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Premium member Presentation Transcript Chapter 18Government and the Economy: Chapter 18 Government and the EconomyPOLITICS AND THE ECONOMY: POLITICS AND THE ECONOMY DECIDING WHAT A SOCIETY WILL PRODUCE, HOW, AND FOR WHOMPOLITICS AND THE ECONOMY: POLITICS AND THE ECONOMY AMERICA’S FREE-MARKET SYSTEM INDIVIDUAL DECISIONS AND A RELIANCE ON VOLUNTARY EXCHANGE POLITICAL ECONOMY THE STUDY OF THE RELATIONSHIP AMONG POLITICS, ECONOMICS, GOVERNMENT, AND THE MARKETS THE FEDERAL GOVERNMENT HAS A GREAT AMOUNT OF INFLUENCE OVER THE AMERICAN ECONOMY THE POLITICAL ECONOMY OF AMERICA IMPACTS THE ENTIRE WORLD… IT’S NOT JUST A DOMESTIC THINGSlide4: CLASSICAL ECONOMIC THEORY STABILITY IS KEPT BY WAY OF THE FORCES OF SUPPLY AND DEMAND KEYNESIAN THEORY GOVERNMENT INTERVENTION CAN COMBAT RECESSION AND INFLATION SOME FEEL SUCH INTERVENTION PRODUCED “STAGNATION” WHICH IS DOUBLE-DIGIT INFLATION, HIGH INTEREST RATES, AND LOW DATES OF ECONOMIC GROWTH SUPPLY-SIDE ECONOMICS SUCCESS IS TIED TO SOLID ECONOMIC GROWTH WHICH INCREASES OVERALL SUPPLY OF GOODS AND SERVICES MONETARIST ECONOMICS HOLDING THE RATE OF MONETARY GROWTH TO THE RATE OF THE ECONOMY’S OWN GROWTHGOVERNMENT DECISIONS: GOVERNMENT DECISIONS THE PRESIDENT’S TEAM OFFICE OF MANAGEMENT AND BUDGET (OMB) DEPARTMENT OF THE TREASURY THE COUNCIL OF ECONOMIC ADVISORS THE FEDERAL RESERVE BOARD INDEPENDENT OF THE EXECUTIVE BRANCH CHARGED WITH OVERSEEING THE NATION’S MONETARY POLICY MONETARY POLICY INVOLVES MONEY SUPPLY AND INTEREST RATESGOVERNMENT DECISIONS: GOVERNMENT DECISIONS The Budget is the tool by which expenditures for public policies are decided. A) Since 1921, the president has been responsible for drafting the budget and submitting it to Congress for approval. B) The budget states how much money government agencies will be allowed to spend on their programs GOVERNMENT DECISIONS: GOVERNMENT DECISIONS The budget applies to the fiscal year. Budget Authority--refers to how much money agencies are authorized to spend. Budget Outlays --refer to how much money agencies are expected to spend. Budget Deficit--the difference between receipts (expected taxes and revenues and total spending) GOVERNMENT DECISIONS: GOVERNMENT DECISIONS According to the Department of the Treasury, the "Public Debt" at the end of FY97 was $5.413 Trillion; at end of FY98, $5.526 Trillion; at the end of FY99, $5.656 Trillion. So the debt grew $130 Billion in FY99. If we have a surplus, why did we borrow $130 Billion? GOVERNMENT DECISIONS: GOVERNMENT DECISIONS So why did we borrow $130 Billion in FY99? Because there is no surplus. If you include your Social Security payment into the trust fund as part of the general revenue, and don't include the Social Security payments made out of the trust fund to recipients....you get a surplus. But your social security payments are not supposed to go into the general fund.GOVERNMENT DECISIONS: GOVERNMENT DECISIONS The preparation of the budget is supervised by the Office of Management and Budget. During the Spring, the OMB meets with the president to discuss the economic situation and budgetary priorities. By the Summer, government agencies are ready to prepare budgets in agreement with the OMB. During the Fall, the OMB analyzes request while political negotiators try to defend their programs. January 1, the final budget is printed and presented to Congress Budget and Congress: Budget and Congress The traditional committee structure has been retained in today’s budget process. Tax Committees are responsible for raising revenue to run government. Authorization Committees have jurisdiction over spending in a particular legislative matter. Appropriations Committees decide which programs passed by the authorization committee will receive funding.The Budget: The Budget In 1974, Congress regained some control over the budget process by creating new budget committees to supervise a new comprehensive budget-review process. The Congressional Budget Office (CBO) was created to allow Congress to present credible alternative budgets. The new budget procedures have allowed Congress to structure the budget as a whole, but this comes at the expense of failing to meet Congress’ own deadlines.Gramm-Rudman-Hollings Act 1985: Gramm-Rudman-Hollings Act 1985 This act mandated that the budget deficit be lowered to a specific level each year until the budget was balanced in 1991. If Congress was unable to meet the deficit targets, the cuts would be automatic for important projects. In 1986, across the board cuts caused many important