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Pearson LongmanPoliticalScienceInteract

ive

Shea, Green, and SmithLiving Democracy, Second

Edition

Chapter 17:Making Economic Policy

Shea, Green, and Smith, Living Democracy, Second Edition Copyright 2009 Pearson Longman

Chapter 17: Making Economic Policy

Adam Smith (1723–1790), The Wealth of Nations

Monetarists

John Maynard Keynes (1883–1946)

Supply-side economists

Economic Basics



The Big Five: Measuring Performance

Inflation

Budget deficit or surplus

Balance of Trade

UnemploymentGross

Domestic Product



As employee of Cingular Wireless, saw his commissions cut in half

Organized workers, and he and his co-workers joined the Communications Workers of America

Student Profile: Jonathan Upright



Fiscal Policy: Major Actors

Congress

President

Congressional Budget Office

Council of Economic Advisers

Office of Management and Budget (pre-1974)



Revenue: Income Taxes

Tax Brackets, 2005



Revenue



Tax Analysis

Arthur Laffer



Tax Equity

Should the wealthy be taxed at a higher rate—a progressive rate—

in order to provide more services for the poor?



Intended and Unintended Consequences:

Dynamic Modeling

Dynamic Modeling

Tries to take into account the effects of tax changes by examining how a tax increase in one area impacts revenue in another area

How could an increase in cigarette taxes affect revenues from alcohol

sales?



Expenditures: Social Security

Established in 1935 during the Great Depression

Technically, an independent, off-budget program

In 1970s, started to run a deficit



Expenditures: Defense

Each Nimitz class aircraft carrier costs about $4.5 billion, with annual operating expenses

of $160 million.



Expenditures: Income Security

The government tries to provide a safety net for the most vulnerable members of society through the

following programs

Earned-income creditChild tax credit

Supplemental Security IncomeUnemployment compensation

Food stamps



Expenditures: Medical Care

Health insurance for retired people (beginning at age

65), as well as for disabled young

people

Health insurance for the

economically disadvantaged

Medicare Medicaid

Both programs were established in the mid-1960s as part of Lyndon B. Johnson’s

Great Society.



Expenditures: Interest and Other Spending

In 2005, interest on the national debt totaled $182 billion, almost 7 percent of the total budget.

Budgets for other programs:– Department of Education: $71 billion– NASA’s budget: $16 billion– National Science Foundation: $5.5 billion

– Department of Justice: $21 billion– Department of Transportation: $58 billion

– Environmental Protection Agency: $8 billion



Long-Term Budget Challenges: The Coming Storm



Addressing the Problem

Medicare: should we– raise the age of eligibility?– increase premiums or cap payments?

– tie the government’s contribution to a set percentage of GDP?

Medicaid: should we– reduce the share that the federal government pays and increase that of the states?

– require co-pays?



Addressing the Problem

Social Security: Should we– reduce benefits?– tie future initial benefits to the consumer price index?

– reduce cost of living allowances?

– raise the retirement age?



Pathways of Action: The AARP

35 million members

Key focus: prescription drug medicine for seniors

Nonpartisan



Monetary Policy: The Federal Reserve Board

Federal Open Market Committee (FOMC) is

the Fed’s policymaking arm.

The Federal Reserve System is designed to

be politically neutral.



The Fed in Action

The “Misery Index” is the sum of the unemployment and inflation rates.



Pathways Profile: Alan Greenspan

“Since I have become a central banker, I

have learned to mumble with great incoherence. If I seem unduly clear to you, you must

have misunderstood what I said.”



Regulatory Policy

Through Roosevelt’s New Deal and Johnson’s Great Society, government regulation became more common and more accepted.

By the 1970s, a move toward deregulation began.



Trade Policy and Globalization

World Trade Organization meetings

have often touched off vehement protest from activists who believe that free

trade represses poor nations.



Pathways of Change From Around the World:

Mercado Global

Founded by Ruth DeGolia in 2002

Mission: help women artisans market their goods at fair prices

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