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CHAPTER 16: LEARNING OBJECTIVESCHAPTER 16: LEARNING OBJECTIVES
Define the various stages in which the public policymaking process unfolds
Assess the formal and informal players involved in the policymaking process
Recognize the different theories that justify decisions to craft fiscal policy
Copyright © 2012 Cengage Learning
CHAPTER 16: LEARNING OBJECTIVESCHAPTER 16: LEARNING OBJECTIVES
Define the different measures used to assess the success or failure of fiscal policy
Analyze the budget-making process, how it unfolds, and the roles played by Congress and the president, respectively
Copyright © 2012 Cengage Learning
CHAPTER 16: LEARNING OBJECTIVESCHAPTER 16: LEARNING OBJECTIVES
Understand the different categories of tax policy, and how it has evolved in American history
Assess the differences between mandatory and discretionary spending by government
Copyright © 2012 Cengage Learning
CHAPTER 16: LEARNING OBJECTIVESCHAPTER 16: LEARNING OBJECTIVES
Understand the origins and development of the federal reserve system in the United States
Assess government’s role in crafting agricultural policy in the U.S.
Copyright © 2012 Cengage Learning
CHAPTER 16: LEARNING OBJECTIVESCHAPTER 16: LEARNING OBJECTIVES
Assess government’s role in crafting urban policy, including recent developments in urban planning
Define and assess the role that FEMA plays in assisting the victims of natural disasters
Copyright © 2012 Cengage Learning
WHEN THE GREED AND ARROGANCE OF WHEN THE GREED AND ARROGANCE OF FINANCIAL INSTITUTIONS DEMAND A FINANCIAL INSTITUTIONS DEMAND A NATIONAL SOLUTION … NOW & THENNATIONAL SOLUTION … NOW & THEN
The U.S. capitalist system was in crisisAt least one major financial institution
had failed, and others were on the brink Some exploited the lax regulatory
environment and millions of others fell victim to the financial institutions
Copyright © 2012 Cengage Learning
……NOW & THENNOW & THENThe president—bolstered by a
legislative branch controlled by his own party—favored regulation
When wealthy financial institutions driven by greed and arrogance defraud so many citizens
A new agenda to regulate such bad behavior is difficult to derail
Copyright © 2012 Cengage Learning
Obama flanked by economic advisors (Larry Summers, Paul Volcker, Goolsbee, Tim Geithner) announcing new proposals to rein in banks JIM WATSON/AFP/GETTY IMAGES
Copyright © 2012 Cengage Learning
NOW… THE “GREAT RECESSION” OF NOW… THE “GREAT RECESSION” OF 2007-2010 2007-2010
The U.S. banking system was suffering a major liquidity crisis brought on by: 1. Predatory lending practices
2. Upsurge in subprime lending to borrowers with weak credit histories
3. Incorrect pricing of risk on complex assets, i.e. “derivatives”
Copyright © 2012 Cengage Learning
NOW… THE “GREAT RECESSION” OF NOW… THE “GREAT RECESSION” OF 2007-2010 2007-2010
4. Rise of the “shadow banking system” —non-bank financial institutions were lending money free of regulations
5. Investment banks like Goldman Sachs sold investments to unwitting clients even as they were secretly betting against those same investments
Copyright © 2012 Cengage Learning
NOW… THE “GREAT RECESSION” OF NOW… THE “GREAT RECESSION” OF 2007–2010 2007–2010
Obama and Congressional Democrats introduced legislation in 2009:
Addressed consumer protection, bank capital requirements, executive pay
Also expanded regulation of the shadow banking system and derivatives, and set new trading limits
Copyright © 2012 Cengage Learning
THEN… 1933THEN… 1933
1929: Wall Street Crash—major banks failed and a majority of Americans’ stock holdings disappeared
Congressional investigators turned up evidence of fraud and irresponsibility
Banks ignored conflicts of interest and underwrote unsound securities to pay off bad loans
Copyright © 2012 Cengage Learning
THEN… 1933THEN… 1933
Competing banks “pooled operations” to artificially support the price of bank stocks
