GOVT 2305 Chapter 16

Thinking Critically about Economic Policy and Your Future

As the debate about whether to have more or less government has led to a series of policy stalemates among politicians, the income of the American middle class has stagnated and the gains going to the top 1 percent have soared. The Great Recession and the divisive politics of economic policy have cut short the debate about how federal economic policy can be reoriented to promote future growth and ensure that all Americans have the opportunity to benefit from it.

The Environment and the Economy

During the 1970s, environmental policy emerged as a major component of federal action, with the passage of new laws reaching into many aspects of the economy. During this time Congress enacted the National Environmental Policy Act (which created the Environmental Protection Agency), the Clean Air Act, the Clean Water Act, and the Safe Drinking Water Act. Concerns about climate change pose complex new challenges for economic policy. Policy makers are considering a variety of solutions, including policies designed to reduce greenhouse gases, development of alternative technologies, and policies that promote adaptation to a changed climate.

Janet Yellen was appointed to head which federal organization in 2013?

Federal Reserve Board

Known for being banker's banks, these banker's banks make loans to other banks, clear checks, and supply the economy with currency and coins.

Federal Reserve banks

Which of the following banks make loans to other banks, clear checks, and supply the economy with currency and coins?

Federal Reserve banks

What effect did the 2008 financial crisis have on federal regulation of the economy?

It created two new financial protection regulatory agencies.

Economists who believe that the government can stimulate the economy by increasing public spending or by cutting taxes are known as

Keynesians.

Which of the following budget items would be considered an "mandatory spending"?

Medicare

The ____ in the Executive Office of the President is responsible for preparing the president's budget.

Office of Management and Budget

At least philosophically, ______ reject the idea that government should intervene in the economy, while _____ believe that economic prosperity requires government action.

Republicans; Democrats

In general, _____ stress the importance of economic freedom for maintaining a healthy economy, whereas ____ are often more willing to support economic regulation to attain social or environmental objectives.

Republicans; Democrats

Which of the following is true about business organizations?

They are the most consistently powerful groups in economic policymaking.

Congress approved a $700-billion emergency bailout of financial institutions in October of 2008. This bailout is known as the

Troubled Asset Relief Program.

tariff

a tax on imported goods (page 648)

A common reference to the Troubled Asset Relief Program (TARP) passed by Congress in October 2008 is the

bailout.

During the beginning of a recession, the typical reaction of the Federal Reserve is to

cut rates.

When leaving office, President Eisenhower warned the nation to beware of the powerful connection between the federal government and

defense contractors.

discretionary spending

federal spending on programs that are controlled through the regular budget process (page 654)

mandatory spending

federal spending that is made up of "uncontrollables," budget items that cannot be controlled through the regular budget process (page 653)

antitrust policy

government regulation of large businesses that have established monopolies (page 654)

The federal funds rate is the

interest rate that member banks of the Federal Reserve System charge each other.

A tax is called ____ if the rate of taxation goes up with each higher-income bracket and ___ if people in lower-income brackets pay a higher proportion of their income toward the tax than people in higher-income brackets.

progressive; regressive

Government grants of cash or other valuable commodities are known as

subsidies.

The federal government has taken on major roles in promoting technological innovation, going so far as to create In-Q-Tel, which is a

a Central Intelligence Agency (CIA) venture capital firm designed to invest in high-tech start-ups whose work could enhance intelligence efforts.

More than 23 large firms in the United States have joined environmentalists in a coalition called the U.S. Climate Action Partnership (USCAP) to press for

a carbon emissions cap-and-trade system.

public policy

a law, rule, statute, or edict that expresses the government's goals and provides for rewards and punishments to promote those goals' attainment (page 629)

deregulation

a policy of reducing or eliminating regulatory restraints on the conduct of individuals or private institutions (page 657)

The exercising of antitrust policy might involve the government

breaking up a large business into smaller companies.

categorical grants

congressional grants given to states and localities on the condition that expenditures be limited to a problem or group specified by the law (page 633)

Fiscal policy has become less effective in counteracting fluctuations in the business cycle because

discretionary spending has become a smaller portion of the annual budget.

