Making Economic Policy

• Market - private sector

• Government - public sector

The Distribution Function

• efficient markets may not produce an equitable distribution of income

  • transfer payments

  • progressive taxation

The Stabilization Function

• high employment

• price stability

• economic growth

• fiscal and monetary policies

Economic Tools of the Federal Government

• taxation

• spending

• regulation of money supply

• regulation of industry and commerce

• economic subsidies

Fiscal policy

• government spending for goods and services

• taxation

• favored by Democrats

• based on Keynesian economics

Monetary policy

• regulation of money supply

• favored by Republicans

• Federal Reserve

  • set discount rate banks can borrow funds from Federal Reserve

  • set reserve requirement

  • open market operations

Regulation of industry and commerce

• minimum wage

• unfair trade practices

• health and safety

Economic Subsidies

• welfare and transfer payments

• subsidies to industry

Models of economic policy making

• organized interest groups - iron triangle - subgovernments

  • interest groups, congressional committee, agency

• issue networks - membership based on issue

• political exchange - votes, contributions, endorsements exchanged for policy support

Government spending for goods and services

Outlays - FY 1993

Billions Percent

500 35% Social security, Medicare, other retirement

344 24% National defense, veterans, foreign affairs

254 17% Social programs (medicaid, food stamps, AFDC, unemployment)

199 14% Net interest on debt

119 8% Physical, human and community development

28 2% Law enforcement and general government

The federal budget process

• Budget and Accounting Act of 1921

  • Bureau of the Budget - Treasury Department

    • transferred to Office of President

    • renamed OMB

  • Executive budget

• Congressional Budget and Impoundment Control Act - 1974

  • budget committees

  • detailed budget calendar

  • continuing resolution

• Gramm-Rudman-Hollings Act

  • automatic budget cuts to balance the budget

  • exempted largest domestic programs

  • encouraged misleading budgeting

• Budget Enforcement Act of 1990

  • temporary caps on discretionary spending

  • omits caps for mandatory spending (entitlement)

Budgetary politics

• incrementalism

• logrolling

• decrementalism

• "untouchable"

• entitlement - uncontrollable

• interest group politics

Uncontrollable

• Social Security and federal retirement benefits

• Medicare and Medicaid

• unemployment compensation

• aid to families with dependent children

• interest payments on national debt

The importance of reducing the federal deficit

• investment is critical to economic growth

• increasing savings will increase investment

• reduced deficit will increase savings

• an increasing national debt requires higher interest payments

• interest payments may squeeze out other spending