projects to be underfunded. In 1987, Congress and the president reduced the Gramm-Rudman targets.Budget Enforcement Act of 1990: Budget Enforcement Act of 1990 This act drew distinctions in spending that drastically altered the significance of the new deficit targets. Mandatory Spending--was defined as expenditures required by previous commitments. Spending was mandatory for entitlement programs (Social Security) that provided benefits for individuals legally entitled to them. Pay-As-You-Go restrictions were imposed on mandatory spending and taxesBEA 1990: BEA 1990 Discretionary Spending was defined as authorized expenditures from annual appropriations. If Congress fails to limit discretionary spending to its cap in any year or violates pay-as-you-go restrictions, a sequestration, or across the board spending cut, will automatically occur in the overspent category. Additional reforms were adopted in 1996: The balanced budget amendment, mentioned in the Republican’s Contract with America, passed in the House but died in the Senate. Congress passed the line-item veto for the President (later ruled unconstitutional.TAX POLITICS: TAX POLITICS Tax policies are designed to provide a continuous flow of revenue without annual legislation. Nevertheless, tax policy is often adjusted to meet budgetary outlays, to make the tax burden more equitable,or control the economy.TAX POLITICS: TAX POLITICS TYPES OF TAXES PROGRESSIVE THE HIGHER THE INCOME THE MORE TAX PAID REGRESSIVE PERSONS IN LOWER INCOME BRACKETS PAY A HIGHER PORTION OF THEIR INCOME TO TAXES; SAME RATE APPLIES TO ALL PROPORTIONAL (FLAT) TAX ALL INCOME GROUPS PAY THE SAME PERCENTAGE OF THEIR INCOME IN TAXES ARGUMENT FOR FLAT TAX SOME BELIEVE IT IS THE ONLY WAY TRUE EQUALITY IN TAXATION CAN BE ACHIEVED? PROGESSIVITY TAKES MORE MONEY (AT LEAST IN THEORY) AWAY FROM THE RICH WHO INVEST IN THE CREATION OF JOBS AND ECONOMIC GROWTHSlide18: REVENUES ARE COLLECTED IN VARIOUS WAYS INDIVIUDAL INCOME TAX IS THE LARGEST SOURCE OF REVENUE CORPORATE INCOME TAX PROVIDES ABOUT 12 PERCENT SOCIAL SECURITY TAX IS THE SECOND LARGEST REVENUE SOURCE IT CONTINUES TO GROW TODAY, MORE TAXPAYERS PAY MORE IN SOCIAL SECURITY TAX THAN DO THEY IN INCOME TAX OTHER AREAS ESTATE AND GIFT TAX TAXING PROPERTY LEFT TO HEIRS IS ONE OF THE OLDEST FORMS OF TAXATION GIFT TAX APPLIES TO PERSONS WHO GIVE MORE THAN $10,000.00 ANNUALLY EXCISE TAX AND CUSTOM DUTIES SOME “SIN TAXES” ARE EXCISE TAX SOURCES AND INCLUDE THE TAX ON TABACCOSlide19: State and local taxes, are flat rate taxes that impose a relatively greater burden on the poor who spend nearly all they make. The tax code contains many policies that favor the rich, such as lower tax rates on capital gains, no withholding of unearned income, and no federal tax for certain securities. Income Distribution: Income Distribution Despite the billions of dollars spent on social programs since 1964, the gap between the rich and the poor has changed very little. The lowest one-fifth of Americans families made 4.3% of the income in 1966, and they made no more than that in 1996. The top one-fifth of American families made 45.7 percent of the income in 1966, and they made slightly more than that in 1996 Income Distribution: Income Distribution Despite a quarter century during which incomes have drifted ever farther apart, the distribution of wealth has remained remarkably stable. The richest Americans now earn as big a share of overall income as they did a century ago but their share of overall wealth is much lower. Indeed, it has barely budged in the few past decades. Income Distribution: Income Distribution AMERICANS do not go in for envy. The gap between rich and poor is bigger than in any other advanced country, but most people are unconcerned. Whereas Europeans fret about the way the economic pie is divided, Americans want to join the rich, not soak them. Eight out of ten, more than anywhere else, believe that though you may start poor, if you work hard, you can make pots of money. It is a central part of the American Dream. SPENDING SPENDING SPENDING: SPENDING SPENDING SPENDING UNCONTROLLABLES IN THE BUDGET ENTITLEMENT PROGRAMS PROGRAMS THAT PROVIDE LEGALLY ENFORCEABLE BENEFITS TO PEOPLE (I.E., SOCIAL SECURITY) INDEXING TYING BENEFIT LEVELS TO GENERAL PRICE LEVELS IN-KIND (NONCASH) BENEFITS NONCASH PAYMENT PROGRAMS THAT PROVIDE BENEFITS AND SERVICES BALANCED BUDGET A SITUATION IN WHICH EXPENDITURES AND REVENUES ARE EQUAL; NO DEFICIT NATIONAL DEBT CURRENT DEBT OWED BY THE GOVERNMENT BACKDOOR SPENDING SPENDING BY AGENCIES WHOSE OPERATIONS ARE NOT