Gross ____ is the same measure as gross national product except that it excludes income from foreign investments.

domestic product

monetary policies

efforts to regulate the economy through the manipulation of the supply of money and credit; America's most powerful institution in this area of monetary policy is the Federal Reserve Board (page 645)

The interest rate that member banks of the Federal Reserve System charge each other is known as the

federal funds rate.

Keynesians

followers of the economic theories of John Maynard Keynes, who argued that the government can stimulate the economy by increasing public spending or by cutting taxes (page 637)

public goods

goods or services that are provided by the government because they either are not supplied by the market or are not supplied in sufficient quantities (page 630)

The ____ is the market value of the goods and services produced in the economy (minus income from foreign investments).

gross domestic product

Raising the federal funds rate (FFR) would be expected to lead to which of the following?

lower inflation

Monetary policy refers to

managing the supply of money and credit in the economy.

The dominant form of public policy of the national government in the nineteenth century was

subsidies.

regressive taxation

taxation that hits lower-income brackets more heavily (page 648)

fiscal policy

the government's use of taxing, monetary, and spending powers to manipulate the economy (page 648)

federal funds rate

the interest rate on loans between banks that the Federal Reserve Board influences by affecting the supply of money available (page 646)

contracting power

the power of government to set conditions on companies seeking to sell goods or services to government agencies (page 658)

gross domestic product (GDP)

the total value of goods and services produced within a country (page 630)

Which of the following budgetary items are beyond the control of budgetary committees and can be controlled only by substantive legislative action in Congress?

uncontrollables

____ policy is the name given to the government's taxing and spending powers.

Fiscal

The Tools of Economic Policy

Monetary policies manipulate the growth of the entire economy by controlling the availability of money to banks through the Federal Reserve System. Fiscal policies include the government's taxing and spending powers. During the nineteenth century, the federal government received most of its revenue from a single tax, the tariff. Since then, the federal government has added new sources of tax revenue, the most important being the income tax and social insurance taxes. One of the most important features of the American income tax is that it is a progressive tax, meaning that it taxes upper-income brackets more heavily. The federal government's power to spend is one of the most important tools of economic policy because spending decisions affect the overall health of the economy and every aspect of American life. These contentious decisions, which often focus on budget deficits and mandatory spending, are made as part of the annual budget process involving the president and Congress. The federal government can establish conditions that regulate the operation of big businesses to ensure fair competition and can force large monopolies to break up into smaller companies. In addition to economic regulation, the federal government can also impose conditions on businesses to protect workers, the environment, and consumers. The trend since the late 1970s has been against regulation. Although the deregulation movement resulted in a reduction in the amount of regulatory laws, the 2008 financial crisis caused Congress to enact a range of new regulations on the financial industry. Subsidies and contracting are the "carrots" of economic policy. Their purpose is to encourage people to do something they might not otherwise do or to get people to do more of what they are already doing.

The Goals of Economic Policy

Public policy consists of laws, rules, statutes, or edicts that express the government's goals and provide for rewards and punishments to promote their attainment. At the most basic level, government makes it possible for the economy to function efficiently by setting the rules for economic exchange and punishing those who violate the rules. Government promotes stable markets by protecting the welfare and property of individuals, maintaining law and order, enacting laws that protect individuals and businesses in economic transactions, regulating businesses, and providing public goods. The government may actively intervene in the economy to promote economic growth by promoting business, investor, and consumer confidence; supporting innovation; and ensuring a productive and sufficiently large workforce. The federal government also works to reduce unemployment and keep inflation low as ways to promote economic growth. Government promotes business development indirectly through categorical grants and supports specific business sectors with direct subsidies, loans, and tax breaks. From the 1930s to the 1980s, the government regulated industrial relations by overseeing union elections and collective bargaining between labor groups and management. But more recently, the government has significantly reduced its involvement in industrial relations. The federal government plays an active role in protecting consumers from unsafe products.