Wall Street insiders like Joseph Kennedy used inside information about stocks to make millions
Officers had been playing by their own rules at many once revered institutions
Copyright © 2012 Cengage Learning
THEN… 1933THEN… 1933
Securities Act of 1933 penalized filing false information about stock offerings
Securities Exchange Act of 1934 formed the Securities and Exchange Commission
Congress now sought to end the era of unregulated securities, and public anger gave them little choice
Copyright © 2012 Cengage Learning
Copyright © 2012 Cengage Learning
RICHARD DREW/AP PHOTO
PABLO MARTINEZ/MONSIVAIS/AP PHOTO
AN OVERVIEW OF THE AN OVERVIEW OF THE POLICYMAKING PROCESSPOLICYMAKING PROCESS
The process varies considerably, but most policies unfold in five stages:1. Recognition/definition stage
2. Formulation stage
3. Adoption (or legitimation) stage
4. Implementation stage
5. Evaluation stage
Copyright © 2012 Cengage Learning
AN OVERVIEW OF THE AN OVERVIEW OF THE POLICYMAKING PROCESSPOLICYMAKING PROCESS
A large number of actors and institutions are involved in making policy
Bureaucrats often play a key role Congress and the president are most
directly involved in the recognition, formulation, and adoption stages, when media attention is most intense
Copyright © 2012 Cengage Learning
AN OVERVIEW OF THE AN OVERVIEW OF THE POLICYMAKING PROCESSPOLICYMAKING PROCESS
Courts may ensure that all procedures are followed in interpreting rules, regulations, and policies
Interest groups and “think tanks” (policy research institutes) tend to be most active in influencing program choices and decisions
Copyright © 2012 Cengage Learning
THEORY AND PRACTICE IN FISCAL THEORY AND PRACTICE IN FISCAL POLICYPOLICY
Fiscal policy: how to raise revenue through taxation and how to spend the revenue generated
Federal budget: primary instrument the federal government uses to manage fiscal policy
Specifies estimated expenditures and revenues
Copyright © 2012 Cengage Learning
THEORY AND PRACTICE IN FISCAL THEORY AND PRACTICE IN FISCAL POLICYPOLICY
Various economic theories explain U.S. fiscal policy at any given point -
Laissez-faire (“leave us alone”) guided U.S. fiscal policy for much of the 18th and 19th centuries
Favors less economic intervention and governmental regulations
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THEORY AND PRACTICE IN FISCAL THEORY AND PRACTICE IN FISCAL POLICYPOLICY
In the 1930s, widespread support for FDR’s New Deal programs based on Keynesian theories spelled the end of laissez-faire fiscal policies
Keynesian theory: government should increase spending in bad economic times to raise total demand for goods and services
Copyright © 2012 Cengage Learning
THEORY AND PRACTICE IN FISCAL THEORY AND PRACTICE IN FISCAL POLICYPOLICY
Government spending may forestall or even end a recession
Economic slowdown characterized by higher unemployment, reduced productivity, or some other negative economic indicators,
But may also cause inflation and chronically high deficits
Copyright © 2012 Cengage Learning
THEORY AND PRACTICE IN FISCAL THEORY AND PRACTICE IN FISCAL POLICYPOLICY
Supply-side economics: argues in favor of cutting taxes and government
Ronald Reagan seized on this theory and secured passage of a large tax cut,
But federal spending and deficits also multiplied during his eight years in office
Copyright © 2012 Cengage Learning
ASSESSING THE ECONOMY’S ASSESSING THE ECONOMY’S PERFORMANCEPERFORMANCE
Gross domestic product (GDP):Estimate of the total value of all goods
and services produced in the U.S. in a one-year period
When GDP improves, workers are producing more in fewer hours, allowing employers to increase wages without raising prices
Copyright © 2012 Cengage Learning
ASSESSING THE ECONOMY’S ASSESSING THE ECONOMY’S PERFORMANCEPERFORMANCE
Consumer Price Index (CPI):An index of prices for goods and
services regularly traded in the U.S. A sustained rise over time indicates
