CHAPTER 19 - Economic Policy

Transcription

1 CHAPTER 19 - Ecnmic Plicy OVERVIEW Presidential ppularity is significantly influenced by natinal ecnmic cnditins. The result is that presidents give ecnmic issues tp pririty. One independent agency that assists in this regard is the Federal Reserve Bard. Relying n fiscal plicy has declined. Grwth f the public debt has been accelerated by the indexatin f taxes and benefits. The end f indexatin marked a new era f Cngress having t take blame fr ecnmic prblems. One result was increasing attentin t ways f refrming the tax system. The debate is ften ver the prgressivity f taxes and their visibility. In spite f Americans dislike fr the tax system and ecnmic prblems, when cmpared with Western Eurpean cuntries, they d nt appear that bad. OUTLINE I. Gvernments and Markets - In large cmplex scieties, even self-interested citizens need gvernment prtectin if they are t engage in the simplest f ecnmic transactins. The rle f gvernment in the ecnmy has becme mre expansive (and plitically cntrversial) ver time, as we shall see. But it is imprtant t pint ut that, at a basic level, gvernment institutins prvide the stability and certainty that make prsperus ecnmies pssible. II. Ecnmic Grwth and the Business Cycle - Ecnmies grw as a result f technlgical innvatins, investments in physical capital, and investments in human capital. - Shrt-term fluctuatins in the ecnmy such as recessins and recvery are referred t as the business cycle. - Gvernments try t ffset the prblems assciated with the business cycle: inflatin and unemplyment. III. Ecnmic Cnditins and Plitical Frtunes - When ecnmic times are hard, peple tend t blame thse in charge. The ppularity f the president drps during recessins. Terrible ecnmic times in American histry are assciated with massive electin lsses fr the party f the president. Prsperity, hwever, strengthens a president s psitin fr reelectin. - Carter fund himself in the wrst psitin when running fr reelectin. Unemplyment and inflatin were bth simultaneusly high thus leading t stagflatin. - While it des nt guarantee ppularity, prsperity generally strengthens a president s psitin and has an effect n ther federal, state, and even lcal electins.

2 IV. Fiscal Plicy - Fiscal plicy cnsists f gvernment spending and taxing decisins. If gvernment expenditures exceed revenues, gvernment runs a deficit. If gvernment revenues exceed expenditures, gvernment enjys a surplus. A. The Use f the Budget Deficit One imprtant ecnmist in the 1920s, Jhn Maynard Keynes (his ecnmic philsphy is called Keynesianism), argued that nt all deficit spending was bad. President Franklin Rsevelt was influenced by Keynes philsphy. In 1946, Cngress created the Cuncil f Ecnmic Advisers (CEA) t advise the President. B. Decline f Fiscal Plicy 1. Divided Gvernment In rder fr fiscal plicy t wrk as a slutin t ecnmic prblems, it must be enacted rather quickly. The American system f gvernment was designed such that hasty actin is difficult. Add t this the frequent situatin in recent decades f divided gvernment, and quick actin becmes mre difficult. 2. Mnetarism A schl f ecnmic thinking knwn as mnetarism undercut the Keynesian theretical claim that fiscal plicy culd fine-tune the ecnmy. The reasning: if a gvernment brrws mney, it saks up sme f the cuntry s savings and has fewer savings t finance investment, s ecnmic grwth slws. 3. Grwing Budget Deficits Fiscal plicy might have been effective in the 1960s, but that was because the deficit was nt that large. The federal debt skyrcketed in the 1980s, partially due t supply-side ecnmics ( Reaganmics ). It has als skyrcketed since 2001 (pst 9/11) t fight the war n terrrism bth at hme and abrad; s much s that aggressive fiscal plicies have becme plitically infeasible. 4. Internatinalizatin A schl f ecnmic thinking called ratinal expectatins develped in the 1970s that, when successful, cunteracted any effect the gvernment planned thrugh fiscal plicy. Als, as ecnmic activity became increasingly internatinal, the reactins f ecnmic actrs t gvernment plicies were n lnger limited t reactins in their wn cuntries. In ther wrds, investrs can vte with their mney, thus impsing ecnmic csts n the gvernment that adpts unfavrable plicies. V. Mnetary Plicy: The Federal Reserve System - Tday, mnetary plicy is the gvernment s mst imprtant tl fr managing the ecnmy. Basically, mnetary plicy relies n raising r lwering interest rates, which gvernments d by subtracting r adding mney t the ecnmy. Mre mney means lwer interest rates; less mney means higher interest rates.

3 - An advantage mnetary plicy has ver fiscal plicy is that it can be altered quickly in respnse t changing ecnmic cnditins. - Created in 1913, the Fed is respnsible fr managing the gvernment s mnetary plicy. It acts n the ecnmy thrugh the peratins f its 12 reginal banks, each f which versees member banks in its part f the cuntry. - The mst imprtant decisins affecting the ecnmy n a daily basis are made by the Fed s Open Market Cmmittee (OMC) cnsisting f the seven gvernrs and 12 reginal bank presidents, nly five f whm have a vte. A. The Fed Chair The persn chairing the Fed is very pwerful due t the clse ties t the President, direct access t up-t-date ecnmic infrmatin, and the pwer t apprve the appintment f the 12 presidents f the Federal Reserve Banks. B. Wh Cntrls the Fed? The Fed is relatively insulated frm electral plitics. 1. Cngressinal Influence Cngress created the Fed; all nminees must be apprved by the Senate, and the Fed must make quarterly reprts t the banking cmmittees f the Huse and the Senate. Still, the Fed is insulated frm cngressinal cntrl due t its ability t literally create its wn budget. It is als relatively free f cngressinally determined salary schedules and persnnel cntrls. The cntrl Cngress des exercise ver the Fed is indirect: jawbning and public hearings. If Cngress des nt exercise significant cntrl ver the Fed, wh des? There are three distinct answers. 2. Banker Dminance One answer is that banks cntrl the Fed. This answer relies n evidence that indicates the Fed is mainly cncerned with lw inflatin and preventing recessin, the same cncerns f banks. The Fed tries t defend itself against such claims by arguing it must take actins that may appear t favr banks r else the ecnmy culd be severely damaged. 3. Presidential Dminance While the President clearly can influence the Fed since he appints its members and chairs, the questin is: hw much influence des he have? Tw versins f presidential cntrl interpretatin, the partisan and the electin cycle, have been prpsed. The partisan cntrl explanatin ges like this: Republicans tend t favr tight mnetary plicy, while Demcrats tend t favr lse mnetary plicy. The Fed strives t fllw the apprach f whever is in pwer. Hwever, this influence is t weak and indirect t call it presidential cntrl.

