Economic Policy
- Introduction
- The politics of deficit spending
- 1999 / 2000 financial "miracle" (first surplus since 1969)
- Uniform public opinion versus divided politicians
- Cut spending?
- Raise taxes?
- Rapid growth of economy and increase in personal income and incoming taxes reduced deficit
- New Debate: What to do with the extra money?
- Republicans: return it to the taxpayers
- Democrats: spend it on new programs
- Economic Growth and Tax Relief Reconciliation Act of 2001
- 2010 expiration and increase in spending on federal programs
- Future economic conditions are difficult to predict
- The politics of deficit spending
- The politics of American economic prosperity
- Health of American economy creates majoritarian politics
- Voters influenced by their immediate economic situation
- Voters worry about the nation as a whole as well as their own situations
- Voting behavior and economic conditions correlated at the national level but not at the individual level
- People understand what government can and cannot be held accountable for
- People see economic conditions as affecting them indirectly, even when they are doing well
- What politicians try to do
- Elected officials tempted to take short-term view of the economy
- Government uses money to influence elections, but government will not always do whatever is necessary
- Government does not know how to produce desirable outcomes
- Attempting to cure one economic problem often exacerbates another
- Ideology plays a large role in determining policy
- Democrats tend to want to reduce unemployment
- Republicans tend to want to reduce inflation
- Health of American economy creates majoritarian politics
- The politics of taxing and spending
- Inconsistency in what people want out of majoritarian politics
- No tax increases
- No government deficit
- Continued (or higher) government spending
- Proposals to spend projected budget surplus in 1999
- Tax cuts
- New or enlarged government programs
- Reduce the debt
- Difficult to make meaningful tax cuts
- Politicians get reelected by spending money
- Increased spending more popular than cutting taxes
- Inconsistency in what people want out of majoritarian politics
- Economic theories and political needs
- Monetarism--inflation occurs when there is too much money chasing too few goods (Milton Friedman); advocates increase in money supply about equal to economic growth
- 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 (John Kenneth Galbraith)
- Wage-price controls
- Industrial policy--government directs investments toward particular industries
- Supply-side tax cuts--need for less government interference and lower taxes (Arthur Laffer)
- Lower taxes would create incentives for investment
- Greater productivity would produce more tax revenue
- Ideology and theory: people embrace an economic theory partly because of their political beliefs
- Reaganomics
- Combination of monetarism, supply-side tax cuts, and domestic budget cutting
- Goals not consistent
- Reduction in size of federal government
- Increase in military strength
- Effects
- Rate of growth of spending slowed (but not spending itself)
- Military spending increased
- Money supply controlled
- Federal taxes decreased
- Large deficits incurred and dramatically increase the size of the national debt
- Unemployment decreased
- The machinery of economic policy-making
- Fragmented policy-making; not under president's full control
- Council of Economic Advisers
- Members chosen are sympathetic to president's view of economics and are experts
- Forecasts economic trends
- Prepares annual economic report for president
- Office of Management and Budget
- Prepares estimates of federal government agencies; negotiates department budgets
- Ensures that agencies' legislative proposals are compatible with president's program
- Secretary of the Treasury
- Reflects point of view of financial community
- Provides estimates of government's revenues
- Recommends tax changes; represents the nation before bankers and other nations
- The Fed (Federal Reserve Board)
- Independent of both president and Congress
- Regulates supply and price of money
- Congress most important in economic policy making
- Approves taxes and expenditures
- Consents to wage and price controls
- Can alter Fed policy by threatening to reduce its powers
- Council of Economic Advisers
- Effects of interest group claims
- Usually majoritorian: economic health good for all
- Sometimes interest group: free trade (e.g., NAFTA)
- Fragmented policy-making; not under president's full control
- Spending money
- Conflict between majoritarian and client or interest group politics
- Sources of conflict reflected in inconsistencies in public opinion
- Politicians have incentive to make two kinds of appeals
- Keep spending down and cut deficit
- Support favorite programs of voters
- The budget
- Earlier practices
- Merely adding expenditures before 1921
- No unified presidential budget until 1930s
- Separate committee reactions after that
- Congressional Budget Act of 1974: procedures
- President submits budget
- House and Senate budget committees analyze budget
- Budget resolution in May proposes budget ceilings
- Members informed whether or not spending proposals conform to budget resolutions
- Committees approve appropriations bills, Congress passes them, and sends them to the president for signature
- Hard to make big changes in government spending because of entitlements
- Big loophole: Congress not required to tighten government's financial belt
- Failures of the process after 1981
- Earlier practices
- Reducing Spending
- Gramm-Rudman Balanced Budget Act (1985) called for:
- A target cap on the deficit each year, leading to a balanced budget
- A spending plan within those targets
- If lack of agreement on a spending plan exists, automatic across-the-board percentage budget cuts (a sequester)
- "Smoke and mirrors" and failure of the Act
- Plan was unpopular, but "necessary"
- Congress and president found ways to increase spending about "target" anyway
- New strategies
- Congress votes for a tax increase
- Passage of Budget Enforcement Act of 1990
- Imposed a cap on discretionary spending (i.e., nonentitlements)
- No limit on mandatory spending (i.e., entitlements) but did impose a "pay-as-you-go" approach
- Gramm-Rudman Balanced Budget Act (1985) called for:
- Levying taxes
- Tax policy reflects blend of majoritarian and client politics
- "What is a 'fair' tax law?" (majoritarian)
- Tax burden is kept low; Americans pay less than citizens in most other countries
- Requires everyone to pay something; Americans cheat less than others
- "How much is in it for me?" (client)
- Requires the better-off to pay more
- Progressiveness is a matter of dispute: hard to calculate
- Many loopholes: example of client politics
- Client politics (special interests) make tax reform difficult, but Tax Reform Act passed (1986)
- "What is a 'fair' tax law?" (majoritarian)
- The rise of the income tax
- Most revenue derived from tariffs until 1913 and ratification of Sixteenth Amendment
- Taxes then varied with war (high), peace (low)
- High rates offset by many loopholes: compromise
- Constituencies organized around loopholes
- Tax bills before 1986 dealt more with deductions than with rates
- Tax Reform Act of 1986: low rates with smaller deductions
- Will Bush tax cuts expire in 2010 or be made permanent?
- Tax policy reflects blend of majoritarian and client politics