inflation is on the rise and Consumers’ buying power is on the
decline
Copyright © 2012 Cengage Learning
ASSESSING THE ECONOMY’S ASSESSING THE ECONOMY’S PERFORMANCEPERFORMANCE
Unemployment rate: Percentage of people unemployed and
actively looking for work Full employment is elusive due to
seasonal factors, voluntary job changes, and routine shifts in economic conditions
5% is now seen as a realistic minimum
Copyright © 2012 Cengage Learning
ASSESSING THE ECONOMY’S ASSESSING THE ECONOMY’S PERFORMANCEPERFORMANCE
National debt: Individuals or organizations purchase
interest-bearing U.S. savings bonds, treasury notes, and treasury bills
Includes budget surpluses and deficits of past years
Currently = trillions with billions paid in interest annually
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ASSESSING THE ECONOMY’S ASSESSING THE ECONOMY’S PERFORMANCEPERFORMANCE
Dow Jones Industrial Average: Most widely used indicator of the overall condition of the stock market
Price-weighted average of 30 actively traded blue chip stocks
Standard & Poor’s 500 Index: broader range of large company stocks
NASDAQ: high-tech company stocksCopyright © 2012 Cengage Learning
ASSESSING THE ECONOMY’S ASSESSING THE ECONOMY’S PERFORMANCEPERFORMANCE
Housing starts:Number of U.S. residential building
construction projects begun in a specific period
Many experts believe a decline is one of the first signs of an approaching economic downturn
Copyright © 2012 Cengage Learning
ASSESSING THE ECONOMY’S ASSESSING THE ECONOMY’S PERFORMANCEPERFORMANCE
Balance of trade figures (aka, net exports):
Money gained by selling exports, minus the cost of buying imports
When a country exports more than it imports it has a trade surplus, the reverse situation denotes a trade deficit
Copyright © 2012 Cengage Learning
AMERICAN GOVERNMENT IN AMERICAN GOVERNMENT IN POPULAR PERSPECTIVEPOPULAR PERSPECTIVE
ASSESSING THE ALL-IMPORTANT CONSUMER CONFIDENCE MEASURE
The monthly calculation is based on five questions1. Current U.S. business conditions2. Expectations about how business conditions
might change in the next six months
Copyright © 2012 Cengage Learning
AMERICAN GOVERNMENT IN AMERICAN GOVERNMENT IN POPULAR PERSPECTIVEPOPULAR PERSPECTIVE
3. Current U.S. employment conditions
4. Expectations about how employment conditions might change in the next six months
5. Expectations about how one’s own income situation might change in the next six months
Copyright © 2012 Cengage Learning
AMERICAN GOVERNMENT IN AMERICAN GOVERNMENT IN POPULAR PERSPECTIVEPOPULAR PERSPECTIVE
What do you think is the best way to instill a positive outlook in consumers?
Are consumers likely to react positively when the federal government takes bold actions, or
Do such moves only confirm the sense that economic times are worsening?
Copyright © 2012 Cengage Learning
Copyright © 2012 Cengage Learning
THE FEDERAL BUDGET-MAKING THE FEDERAL BUDGET-MAKING PROCESSPROCESS
Agencies submit budget requests to the Office of Management and Budget (OMB)
OMB then prepares a budget proposal in keeping with the president’s program
Sets guidelines for estimating revenue and allotting spending
Copyright © 2012 Cengage Learning
THE FEDERAL BUDGET-MAKING THE FEDERAL BUDGET-MAKING PROCESSPROCESS
All appropriations bills originate in the House
After the House Appropriations Committee reports the bills to the full House, and
After the full House has passed each measure
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THE FEDERAL BUDGET-MAKING THE FEDERAL BUDGET-MAKING PROCESSPROCESS
The Senate Appropriations Committee takes its turn revising the House version
Reports this to the Senate floorThe House and Senate must reconcile
their versions and secure enough votes for approval of the final bill
Sent to the president for approvalCopyright © 2012 Cengage Learning
BALANCING THE FEDERAL BUDGET?BALANCING THE FEDERAL BUDGET?
