Top 10 Things To Know About Economic Policy
1) There are four main theories that are best used to manage the economy and are usually
applied with one another
a) Monetarism=belief that inflation occurs when too much money is chasing too few
goods. Need steady increase in money supply at a rate= growth of economy’s
productivity and free market trade
b) Keynesianism= government should manage the economy by spending more money
when in a recession and cutting spending when there is inflation & economy performance
> year-year balance/budget
i) Too little demand government =spend more than gets in taxes + create more public
works
ii) Demand too great = increase taxes + cutting federal expenditures
c) Economic Planning=belief that government plans like wage and price controls or
direction of investment, can improve the economy. During inflation times the
government should regulate maximum prices that can be charged and wages can be paid-
> at least for larger industries
d) “Reaganomics”= belief that combination of monetarism, lower federal spending, and
supply-side economics will stimulate the economy. This effect of lowering taxes and
increasing spending->drop of unemployment rate & rise in business, but large deficits
drastically increased national debt
2) “Troika” (OMB, CEA, Treasury) + President + “The Fed” + Congress = Who decides Econ
Policies
a) Secretary of Treasury = estimates revenue + result in change of tax laws + reps US when
meeting foreign finance ministers. OMB’s estimates of amount that will be spend by
federal agencies, negotiate with departments on budget size, & legislative proposals of
departments in = president’s program. CEA forecasts economic trends, analyzing
economic issues, helping prepare the economic report that goes to Congress. The Federal
Reserve(“The Fed”) has 7 members appointed by the President whom serve 14 year non-
renewable terms and regulates supply of money (circulation, bank deposits, etc) while
setting monetary policy (shape economy by controlling, deposits, interest rates, &
amount money). Congress along with approving all taxes & expenditures uses
committees & fiscal policy (how high taxes should be & amount government can spend)
3) In 1990s during a deficit & no new money coming can only create new programs by cutting
out, increasing debt, or raising taxes. Since none of these are favorable-> raise tax “other
people” (minority voters like raising tax on cigarettes for Medical Research or affluent
voters)
a) Politicians either like lower tax rate(too much $) or don’t oppose tax cut more limited to
ordinary people & put to certain programs (education & childcare efforts)
b) Most politicians like increase on social security/high reconstruction & grants (business,
college, etc)
4) Economic choices made by politicians are shaped generally by ideological differences in
parties. All politicians want low unemployment & no inflation, but when forced to choose
Democrats prefer reducing unemployment (generally) while Republicans prefer attempting to
reduce inflation (generally)
5) Pocketbook Issue= economic conditions are strong association of amount of success the
incumbent party has for staying in the White House & seats held by WH party in Congress.
Lower Income will worry about unemployment=vote Democrat while Higher Income worry
Top 10 Things To Know About Economic Policy
about inflation=Republican. Even in a recession when unemployment not high people still
vote against incumbent because unemployment increased during their term. *Voting
Behavior and economic conditions are strongly correlated nationally but not individually*
a) Deficit=governments spends more money than it collects in taxes in a given year
b) National Debt= total amount of deficits since 1st Presidency
c) GDP=total of all goods & services produced in country in a given year
d) Raising Taxes & Cutting Spending can reduce deficit and create progress to lower
national debt
6) The Federal Reserve Board (est. 1913) is in charge of monetary policy. It has 7 members.
Each member is appointed by President and confirmed by Senate for a nonrenewable 14 year
term. The chairman is appointed or reappointed every 4 years from the board.
The fed regulates the economy through monetary policy that is controlling the supply and
price (aka interest rates) of money.
By buying federal securities the fed can increase money supply and decrease
interest. By selling federal government securities the fed can decrease money
supply and increase interest.
The fed can also regulate reserve requirements i.e. the amount of money the bank
cannot loan out.
Discount rate is the rate at which the Fed loans to banks.
7) Congress has a say in monetary policy because it can threaten to lessen the power of the Fed.
BUT, more importantly congress regulates the economy through fiscal policy i.e. taxes
and spending. Trade is an example of interest group politics. Domestic manufactures of
certain goods push for tariffs i.e. taxes or quotas i.e. limits on the quantity of imports on
foreign goods because it makes them more competitive. And domestic manufactures who are
hurt by free trade e.g. NAFTA(North American free trade agreement between the US,
Mexico and Canada) oppose it more strongly than the larger public that generally benefits.
Expenditures are client and interest politics. Americans want both the benefits of
expenditures and a lower deficit.
8) A budget lists the expected revenue for a fiscal year and the allocation of funds. Fiscal years
go from October 1st to September 30th and are named according to the year they end in.
Budget Resolution congressional decision on where to cap government spending.
9) Taxes are partly majoritarian (everyone pays them) and partly client (exemptions,
exclusions and deductions) politics. In US taxes are slightly progressive with lighter
burden than much of the world.
10) Before income taxes, the federal government made most of its money from tariffs. In 1895
the Supreme Court declared the income tax unconstitutional. So, the 16th Amendment ratified
in 1913 made the income tax constitutional. Rates increased in times of war and decreased in
times of peace. But, they remained high after WWII. Before the 1986 tax reform, which
lowered rates across the board, Republicans took loopholes in exchange for high rates and
Democrats did not think they could get rid of the loopholes because just about every one
benefited from one loophole or another.
The tax reform of 1986 shifted industry savings to people and cut down on legal and
illegal tax evasion. Deductions (through they are making a comeback) were curtailed in the
1986 tax reform. Deductions often incentivize the public to buy certain tax deductable
products. They can work like subsides. Also lower rates decrease tax evasion because the
expense of sheltering income can be more or close to the actual tax.
Top 10 Things To Know About Economic Policy