The Policy-Making Process

Chapter Seventeen

The Policy Making Process

Political agenda~ Issues that people believe require governmental action

Legitimate scope of government action is generally determined by public opinion.

What do you see as the issues that require governmental action?

What is the legitimate scope of the government?

Costs, Benefits, and Policy

Cost: any burden, monetary or non-monetary, that some people must, or expect, to bear from the policy

Benefit: any satisfaction, monetary or non-monetary, that some people must, or expect, to receive from the policy

Politics is a process of settling disputes over who benefits/pays and who ought to benefit/pay.

Figure 17.1: A Way of Classifying and Explaining the Politics of Different Policy Issues

Figure 17.1: A Way of Classifying and Explaining the Politics of Different Policy Issues

Types of Politics: Majoritarian politics: distributed benefits, distributed

costs (Antitrust legislation)Interest group politics: concentrated benefits,

concentrated costs (Union labor)Client politics: concentrated benefits, distributed costs

(Milk industry)Entrepreneurial politics: distributed benefits,

concentrated costs (Sinclair, Nader)

Economic Policymaking

Chapter 18

Managing the Economy

Types of Economic Policies Fiscal Policy: taxing and spending (budget). Handled by Congress and the PresidentMonetary policy: regulation of the money supply by the Federal Reserve Board (the Fed).

Economic Theories: 1.Keynesian economics: Government can manipulate the health of an economy through spending2.Supply-side economics: Cuts in taxes will produce business investment that will offset loss of $ due to lower taxes. 3.Monetarism: Money supply is the most important factor for determining the health of the economy4.Economic planning: The free market is unstable and therefore the government must plan parts of the country’s economic activity.

Economic Theories: 1.Keynesian economics: Government can manipulate the health of an economy through spending2.Supply-side economics: Cuts in taxes will produce business investment that will offset loss of $ due to lower taxes. 3.Monetarism: Money supply is the most important factor for determining the health of the economy4.Economic planning: The free market is unstable and therefore the government must plan parts of the country’s economic activity.

Funding the Government We authorize the government, through the We authorize the government, through the

Constitution and elected officials, to raise Constitution and elected officials, to raise money through taxes.money through taxes.

Taxation is the primary way that the Taxation is the primary way that the government collects money. government collects money.

Without revenue, or income from taxes, Without revenue, or income from taxes, government would not be able to provide government would not be able to provide goods and services.goods and services.

The Power to TaxThe Power to TaxArticle 1, Section 8, Article 1, Section 8,

Clause 1 of the Clause 1 of the Constitution grants Constitution grants Congress the power to Congress the power to tax.tax.

The Sixteenth The Sixteenth Amendment gives Amendment gives Congress the power to Congress the power to levy an income tax.levy an income tax.

Limits on the Power to Tax1. The purpose of the tax must

be for “the common defense and general welfare.”

2. Federal taxes must be the same in every state.

3. The government may not tax exports.

Tax StructuresProportional Taxes (PA State Tax)Proportional Taxes (PA State Tax)

A proportional tax is a tax for which the percentage A proportional tax is a tax for which the percentage of income paid in taxes remains the same for all of income paid in taxes remains the same for all income levels. income levels.

Progressive Taxes (Federal Income Tax)Progressive Taxes (Federal Income Tax)A progressive tax is a tax for which the percent of A progressive tax is a tax for which the percent of

income paid in taxes increases as income increases.income paid in taxes increases as income increases.Regressive Taxes (Sales Tax)Regressive Taxes (Sales Tax)

A regressive tax is a tax for which the percentage of A regressive tax is a tax for which the percentage of income paid in taxes decreases as income increases.income paid in taxes decreases as income increases.

Spending Categories

Mandatory Spending Mandatory Spending

Money that lawmakers Money that lawmakers are required by law to are required by law to spend spend

Interest payments on Interest payments on the national debtthe national debt

““Entitlement” Entitlement” programs (Social programs (Social Security, Medicare Security, Medicare and Medicaid)and Medicaid)

Discretionary Spending Money that government planners can choose how to spend.

Defense EducationTrainingEnvironmental cleanupNational parks and monumentsScientific researchLand managementFarm subsidiesForeign aid

Source of Federal Revenue

Social Security and Medicare Taxes (21%)Unemployment Taxes (12%)Federal Income Taxes (49%)Corporate Taxes (10%)Excise Taxes (3%)Other (4%)

Estate TaxesGift TaxesImport Taxes

The President’s Message on the 2010 budget

Taxing and Spending

Entitlements: Programs where money is automatically spent without annual review

of programs.1. Social Security2. Medicare3. Federal Pensions4. Interest on National Debt

Makes up almost 2/3 of federal budget Problem because Congress and the President cannot control much of spending

Entitlements: Programs where money is automatically spent without annual review

of programs.1. Social Security2. Medicare3. Federal Pensions4. Interest on National Debt

Makes up almost 2/3 of federal budget Problem because Congress and the President cannot control much of spending

Budget Process

1. Agencies prepare their budget needs and submit to President’s Office of Management and Budget (OMB)

2. OMB makes recommendations to President3. President submits budget to Congress4. Congressional Budget Office (CBO) checks President’s

budget5. Ways and Means committee in House review taxes and

revenues. 6. Appropriations committee review spending7. Agencies lobby for money8. Majority vote in both houses passes budget9. President signs or vetoes bill (no line-item veto)

The Federal Budget Debate

Social Welfare Policy

Trade Policy

Trade deficits (US imports more goods from other nations than it exports) have led to calls for protectionism.

Recent push for free trade GATTWTONAFTA

The Federal ReserveThe Federal Reserve (“Fed”) serves as the nation’s central

bank, which is designed to oversee the banking system and regulate the quantity of money in the economy.

The “Fed” is a privately owned institution, authorized in 1914 by Congress to ensure the health of the nation’s banking system.

The Fed is run by its Board of Governors. Seven members appointed by the President of the United

States.The Chairman of the Board is the most important position:

presiding, directing, and testifying about Fed policy. He is appointed by the President and confirmed by the Senate.

The Federal Reserve System is made up of the Federal Reserve Board in Washington, D.C. and twelve regional Federal Reserve Banks.

Three Primary Functions of the Fed

Regulate the private banking industry to make sure banks follow federal laws intended to promote safe and sound banking practices.

Act as a banker’s bank, making loans to other banks and as a lender of last resort.

Control of the supply of money i.e. Monetary Policy.

Tools of Monetary Control The Fed has three instruments of monetary control:Open-Market Operations:

Buying and selling bonds.Changing the Reserve Ratio:

Increasing or decreasing the ratio.Changing the Discount Rate:

The interest rate the Fed charges other banks for loans.

Problems with controlling the monetary system:The Fed does not control the amount of money that

households choose to hold as deposits in banks.The Fed does not control the amount of money that

bankers choose to lend.