Congress has debated a balanced budget amendment to the Constitution
Proponents argue it would force lawmakers to become more accountable
Opponents counter that deficit spending may be necessary during recessions and in defending national security
Copyright © 2012 Cengage Learning
The Smithsonian Institution was among many government sites closed down during the 1995 government shutdown.AFP/GETTY IMAGES
Copyright © 2012 Cengage Learning
TAXATION POLICYTAXATION POLICY
July 1789: Congress passed its first revenue-raising bill:
Levied tariffs: taxes on imported foreign goods
Until the Civil War, tariffs provided approximately 90% of federal revenue
Increased demands required additional sources of revenue
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TAXATION POLICYTAXATION POLICY
The Sixteenth Amendment authorizes taxes on individual increases in wealth, from wages, benefits, bonuses, or any other form of income
Progressive tax: tax rate increases as the amount of income gets larger
Regressive tax: charges the same amount, regardless of income
Copyright © 2012 Cengage Learning
TAXATION POLICYTAXATION POLICYSocial Security taxes: Created in 1935;
intended to be self-supporting: Payroll taxes taken directly out of each
paycheck and held until retirement In reality, the system has become “pay
as you go” Current payroll taxes are going directly
to pay the benefits of current retireesCopyright © 2012 Cengage Learning
TAXATION POLICYTAXATION POLICY
Congress has also imposed corporate income taxes
Other sources include taxes on— Gasoline and communications servicesEstates and large financial gifts, andCustoms duties
Copyright © 2012 Cengage Learning
AMERICAN GOVERNMENT. . . IN AMERICAN GOVERNMENT. . . IN GLOBAL PERSPECTIVEGLOBAL PERSPECTIVE
What About Us? The Chinese Reaction to the U.S. Fiscal Stimulus Plan
The 2009 stimulus plan required that all public works and building projects use only U.S.-made goods
Exceptions allowed goods from Canada, the European Union, and Japan
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AMERICAN GOVERNMENT. . . IN AMERICAN GOVERNMENT. . . IN GLOBAL PERSPECTIVEGLOBAL PERSPECTIVE
China’s official news agency, Xinhua reported this “trade protectionism” could harm the world economy:
As the largest holder of U.S. Treasury securities, they expressed concern about asset depreciation and
“…catastrophic effects to some poor countries…”
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YOUR PERSPECTIVE … ON YOUR PERSPECTIVE … ON AMERICAN GOVERNMENTAMERICAN GOVERNMENT
College Students Get an Education … in Credit Card Abuse
Credit card companies eagerly target economically stressed college students
More likely to make late payments and less likely to pay off their cards in full at the end of each month
Copyright © 2012 Cengage Learning
YOUR PERSPECTIVE … ON YOUR PERSPECTIVE … ON AMERICAN GOVERNMENTAMERICAN GOVERNMENT
Did you apply for a credit card during your first semester as a college student?
Were you surprised at how easy it was to sign up for your own credit card?
Should colleges limit credit card companies’ access to college students? Why or why not?
Copyright © 2012 Cengage Learning
YOUR PERSPECTIVE … ON YOUR PERSPECTIVE … ON AMERICAN GOVERNMENTAMERICAN GOVERNMENT
Would you favor requiring that all undergraduate students take a course in personal financial management?
If the government can rack up large deficits, why do you think families and individuals like yourself are so heavily penalized for doing so?
