Economic Policy

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Chapter 16 Economic Policy
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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.
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The Monetarist Position

• According to the monetarist position, inflation
  occurs when government prints too much money.

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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

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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

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Supply-side

• Supply-side economists advocate that government
  interfere less in the economy.

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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

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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.
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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.
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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.
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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.
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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.
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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.
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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!

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Compare Tax Burdens in 19 Democratic Nations
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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.

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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).

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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)..

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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.

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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

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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).
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"On" and "Off" Budget

• From time to time, you may hear about the
  "on-budget" which is the budget excluding certain
  programs that are legally designated as
  "off-budget."
• 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).

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"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.

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U.S. National Debt Clock

• See following link
• http//www.brillig.com/debt_clock/

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