Chapter 18

Economic Policy

1. How do you define deficit, national debt,

and gross domestic product?
2. What makes the politics of taxing and
spending so difficult?
3. On which programs does the federal
government spend most of its money?
4. Who in the federal government can make
our economy strong?
5. Why does the federal government ever have
a budget deficit?

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Learning Objectives

WHO GOVERNS?
1. Who in the federal government can make our
economy strong?
2. Who was responsible for the recession?

TO WHAT ENDS?
1. Why does the federal government ever have a
budget deficit?
2. Do most Americans trust government to protect
their economic interests?

Copyright 2015 Cengage Learning. All rights reserved.

Introduction

 Deficit: the result of when the government in

one year spends more money than it takes
in from taxes
National debt: the total deficit from the first
presidency to the present
Gross domestic product: total of all goods
and services produced during a given year

Copyright 2015 Cengage Learning. All rights reserved.

Introduction

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Federal Budget Deficit (or Surplus),

FY19602013 in Billions of Constant
FY2005 Dollars (Presidents Proposals)

 Majoritarian politics
Pocketbook issues
National level
Individual level

What Politicians Try to Do

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The Politics of Economic

Prosperity

 Voters want
Lower taxes
Less debt
New/continued
programs

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The Politics of Taxing

and Spending

 Monetarism
Keynesianism
Planning
Supply-Side Tax Cuts

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Economic Theories and

Political Needs

 Executive branch (president and

troika)
The Fed (monetary policy)
Congress (fiscal policy)
Globalization

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The Machinery of Economic

Policymaking

Tools of the Fed

Buying and selling
government securities
Money supply
Alters interest rates

Tools of Congress
Approves all taxes
Approves most
expenditures
Wage/price controls
Can alter Federal
Reserve policies
Key committees

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The Machinery of Economic

Policymaking

10

 Conflicting interests
Majoritarian politics
Client politics
Interest group politics

Public opinion
Politicians appeals

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Spending Money

11

 The U.S. Budget: What is it?

In theory
In practice

Before 1921: no federal budget

Fiscal Year October 1 through the
following September 30 (federal)

Congressional Budget Act of 1974

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The Budget

12

 Congressional Budget Act of 1974

Balanced Budget Act of 1985 (GrammRudman Act)
Sequester automatic spending cuts

Budget Enforcement Act of 1990

Limits on discretionary spending

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Reducing Spending

13

Federal
Revenues in 2012
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Federal Outlays
in 2012

14

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Social Security and Medicare

Cost as a % of GDP

15

 Majoritarian politics
Modest tax burden
Minimize cheating

Client politics
Loopholes

The Rise of the Income Tax

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Levying Taxes

16

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Federal Taxes on Income, Top

Percentage Rates, 1913-2013

17

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Tax Burdens in
Democratic
Nations

18

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Growing Debt Threatens

Americas World Standing

19

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Taking a closer look:

1. How does rising U.S. debt affect the
average worker?
2. Why does China want the U.S. economy
to succeed?
3. What are the political liabilities of
significant debt?

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Growing Debt Threatens

Americas World Standing

20