Copyright © 2012 Cengage Learning
SPENDING POLICIES – SPENDING POLICIES – DIVIDING UP THE PIEDIVIDING UP THE PIE
Mandatory spending: not controlled by annual budget decisions
Obligated by previously enacted laws and may only be modified by repeal or revising the original legislation
Discretionary spending: may be modified or eliminated in a given year
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Figure 16.1 Where Do Federal Tax Dollars Come From and Where Do They Go?
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Source: Budget of the U.S. Government Fiscal Year 2011, Historical Tables, published by the Executive Office of the President.
THEORIES AND PRACTICE IN THEORIES AND PRACTICE IN MONETARY POLICYMONETARY POLICY
Monetary policy: how the government controls the supply and price of money in the economy
With few exceptions, the Federal Reserve System headed by the Federal Reserve Board (“the Fed”) –
Determines U.S. monetary policy
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CHECK THE LISTCHECK THE LIST
G-7 Nations, Ranked According to Income Tax Rates Imposed on Their Citizens
Organization for Economic Cooperation and Development (OECD)
Data on state and federal wage taxes for the G-7 shows the U.S. tax burden is toward the lower end
Copyright © 2012 Cengage Learning
Copyright © 2012 Cengage Learning
EMERGENCY AND DISASTER RELIEF EMERGENCY AND DISASTER RELIEF POLICYPOLICY
Federal Emergency Management Agency (FEMA) provides relief after disasters
When the president declares a state of emergency, FEMA coordinates federal relief efforts and offers assistance
FEMA’s delayed response to Hurricane Katrina drew widespread criticism
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AMERICAN GOVERNMENT… IN AMERICAN GOVERNMENT… IN HISTORICAL PERSPECTIVEHISTORICAL PERSPECTIVE
HURRICANE RELIEF THAT CALLS FOR A “HANDS-ON” PRESIDENT
9/5/1965: Category 4 Hurricane Betsy left 3/4ths of New Orleans underwater
Initially resistant, but heeding advice, President Johnson visited New Orleans to reach out to the storm’s victims
Copyright © 2012 Cengage Learning
AMERICAN GOVERNMENT… IN AMERICAN GOVERNMENT… IN HISTORICAL PERSPECTIVEHISTORICAL PERSPECTIVE
8/30/2005: Category 4 Hurricane Katrina proved among the deadliest
Over 1300 fatalities and $100 billion in damage
Like LBJ, Bush failed to immediately see that entrusting subordinates to on-site activities is never enough in natural disasters
Copyright © 2012 Cengage Learning
NOW & THEN: MAKING THE NOW & THEN: MAKING THE CONNECTIONCONNECTION
Most modern presidents’ political fates rise and fall with the U.S. economy
Hoover’s presidency essentially ended with the Great Depression
Carter’s presidency coincided with a near record high misery index, and he too became a one-term president
Copyright © 2012 Cengage Learning
NOW & THEN: MAKING THE NOW & THEN: MAKING THE CONNECTIONCONNECTION
FDR’s and Obama’s economic policies clearly reflected Keynesian principles
It is easy to look back decades later and judge a president’s economic policies
Presidents reacting to the moment do not have that luxury
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POLITICS INTERACTIVE!POLITICS INTERACTIVE!
FORMER FED CHAIRMAN GREENSPAN: A LEGACY OF FORCEFULNESS
One of the most renowned Fed chairman in history
During his 19-year term he became so respected that even a simple appearance by him before Congress became a market-shifting event
Copyright © 2012 Cengage Learning
POLITICS INTERACTIVE!POLITICS INTERACTIVE!
www.cengage.com/dautrich/americangovernment/2e Find the Politics Interactive link for the challenges faced by current Federal Reserve Chairman, Ben Bernanke
How do they differ from the challenges faced by Greenspan?
Did the ‘08–09 recession fundamentally alter the role of Fed Chairman?
Copyright © 2012 Cengage Learning
Brokers on the NY Stock Exchange at work as they listen to former Federal Reserve Chairman Alan Greenspan testifying before CongressAP PHOTO/RICHARD DREW
Copyright © 2012 Cengage Learning
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