Chapter 7 Economic and Budgetary Policy Economic Growth Defined as an increase in Gross Domestic Product Gross Domestic Product GDP the market value of all officially recognized final goods and services produced within a country in a year o The sum of Consumption Investment Government Spending and Net Exports Full Employment goal of economic policy generally defined as the lowest level of unemployment that can be sustained in light of the structure of the overall economy Also described as the condition in which everyone who wishes to work at the prevailing wage rates can find a job Past several decades have seen increases in the amount of two income families and an increasing amount of women in the workforce Inflation increase in the costs of goods and services o 3 percent a year or less is considered acceptable Consumer Price Index CPI An economic statistic used to measure the inflation rate The index is calculated by examining percent price changes for a typical market basket of goods o CPI has been demonstrated to be inaccurate in some areas overstated inflation by 1 1 percent Balance of trade economic goal related to the role of the United States in an international economy examines the value of a nation s exports compared to its imports o Positive balance imports more than exports negative vice versa o Protectionists favor positive balance of trade o Other analysts assert that countries should import export based on the theory of comparative advantage maintaining a positive balance of trade is not that important Globalization increasing integration of economies around the world particularly through trade and financial flows National Debt The accumulation of all of the deficits the nation has run historically o US national debt currently upwards of 17 trillion Debt ceiling legal limit on the amount of money the government can owe Fiscal Policy describes the taxing and spending tools at the government s disposal to influence the economy o In a recession the economy should be stimulated Cut taxes Increase spending o When the economy is too hot the government does the opposite in order to reduce inflation Monetary Policy implemented by the Federal Reserve Board to influence economic policy goals it attempts to control economic fluctuations by controlling the amount of money in circulation also referred to as the money supply o Independent of the government monetary policy decisions are free of o Open market operations increase or decrease the money supply Buys US Treasury bonds to increase money supply and vice politics versa o Discount rate the rate the Federal Reserve Board charges member banks to borrow money from the Federal Reserve Bank o Reserve Requirement amount of money that member banks must keep on reserve a percentage of deposits Supply side Economics economic theory that states that the government can increase economic growth by cutting taxes especially for the richest individuals Regulation tool that the government uses to correct an unfavorable market situation o Minimum wage o Illegalization of monopolies o Ensuring safe practices Tax Expenditures a tax subsidy such as an investment credit or deduction that is designed to favor a particular industry activity or set of persons Called expenditure because such a subsidy reduces government revenue and thus is like spending money Also sometimes called corporate welfare Tax Policy how the government chooses to tax its economy o Regressive tax tax that when applied taxes all individuals at the same rate regardless of their income or socioeconomic standing o Progressive tax A tax that is based on the philosophy that higher earners should pay higher taxes both in terms of actual dollars and as a percentage of income Variables in Tax Policy o Collectability ease of collecting tax and ability to generate revenue o Fiscal neutrality whether or not the system gives preference to a single kind of revenue without good reason o Buoyancy ability to keep up with inflation economic growth o Distributive Effects impact of the tax on different groups in the population o Visibility extent to which the tax is visible acceptable to the general o Horizontal and vertical equity degree to which the tax system is fair public or equitable Internal Revenue Service IRS collects federal taxes Federal Budgetary Process 1 Assumptions and Planning Set goals assumptions made about economic conditions 2 Agency Budget Development prepare estimates from current programs new programs try to get more funding referred to as incrementalism 3 OMG Budget Review Office of Management and Budget presidential agency reviews agency budgets ensure they conform to agenda Negotiates with agencies over amounts 4 Congressional Review committees subcommittees bureaucratic bull they send it to the president He vetoes or signs sometimes he wishes he had the line item veto budgeting tool that allows chief executives to delete specific items from an appropriations bill without rejecting the whole bill 5 Budget Execution and Control money is spent Government Accountability Office GAO makes sure money is spent properly Entitlement program program in which payment obligations are determined by the law that created it not by the budget associated with that program Under entitlement programs any person who meets the eligibility requirements is entitled to receive benefits from the program o Social security for example o Expenses on entitlement programs constantly increasing 2008 Economic Crisis caused by subprime mortgages and risky exotic Wall Street securities Protection Act o Resulted in Dodd Frank Wall Street Reform Act and Consumer American Recovery and Reform Act ARRA injected several hundred billion dollars into the economy to shorten the recession worsened the debt and deficit even more How do we reduce the deficit o Decrease entitlements o Decrease discretionaries o Increase revenues Chapter 8 Healthcare Policy National health insurance A common health care policy in industrialized nations in which the national government provides health insurance to all citizens Also called a single payer system Affordable Care Act Obamacare highly complex and multifaceted politically controversial o Expands Medicaid and Children s Health Insurance Program makes o Mandates minimum level of health insurance for individuals not benefits uniform across states covered through employers o Subsidizes cost of insurance for low to moderate income families o Offers tax credits to businesses
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