chapter 14: the policy & economic policy


The Policy Process and Economic Policy

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Ideas and Values in Public PolicyIllustrate how values shape public policy in a democracy.

Types of Public PolicyCompare and contrast the three main types of public policies.

The Public Policy ProcessAnalyze how the policy process is shaped by political influences.

Economic BasicsIdentify the key indicators of economic performance used by economists.

Key Objectives

14.1

14.4

14.3

14.2

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Fiscal PolicyDescribe the major actors responsible for creating economic policy.

Revenue and ExpendituresExplain the major sources of U.S. government revenue and expenditure.

Monetary PolicyIdentify the major instruments of monetary policy.

Key Objectives

14.5

14.7

14.6

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Ideas and Values in Public Policy

• Policy is the output of politics• Policy can be viewed as a series of phases in a

process

Illustrate how values shape public policy in a democracy.14.1

Back to Learning Objectives


The Steps of Policymaking

• The policy process model describes policymaking in five or six steps– Identifying the policy problem – Setting an agenda– Formulating a solution– Legitimizing the solution– Implementing the solution– In some versions, evaluating the solution

14.1



Values• Two terms lay at the center of policy debates and

the how they are defined are connected closely to people’s views of the role of government– Freedom– Equality

14.1



Political Ideology• Classical Liberalism: A political philosophy

based on the desire for limited government; the basis for modern conservatism.– Modern conservatives debate whether

expansion of government and increased spending violate the true meaning of conservatism.

• Modern Liberalism (Progressivism): A political philosophy based on the belief that government is the best actor to solve social, economic, and political problems.

14.1



According to the process model of the policy process, the step associated with putting a policy into action would be:

A. agenda setting.B. evaluation.C. formulation.D. implementation.

14.1



Types of Public Policy

• Organizing policies by issue areas helps make sense of the broad contours of both the problems and their possible solutions but may not help to understand many of the particular nuances that shape public policies

• A more sophisticated approach to studying public policy involves creating policy categories that classify what policies do and how they do it

Compare and contrast the three main types of public policies.14.2



Categorizing Policies by BasicFunctions of Government

• Political scientists have identified three basic functions of government:– Distribution– Regulation– Redistribution

14.2



Categorizing Policies by Tangible or Symbolic Benefits

• Policies themselves can produce either tangible benefits for the public or merely symbolic benefits– Tangible benefits– Symbolic benefits

14.2



Which of the following represent a symbolic benefit?

A. Housing subsidies for low-income families

B. Designating next Tuesday “Iraqi Freedom Day”

C. Pell Grants for students

D. Most favored nation trading status for China

14.2



What do you think?Do members of Congress abuse the ability to formulate distributive policy?

YES. Members of Congress attach far too much emphasis to ‘bringing home the bacon’ at the risk of jeopardizing financial stability of the nation.

NO. Congressional members are elected based upon their ability to provide goods and services to their local constituents, and distributive policy is one means by which they are able to do that.



The Public Policy Process

• Like all models, it is a generalization—a simplified representation of reality

• Process implies separate actions that lead to a final goal

Analyze how the policy process is shaped by political influences.14.3



Identifying the Problem

• What constitutes a problem?• Who identifies problems?

– Pluralists argue anyone can identify a problem and bring it to the attention of a policymaker

– Elitists posit that only the affluent and well connected identify problems and are able to have policymakers address them

14.3



Setting an Agenda

• The ability to exclude an item from the agenda, for whatever reason, is a powerful way to control what government does

• The process of crafting an agenda cannot begin until formal decision makers place the problem on the nation’s formal or institutional agenda

• Sometimes a focusing event propels issues onto the agenda

• Getting an issue onto the agenda doesn’t assure a solution

14.3



Formulating and Legitimizing Policy

• Formulating policy– Laws– Decisions– Rules

• The power of the presidency in shaping policy• Legitimizing policy

14.3



Implementing Policy

• Discretion given to the individuals who implement policy

• Legislative oversight– Reauthorization– Investigation

• Judicial oversight• Grass-roots mobilization or cultural change

14.3



The set of problems that governmental decision makers are actively working to solve is called

A. the public agenda.

B. the legislative agenda.

C. the docket.

D. the institutional agenda.

14.3



• There are two primary types of economic policy– Fiscal policy– Monetary policy

• Both can affect growth, employment, and inflation and, often the goals of each clash

• Economists focus on (1) inflation, (2) unemployment, (3) GDP (4) the balance of trade, and (5) the budget deficit or surplus to gauge the economy’s performance.

Economic BasicsIdentify the key indicators of economic performance used by economists.14.4



Inflation

• Inflation: An increase in prices over time.– In the 1970s, inflation emerged as a major

concern of federal economic regulators, who prescribed “tight money” policies to try to keep it in check.

