B - "Reaganomics" and the
Deficit
Reaganomics was a combination of monetarism,
supply-side tax cuts, and domestic budget cutting.
Compared to federal spending in the Carter
Administration, during the presidency of Ronald
Reagan federal spending, increased in dollars and as
a percentage of GNP.
THEME B - "Reaganomics" and the Deficit
The actual results involved the slowing of the
federal government's spending rate (aggregate
spending was not reduced), the curbing of
inflation, the lowering of income taxes by
about 23 percent over three years, and
unfortunately, the creation of huge
government, private and corporate debt. (12
trillion dollars by the end of the 1980s, $4
trillion each.) 7.5 trillion in public debt alone
by 2002.
THEME C - The Budget Process
The Presidents Troika consists of the
following three units:
1. The Council of Economic Advisers generally represents the promarket
views of professional economists.
2. The Office of Management and
Budget - has the responsibility of
preparing a federal budget in
accordance with the president's
program.
3. The secretary of the treasury generally represents the bankers' point
of view.
Until 1974, the annual budget of
the United States was pretty much
the sum of what the committees in
a decentralized Congress wanted
to spend. The Congressional
Budget Act of 1974 attempted to
impose some centralization on the
process.
Now budget committees in each
house produce a May budget
resolution that imposes ceilings on
overall spending and spending in
each area (such as health and
defense). Cutting spending is a
difficult matter, because about 3/4
of all federal spending is relatively
uncontrollable, at least politically.
According to opinion polls, the
public wants all of the below
A balanced federal budget.
Lowered governmental spending.
More spending on education and many
other issues.
IMPOSSIBLE!
Compare Tax Burdens
in 19 Democratic
Nations
Revenues come from these
sources
Individual income taxes
Social insurance payroll taxes include Social Security taxes,
Medicare taxes, unemployment insurance taxes, and
Federal employee retirement payments..
Corporate income taxes
Excise taxes apply to various products, including alcohol,
tobacco, transportation fuels, and telephone services. The
Government earmarks some of these taxes to support
certain activities--including highways and airports and
airways--and deposits others in the general fund.
The Government also collects estate and gift taxes,
customs duties, and miscellaneous revenues--e.g., Federal
Reserve earnings, fines, penalties, and forfeitures.
Spending
The largest Federal program is Social
Security, which will provide monthly
benefits to over 45 million retired and
disabled workers, their dependents, and
survivors.
Medicare, which will provide health care
coverage for over 40 million elderly
Americans and people with disabilities,
consists of Part A (hospital insurance) and
Part B (insurance for physician costs and
other services).
Spending
Medicaid, in provides health care services
to almost 34 million Americans, including
the poor, people with disabilities, and
senior citizens in nursing homes. Unlike
Medicare, the Federal Government shares
the costs of Medicaid with the States,
paying between 50 and 83 percent of the
total (depending on each State's
requirements)..
Spending
Other means-tested entitlements provide benefits
to people and families with incomes below certain
minimum levels that vary from program to
program. The major means-tested entitlements
are Food Stamps and food aid to Puerto Rico,
Supplemental Security Income, Child Nutrition,
the Earned Income Tax Credit, and veterans'
pensions.
The remaining mandatory spending, which mainly
consists of Federal retirement and insurance
programs, unemployment insurance, and
payments to farmers.
Spending
National defense discretionary spending
Non-defense discretionary spending--a
wide array of programs that include
education, training, science, technology,
housing, transportation, and foreign
aidNational defense discretionary spending
Interest payments, primarily the result of
previous budget deficits
Figure 16.3: When Will the Crunch
Come? Projections of the Growth in
Federal Spending
Source: Congressional Budget Office, The Economic and Budget Outlook: An Update (July 1, 1999).
"On" and "Off" Budget
From time to time, you may hear about the "onbudget" which is the budget excluding certain
programs that are legally designated as "offbudget."
Traditionally, the President's budget has focused
on the totals for the unified budget. The unified
budget encompasses all of the budgetary
activities of the Government, and the unified
budget surplus or deficit is the measure that best
determines how much the Government has to
borrow from the public (in the case of a deficit),
or how much past borrowing can be repaid (in
the case of a surplus).
"On" and "Off" Budget
More recently, the on-budget surplus has
received increasing attention. For all practical
purposes, the off-budget surplus is the surplus in
the Social Security program. This means that the
on-budget surplus is the budget surplus
excluding the Social Security surplus.2
Social Security is running large surpluses right
now, because the payroll taxes of the relatively
large "baby-boom" generation exceed the Social
Security benefits paid to the relatively small
generation of current retirees. These surpluses
have held down the unified deficit, by offsetting
part of the deficit in the on-budget accounts.
U.S. National Debt Clock
See following link:
http://www.brillig.com/d
ebt_clock/
SELF TEST