INCLUDED IN THE FEDERAL BUDGETSPENDING SPENDING SPENDING: SPENDING SPENDING SPENDING Unlike tax policies, which usually do not vary form year to year, government spending is subject to annual appropriations.SPENDING SPENDING SPENDING: SPENDING SPENDING SPENDING Five Largest Expense Categories (2005) 1) Social Security (21%) 2) Defense (19%) 3) Non-military Discretionary (18%) 4) Medicare and Health Combined (21%) 5) Interest on the Federal Debt (9%) The FY99 interest payments on the National Debt totaled $354 Billion; that was the biggest item in the federal budget. SPENDING SPENDING SPENDING: SPENDING SPENDING SPENDING Federal Spending Most federal spending has gone to two major categories: 1) 1940-1971: Defense 2) 1971- Present: the largest expense in the federal budget has been payments to individuals, with Social Security the largest component of that spending. SPENDING SPENDING SPENDING: SPENDING SPENDING SPENDING Budget Increases The large increase in the percentage of federal spending relative to GDP from WWII to the present (15 to 25%) is explained by bureaucratic and political factors. Incremental Budgeting produces a sort of bureaucratic momentum, which continually pushes federal spending. SPENDING SPENDING SPENDING: SPENDING SPENDING SPENDING Incremental Budgeting Bureaucrats base their budgetary requests on the amount they received in the previous year plus some increment to fund new products. Members of Congress pay more attention to the size of the increment than to the total size of the agency’s budget The huge budget deficit has substantially checked the practice of incremental budgeting SPENDING SPENDING SPENDING: SPENDING SPENDING SPENDING Spending Programs Certain spending programs cannot be reduced because they are enacted into existing law or protected by powerful interest groups. Uncontrollable Outlays--payments that are made according to existing law (Between 66% and 80% of total budget). Modifying existing laws and entitlements to reduce deficits is politically unpalatable. Americans have become accustomed to certain government benefits, but they do not like the thought of more taxes to pay for them SPENDING SPENDING SPENDING: SPENDING SPENDING SPENDING Government Spending and Equality How have government spending and taxes affected economic inequality in America? Transfer payments (government payment to individuals) have had a definite role in increasing income inequality. Although the tax burden of the federal income tax is progressive, the burden of other taxes is highly regressive.THE DEFICIT: THE DEFICIT SINCE 1969, MANY GOVERNMENT EXPENDITURES HAVE EXCEEDED REVENUES THE RESULT IS A LARGE NATIONAL DEFICIT OR IMALANCE IN THE BUDGET THE DEBT IS OVER $8.5 TRILLION OR $30,000.00 FOR EVERY MAN, WOMAN AND CHILD IN THE NATION! INTEREST BURDEN FOR THE FUTURE LARGE DEFICITS MEAN SUBSTANTIAL INTEREST PAYMENTS THIS TAKES MONEY AWAY FROM NEEDED PROGRAMS TODAY’S HIGH SPENDING AND LOW TAXING CONTINUES TO SHIFT THE BURDEN OF DEBT TO FUTURE GENERATIONSGOVERNMENT DECISIONS: GOVERNMENT DECISIONS THE FEDERAL RESERVE BOARD INDEPENDENT OF THE EXECUTIVE BRANCH CHARGED WITH OVERSEEING THE NATION’S MONETARY POLICY MONETARY POLICY INVOLVES MONEY SUPPLY AND INTEREST RATESGOVERNMENT DECISIONS: GOVERNMENT DECISIONS Monetary Policy Efforts to regulate the economy through the manipulation of the supply of money and credit. America’s most powerful institution in the area of monetary policy is the Federal Reserve Board. Monthly adjustments in the interest rate are designed to stabilize the inflation rate and promote a stable economy. GUIDING THE GOVERNMENT: GUIDING THE GOVERNMENT TRYING TO UNDERSTAND AND EXPLAIN ECONOMIC FORCES INFLATION IS A RISE IN THE GENERAL LEVEL OF PRICES RECESSION IS A DECLINE IN THE GENERAL LEVEL OF ECONOMIC ACTIVITY ECONOMIC GROWTH IS AN INCREASE IN THE NATION’S TOTAL ECONOMIC OUTPUT (GROSS DOMESTIC PRODUCT) VARIOUS THEORIES HAVE BEEN USED AS GUIDES FOR THOSE WHO GOVERNGUIDING THE GOVERNMENT: GUIDING THE GOVERNMENT Fiscal Policy The use of taxing, monetary, and spending powers to manipulate the economy. Usually exercised by the president and Congress Taxing and spending levels are adjusted to impact the economy. Slide36: ECONOMIC GROWTH CAN BE MEASURED IN DIFFERENT WAYS THE GROSS DOMESTIC PRODUCT A NATIONS’S TOTAL PRODUCTION OF GOODS AND SERVICES FOR A SINGLE YEAR UNEMPLOYMENT RATE IS ANOTHER IMPORTANT MEASURE OF ECONOMIC GROWTH THE PERCENTAGE OF THE CIVILIAN LABOR FORCE You do not have the permission to view this presentation. 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