• The inflation rate is measured by the Consumer Price Index (CPI), a figure computed by the Department of Labor.

• The Fed must also guard against deflation—dropping prices.

14.4



Unemployment

• The unemployment rate measures the percentage of Americans who are out of work.

• A “good” unemployment rate is around 5 percent.– In the 1980s, many economists considered 5 percent to

be full employment, only to have unemployment drop below that figure in the late 1990s and again in 2005 and 2006.

– By the end of 2009, the unemployment level was 10 percent.

14.4



Gross Domestic Product

• Gross domestic product (GDP)—the value of all the goods and services produced in a nation—measures the size of the American economy.

• A good growth target for GDP for the U.S. economy is between 3 and 4 percent.

• The growth rate commonly reported in the media is the “real GDP” rate—GDP adjusted to account for the effects of the CPI, so that actual economic growth does not falsely include the rate of inflation.

14.4



Balance of Trade

• The balance of trade measures the difference between imports and exports.

• The United States has been running a significant trade deficit for years.

• The U.S. trade deficit in goods fell from $840.3 billion in 2008 to $517 billion in 2009.– This represents a 38.5 percent reduction and is explained,

in part, by a reduction in demand for imports due to the recession.

14.4



The Budget Deficit

• The budget deficit is the amount by which, in a given year, government spending exceeds government revenue.

• The rare circumstance when revenue outstrips expenditures is called a budget surplus.

• The net sum of the budget deficit minus the surplus is the national debt.– About $12.98 trillion by early 2010.

• The CBO estimates that the budget deficit was $1.36 trillion in 2010, will fall to $471 billion in 2015, and rise to $683 billion by 2020.

14.4



Status of the Dollar

• An important factor in the strength of the American economy

• Recently, the status of the dollar as the world’s reserve currency has come under scrutiny

• Between 2002 and 2009, the dollar lost about a third of its value against major currencies

14.4



A major concern affecting the view of the resilience of the US economy is

1. tariffs.2. outsourcing of jobs.3. reliance on foreign oil.4. None of these.

14.4



Fiscal Policy

• The game of politics is all about deciding who gets what, and part of that involves deciding who pays for what

• On-budget and off-budget expenditures are how the national budget is often discussed

Describe the major actors responsible for creating economic policy.14.5



Major Actors

• Budgets are created through interactions between Congress and the president, but there are several other major actors in the realm of fiscal policy– Congressional Budget Office (CBO)– Office of Management and Budget (OMB)– Council of Economic Advisors (CEA) – National Economic Council (NEC)

14.5



Key Congressional Players

• House and Senate Appropriations committees• House and Senate Budget Committees• House Ways & Means Committee• Senate Finance Committee

14.5



The body responsible for helping Congress analyze long-term fiscal implications of the executive’s budget is theA. Congressional Budget Oversight Committee.

B. Council of Economic Advisors.

C. Congressional Budget Office.

D. Office of Management and Budget.

14.5



Revenue and Expenditures

– The federal budget can best be understood by thinking about its two primary parts: (1) revenue; and (2) expenditures.

– Revenue entails all financial resources that the government collects from sources.

– Expenditures include all of the funds spent by the government.

Explain the major sources of U.S. government revenue and expenditure.14.6



Revenue

• In 2009, the U.S. government collected about $2.15 trillion in revenue

• This revenue comes from– Income taxes– Payroll taxes– Corporate taxes– Customs duties and other miscellaneous

taxes

14.6



14.6

The Federal Revenue Budget

Federal government revenue comes primarily from individual income tax and payroll taxes for Social Security and Medicare.



Revenue (cont’d)

Income Taxes•Taxes on income make up just over 7.5 percent of GDP• There are six different tax brackets

14.6



Revenue (cont’d)

Payroll Taxes•Social Security taxes make up 6.5 percent of GDP•They take the form of a payroll tax, split in half between the employees and their employers•1.45 percent is paid into the Medicare trust fund

14.6



Revenue (cont’d)

The Tax Burden•Analysis of household income and tax burden by the CBO shows that

– The top 10 percent of earners pay almost 50 percent of taxes

– The bottom 20 percent pay only about 1 percent

•Most American workers pay more per year in payroll taxes than they do in income taxes

14.6



Revenue (cont’d)

Corporate Taxes•Corporate tax collection amounts to only about 2 percent of GDP•Taxes on corporations generate about 15 percent of the federal government’s revenue•The United States has one of the highest effective corporate tax rates in the industrialized world, with a top tax rate of 35 percent

14.6



Revenue (cont’d)

Other Taxes•Excise taxes•Customs duties•Inheritance taxes•Miscellaneous receipts

14.6



Revenue (cont’d)

