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- American Government, 1/e
14 Economic Policy Making
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Most economists believe that a downturn in the housing market was the cause of the economic recession, announced in late 2008.
Economic Policymaking
- The most important elements of the environment for economic policymaking are public opinion, the strength of the economy, and party control of the executive and legislative branches of government.
Agenda Building
- A number of political actors participate in elevating economic issues to the official policy agenda. Candidates often highlight economic issues during election campaigns. George W. Bush promised to cut taxes during his presidential campaign in 2000. Interest groups frequently emphasize economic issues. The AARP, an interest group representing the interests of older Americans, stresses the need to preserve Social Security and Medicare.
Policy Formulation and Adoption
- Economic policy formulation takes place in congressional committees, executive branch agencies, and the White House. It involves officials from all levels of government as well as a wide range of interest group participants.
- The executive and legislative branches of American national government are primarily responsible for the adoption of fiscal policy. Congress and the president create government programs and appropriate money to fund them. They raise funds through taxation and borrowing. In the meantime, the Fed adopts monetary policies through its rulemaking process.
Policy Implementation and Evaluation
- The implementation of economic policy involves nearly the whole of government in America. The Treasury Department is responsible for tax collection and borrowing. The Federal Reserve and its member banks implement monetary policy. Money is spent by the agencies of the executive branch and, through federal programs, by an array of state and local governments.
- Both the executive and legislative branches of American government have mechanisms for evaluating economic policy. The OMB assesses the operation of programs within the executive branch for the president, whereas the General Accountability Office (GAO) performs a similar role for Congress, investigating agency activities and auditing expenditures.
Key Terms
AARP
an interest group representing the concerns of older Americans
Ability To Pay Theory of Taxation
the approach to government finance that holds that taxes should be based on an individual’s ability to pay
Appropriations Process
the procedure through which Congress legislatively allocates money for a particular purpose
Authorization Process
the procedure through which Congress legislatively establishes a program, defines its general purpose, devises procedures for its operation, specifies an agency to implement the program, and indicates an approximate level of funding for the program, but does not actually provide money
Balanced Budget
budget receipts equal budget expenditures
Budget Deficit
the amount by which annual budget expenditures exceed annual budget receipts
Budget Surplus
the sum by which annual budget receipts exceed annual budget expenditures
Consumer Price Index (CPI)
a measure of inflation that is based on the changing cost of goods and service
Cost-of-Living Adjustment (COLA)
a mechanism designed to regularly increase the size of a payment to compensate for the effects of inflation
Depression
a severe and prolonged economic slump characterized by decreased business activity and high unemployment
Discretionary Spending
budgetary expenditures that are not mandated by law or contract, including annual funding for education, the Coast Guard, space exploration, highway construction, defense, foreign aid, and the Federal Bureau of Investigation (FBI)
Earmarks
provisions that direct that funds be spent for particular purposes
Entitlement Program
a government program providing benefits to all persons qualified to receive them under law
Estate Tax
a tax levied on the value of an inheritance
Excise Taxes
taxes levied on the manufacture, transportation, sale, or consumption of a particular item or set of related items
Federal Open Market Committee (FOMC)
a committee of the Federal Reserve that meets eight times a year to review the economy and adjust monetary policy to achieving the net goals
Federal Reserve Board (Fed)
an independent regulatory commission that makes monetary policy
Fiscal Policy
the use of government spending and taxation for the purpose of achieving economic goals
Fiscal Year
budget year
Gross Domestic Product (GDP)
the total value of goods and services produced by a nations economy in a year, excluding transactions with foreign countries
Income Redistribution
government taking items of value, especially money, from some groups of people and then giving items of value, either in cash or services, to other groups of people
Inflation
a decline in the purchasing power of the currency
Interest
money paid for the use of money
Mandatory Spending
budgetary expenditures that are mandated by law, including entitlements and contractual commitments made in previous years
Means-Tested Program
a government program that provides benefits to recipients based on their financial need
Monetary Policy
the control of the money supply for the purpose of achieving economic goals
National Debt
the accumulated indebtedness of the federal government
PAYGO
a pay-as-you-go budget rule that requires that any tax cut or spending increase be offset by tax increases or spending cuts elsewhere in the budget
Pork-Barrel Spending
expenditures to fund local projects that are not critically important from a national perspective
Progressive Tax
a levy that taxes people earning higher incomes at a higher rate than it does individuals making less money
Proportional Tax
a levy that taxes all persons at the same percentage rate, regardless of income
Recession
an economic slowdown characterized by declining economic output and rising unemployment
Regressive Tax
a levy whose burden falls more heavily on lower-income groups than on wealthy taxpayers
Social Security
a federal pension and disability insurance program funded through a payroll tax on workers and their employers
Subsidy
a financial incentive given by government to an individual or a business interest to accomplish a public objective
Supply-Side Economics
the economic theory that tax cuts, especially for business and the wealthy, will lead to savings and investment that will benefit everyone
Tax Deduction
an expenditure that can be subtracted from a taxpayer’s gross income before figuring the tax owed
Tax Exemption
the exclusion of some types of income from taxation
Tax Incidence
the point at which the actual cost of a tax falls
Tax Preference
a tax deduction or exclusion that allows individuals to pay less tax than they would otherwise
Welfare Programs
government programs that provide benefits to individuals based on their economic status
Discussion Questions
1. What is the best type of tax system? Explain the basis of your answer.
2. What is the history of the Social Security program? Why do some observers worry about the future of the Social Security system?
3. What are the major types of public assistance programs?
4. What is the history of budget deficits in American national government? What are the most frequently offered explanations for the existence of the federal budget deficit?
4. What individuals and groups set the agenda for economic policymaking?
Interactive Activity
Simulation: You Are the Director of Economic Development for the City of Los Angeles, California
City leaders are always looking for ways to keep their cities attractive to investors and residents who have alternatives to invest or live elsewhere, and to improve areas that are run down and dangerous. In this simulation, you will play the role of a newly appointed Director of Economic Development for the city of Los Angeles, CA. You will develop a plan for economic development in the face of a budget crisis, and you will have to deal with challenges including legal restrictions on your ability to tax and spend and resistance from individual property owners. Will you create a strategy that successfully addresses the economic development challenges facing California’s largest city? Or will your poor decisions leave you looking for a new line of work?
“Talking About American Government” Podcasts
Author Neal Tannahill discusses the most important concepts in this chapter