The Politics of Economic Policy Making

Since the Great Depression of the 1930s, the public has held the government responsible for maintaining a healthy economy. Politicians disagree about what the priorities of economic policy should be. Both Democrats and Republicans want to promote economic growth, but Republicans stress the importance of maintaining economic freedom whereas Democrats are more willing to believe that economic prosperity requires government action. There are different theories about whether, how much, and in what ways government should be involved in the economy. Proponents of Keynesianism argue that government can stimulate the economy by increasing public spending and cutting taxes. Proponents of laissez-faire capitalism argue that the economy will flourish with minimal or no government interference. Proponents of supply-side economics argue that reducing the government's role in the economy, particularly through tax cuts, will promote investment and spur economic growth. Because neither party wishes to cut big, expensive, popular programs and because tax increases have been so difficult to enact, budget deficits have grown and smaller programs have been cut. Economic regulation, like the minimum wage, attracts intense political conflict as businesses seek to decrease the government's role while other interests press for stronger government action. Consumer groups, environmentalists, businesses, and labor all attempt to shape economic policy; organized labor and business groups are the most consistently influential today. After the 2008 global economic crisis, the federal government, first under George W. Bush and then under Barack Obama, initiated large-scale government interventions, which included emergency measures to bail out failing companies, a short-term stimulus to get the economy moving again, and proposals for regulations that would prevent similar financial meltdowns in the future. Support for these measures wavered as fears of rising deficits, long-term debt, and, more abstractly, "big government" grew.

inflation

a consistent increase in the general level of prices (page 633)

redistribution

a policy whose objective is to tax or spend in such a way as to reduce the disparities of wealth between the lowest and the highest income brackets (page 649)

monopoly

a single firm in a market that controls all the goods and services of that market; absence of competition (page 654)

Federal Reserve System

a system of 12 Federal Reserve banks that facilitates exchanges of cash, checks, and credit; regulates member banks; and uses monetary policies to fight inflation and deflation (page 646)

budget deficit

amount by which government spending exceeds government revenue in a fiscal year (page 652)

laissez-faire capitalism

an economic system in which the means of production and distribution are privately owned and operated for profit with minimal or no government interference (page 638)

supply-side economics

an economic theory that posits that reducing the marginal rate of taxation will create a productive economy by promoting levels of work and investment that would otherwise be discouraged by higher taxes (page 638)

uncontrollables

budgetary items that are beyond the control of budgetary committees and can be controlled only by substantive legislative action in Congress; some uncontrollables, such as interest on the debt, are beyond the power of Congress because the terms of payments are set in contracts (page 654)

The MOST powerful actors in influencing economic policy today are

business organizations.

The Securities and Exchange Commission (SEC) received harsh criticism for its role in the

financial crisis of 2008.

The government's taxing and spending powers, especially personal and corporate income taxes, are examples of

fiscal policy.

subsidies

government grants of cash or other valuable commodities, such as land, to an individual or an organization; used to promote activities desired by the government, reward political support, or buy off political opposition (page 657)

The American Recovery and Reinvestment Act of 2009 was designed to

help recover American jobs after the 2008 economic recession.

loophole

incentive to individuals and businesses to reduce their tax liabilities by investing their money in areas the government designates (page 649)

In the past few decades, discretionary spending as a percentage of the budget has declined significantly. This means that the government is

less able to use fiscal policy to counteract fluctuations in the business cycle.

open-market operations

methods by which the Open Market Committee of the Federal Reserve System buys and sells government securities and other investment instruments to help finance government operations and to reduce or increase the total amount of money circulating in the economy (page 647)

This approach for resolving problems from climate change seeks to reduce greenhouse gas emissions.

mitigation

Manipulating the growth of the entire economy by controlling the availability of money to banks is known as

monetary policy.

Goods or services that are provided by the government because they are not supplied by the market or are in insufficient numbers are known as

public goods.

The Securities and Exchange Commission (SEC) is responsible for

regulation of financial markets.

The economic theory that posits that reducing the marginal rate of taxation will create a productive economy and that is opposed to Keynesian theory is known as

supply-side economics.

progressive taxation

taxation that hits upper-income brackets more heavily (page 648)

Which of the major American political parties is generally more willing to accept economic regulation to help attain social or environmental objectives?

the Democratic party

Which entity bears primary responsibility for preparing the president's budget?

the Office of Management and Budget