4 The electin cycle interpretatin ges like this: presidents deliberately manipulate the ecnmy. They tlerate slw grwth early in their terms and then rev up the ecnmy as the electin appraches t help guarantee their reelectin. The prblem with this interpretatin is that the pattern it relies n is nly slightly cnfirmed by histrical fact. 4. An Independent Fed Fed supprters say several factrs guarantee the independence f the Fed: 14-year terms fr bard members; remval nly by impeachment; a strng, independent staff, a chair that is usually mre knwledgeable abut ecnmic plicy than any presidential appintee; and an independent Fed that is viewed by many as a gd thing. VI. The T Wrd: Taxes - Taxes are a ht plitical issue since mst Americans think taxes are t high and the gvernment spends the mney n frivlus prgrams. A. The Tax Burden Taxes, as a percentage f the Grss Natinal Prduct (GNP), scarcely increased between 1970 and While sme peple think Americans are getting stingy with paying taxes that culd g t gd causes, thers think taxes are just t high, especially with wages nt increasing much. In part because f the size f the budget surplus fllwing ecnmic grwth in the 1990s, each presidential candidate in the 2000 campaign advcated sme tax cuts. The 2004 presidential campaign actually had Demcratic nminee Jhn Kerry calling fr a tax increase n the upper ne-percent f Americans. B. The Tax Base Ecnmists argue that taxes are less intrusive if they tax all ecnmic activity at the same rate. If everything is taxed alike, then tax plicy will nt distrt the ecnmy. But this is easier said than dne since gd reasns can ften be given fr nt taxing sme activities, and grups pressure Cngress nt t tax their favrite activities. Lawmakers have respnded with thusands f tax preferences. The gvernment als smetimes impses sin taxes, taxes intended t discurage unwanted behavir. Examples wuld be taxes n cigarettes and alchlic beverages. C. Tax Prgressivity Taxes are said t be prgressive if peple with higher incme pay a higher tax rate, such as with the incme tax. Taxes that require lw-incme peple t pay a higher rate are called regressive, such as the payrll r Scial Security tax. Cnservatives generally dislike prgressive taxes. Taxes vary s much in the United States that it is difficult t characterize the tax structure as prgressive r regressive.

5 D. Tax Refrm One refrm mentined in recent years is the flat tax. It wuld tax all incme grups abve a certain minimum at the same rate, eliminating the prgressivity f the incme tax. It is tuted as fairer and less cmplex. A mre radical prpsal fr tax refrm is t change the basis f taxatin t, say, a value-added tax, a cnsumptin tax. Liberals ppse the idea because it is nt prgressive; cnservatives ppse it because it is t easily hidden. The debate ver tax refrm is fractius because peple want t use the tax system t achieve different gals that ften cnflict. One thing seems certain: Americans dn t like the current tax system. VII. The U.S. Ecnmy: An Internatinal Cmparisn - In tday s wrldwide ecnmy, the U.S. ecnmy is ften subject t frces beynd the cntrl f America s pliticians. Relative t ther advanced demcracies, the United States is dealing reasnably well with its ecnmic challenges and difficulties. A. Taxes As f 1998, the tax burden in the United States was amng the lwest f 13 majr industrialized cuntries, at abut 34 percent f the GDP. Hwever, ther cuntries prvide mre services in exchange fr the mney extracted in taxes, like health care. Why, then, are Americans s unhappy with their taxes? Part f the answer may be due t the fact that s much f the tax mney raised in the U.S. cmes frm payrll taxes. Nearly tw-thirds f the tax mney is raised this way. In additin, Americans are ecnmic individualists wh wish t keep the rle f gvernment limited. B. Natinal Debt As f April 2011, the natinal debt is a whpping $14.3 trillin. The estimated ppulatin f the United States is 311,000,000, s each citizen s share f this debt is $45,933 r $128,552 per taxpayer. The Natinal Debt has cntinued t increase an average f almst $2 billin per day since September 30, C. Emplyment Opprtunities The United States has dne a better jb than mst cuntries f incrprating new wrkers int the ecnmy. The United States did a better jb f absrbing the baby-bmers int the ecnmy in the 1980s than Western Eurpe. While sme say the jbs created in the United States were lw-skill, lw-paying service-based McJbs, the evidence suggests therwise. Cmpared t mst ther cuntries, the American ecnmy is less restricted by gvernment plicies and regulatins. D. Inequality Cmpared t ther advanced demcracies, incme inequality in the United States is higher. While sme criticize this situatin, there seems t be n ppular demand fr gvernment t d anything abut it, and candidates advcating such a gvernmental rle usually lse.