Tax Analysis•Finding the optimum tax rate is difficult

– The Laffer Curve•No one likes paying taxes, but the government needs a source of revenue to fund even the most minimal services•Major reform initiatives fall under one of two basic concepts

– A flat tax – National sales tax

14.6



Expenditures

• According to Congressional Budget Office estimates, the budget deficit for 2010 is expected to be around $1.3 trillion or 9.2 percent of GDP

• Government expenditures continually expand, in part because levels of “current services” have become the baseline for most government programs

14.6



14.6President Obama’s 2011 Proposed Budget (in billions)



Expenditures (cont’d)

Social Security•Established in 1935 during the Great Depression as a self-financed program•Covered employees of industrial and commercial firms•Cost of living adjustments were added in the 1950s and these became automatic and annual after 1975•Social Security Trust Fund

14.6




Defense•The nation’s largest on-budget appropriations are for defense•Many factors lead to the high costs of maintaining the armed forces

– Operations and support– Development, testing and procurement of

weapons systems

14.6




Income Security•Safety net for the most vulnerable

– Earned Income Child Credit (EIC)– Child Tax Credit– Supplemental Security Income (SSI)– Unemployment compensation– Food stamps – Temporary Aid to Needy Families(TANF)– Women, Infants, and Children (WIC)

14.6




Government Medical Care•Medicare

– General population over 65 years of age and the disabled

•Medicaid– Poor, children and pregnant women, but also

includes the elderly who have exhausted their life savings

14.6



Interest and Other Spending

• Interest on the debt for 2011 is estimated at $251 billion, almost 7% of the total budget goes to pay interest on the debt

• All other cabinet level agencies receive budget allocations for the programs they are responsible for implementing

• The size of the debt is only one factor when it comes to interest payments

14.6



The nation’s largest on-budget appropriations are for

A. Social Security.B. defense.C. education.D. Medicare.

14.6



Monetary Policy

• In the simplest terms, monetary policy involves the management of the supply of money in circulation within the U.S.

• Keeping the balance right by managing monetary policy is the job of the Federal Reserve Board of Governors and its Federal Open Market Committee

Identify the major instruments of monetary policy.14.7



The Federal Reserve Board

• Created in 1913 by an act of Congress, the Federal Reserve System (the Fed) is our nation’s independent central bank

• The Federal Open Market Committee (FOMC), the Fed’s policymaking arm using five main tools to manipulate monetary policy:– Reserve ratios– Federal funds rate– Open-market operations– Discount rate– Buying and selling foreign currency

14.7



The Fed in Action

• Fed action is precarious because of the significant lag time between its action and economic results

• The Fed has to be right twice– Its prediction of where the economy is headed– Determining the correct response to the

circumstances it predicts will occur• It has to be right every time!

14.7



The most significant tool The Fed has in its arsenal to control monetary policy is

1. buying and selling foreign currency.2. reserve rations.3. federal funds rate.4. open-market operations.

14.7



Credits530 Martin H. Simon/UPI/Pool/Landov; 535, left to right: AP Images/Paul Sakuma; Newscom; 536, left to right: Alfred Eisenstaedt/Time & Life Pictures/Getty Images; Bettmann/Corbis; Dan Miller/Time Magazine/Time & Life Pictures/Getty Images; 537, left to right: Natalie Behring/Greenpeace/Getty Images; U.S. Coast Guard photo by Petty Officer 3rd Class Ann Marie Gorden; 540 AFP/Getty Images; 543 Hans Strand/Corbis; 544 Sarah M. Golonka/Getty Images; 545 Time Life Pictures/Getty Images; 553, top to bottom: Bloomberg via Getty Images; Jim West/Alamy; Dirck Halstead/Time & Life Pictures/Getty Imjages; Alex Wong/Getty Images; Glow Images/SuperStock; Scott Olson/Getty Images 558 Justin Sullivan/Getty Images; 560Time Magazine; 561 Time Magazine; 566 Alex Wong/Getty Images; 567 Jim Young/Reuters/Corbis; 570 Stephen Chemin/Getty Images; 573 DoD Photo by Tech. Sgt. James L. Harper Jr., U.S. Air Force; 575 Paul Burnett/The New York Times/Redux Pictures; 580 Matthew Cavanaugh/epa/Corbis; 584 David Pearson/Alamy; 587, top to bottom: Kvork Djansezian/Getty Images; Matthew Cavanaugh/epa/Corbis; Joseph Sohm/Visions of America/Corbis


chapter 14: the policy & economic policy

News & Politics

public policy policy

pearson education

public policy process

longman types of public

longman fiscal policy

policy problem

policy categories

distributive policy