Chapter16DomesticPolicy.pptx
Chapter 16 Domestic Policy
PL-102-OL1
Instructor Walter Pearn
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Chapter Objectives
Explain the concept of public policy.
Discuss examples of public policy in action.
Describe the different types of goods in a society.
Identify key public policy domains in the United States.
Compare the different forms of policy and the way they transfer goods within a society.
Identify the key domestic arenas of public policy.
Describe the major social safety net programs.
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Chapter Objectives
List the key agencies responsible for promoting and regulating U.S. business and industry.
Identify types of policymakers in different issue areas.
Describe the public policy process.
Discuss economic theories that shape U.S. economic policy.
Explain how the government uses fiscal policy tools to maintain a healthy economy.
Analyze the taxing and spending decisions made by Congress and the president.
Discuss the role of the Federal Reserve Board in monetary policy.
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PUBLIC POLICY DEFINED
Public policy is an attempt by a government to address a public issue by instituting laws, regulations, decisions, or actions pertinent to the problem at hand.
Numerous issues can be addressed by public policy including crime, education, foreign policy, health, and social welfare.
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Examples of public policy
Minimum wage laws
Public assistance programs
Affordable Care Act.
The definition of public policy is the laws, priorities and governmental actions that reflect the attitudes and rules for the public.
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Types of Public Goods
There are four different types of goods in economics which can be classified based on excludability and rivalrousness:
Private goods
Public goods
Common resources
Club goods
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Private goods
Private Goods are products that are excludable and rival.
They have to be purchased before they can be consumed.
Thus, anyone who cannot afford private goods is excluded from their consumption.
Likewise, the consumption of private goods by an individual prevents other individuals from consuming the same goods.
Examples of private goods include ice cream, cheese, houses, cars, etc.
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Public Goods
Public goods describe products that are non-excludable and non-rival.
That means no one can be prevented from consuming them, and individuals can use them without reducing their availability to other individuals.
Examples of public goods include fresh air, knowledge, national defense, street lighting, etc.
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Common Resources
Common resources are defined as products or resources that are non-excludable but rival.
That means virtually anyone can use them. However, if one individual consumes common resources, their availability to other individuals is reduced.
The combination of those two characteristics often results in an overuse of common resources.
Examples of common resources include freshwater, fish, timber, pasture, etc.
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Club Goods
Club goods are products that are excludable but non-rival.
Thus, individuals can be prevented from consuming them, but their consumption does not reduce their availability to other individuals.
Club goods are sometimes also referred to as artificially scarce resources.
They are often provided by natural monopolies.
Examples of club goods include cable television, cinemas, wireless internet, toll roads, etc.
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Free-market economics
believe that the market forces of supply and demand, working without any government involvement, are the most effective way for markets to operate.
One of the basic principles of free-market economics is that for just about any good that can be privatized, the most efficient means for exchange is the marketplace.
A well-functioning market will allow producers of goods to come together with consumers of goods to negotiate a trade.
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Libertarians
Some people in the United States argue that the self-monitoring and self-regulating incentives provided by the existence of private goods mean that sound public policy requires very little government action.
Libertarians, believe government almost always operates less efficiently than the private sector (the segment of the economy run for profit and not under government control), and that government actions should therefore be kept to a minimum.
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Classic Types of Policy
One policy category, known as distributive policy, tends to collect payments or resources from many but concentrates direct benefits on relatively few.
Highways are often developed through distributive policy.
Distributive policy is also common when society feels there is a social benefit to individuals obtaining private goods such as higher education that offer long-term benefits, but the upfront cost may be too high for the average citizen.
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Classic Types of Policy
Regulatory policy features the opposite arrangement, with concentrated costs and diffuse benefits.
A relatively small number of groups or individuals bear the costs of regulatory policy, but its benefits are expected to be distributed broadly across society.
As you might imagine, regulatory policy is most effective for controlling or protecting public or common resources.
Among the best-known examples are policies designed to protect public health and safety, and the environment.
These regulatory policies prevent manufacturers or businesses from maximizing their profits by excessively polluting the air or water, selling products they know to be harmful, or compromising the health of their employees during production.
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Classic Types of Policy
Redistributive policy, so named because it redistributes resources in society from one group to another.
Most redistributive policies are intended to have a sort of “Robin Hood” effect; their goal is to transfer income and wealth from one group to another such that everyone enjoys at least a minimal standard of living.
Typically, the wealthy and middle class pay into the federal tax base, which then funds need-based programs that support low-income individuals and families.
A few examples of redistributive policies are Head Start (education), Medicaid (health care), Temporary Assistance for Needy Families (TANF, income support), and food programs like the Supplementary Nutritional Aid Program (SNAP).
The government also uses redistribution to incentivize specific behaviors or aid small groups of people. Pell grants to encourage college attendance and tax credits to encourage home ownership are other examples of redistribution.
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Three Major Domestic Policy Areas
Social welfare
Science, technology and Education
Business stimulus and regulation.
Social welfare programs like Social Security, Medicaid, and Medicare form a safety net for vulnerable populations.
Science, technology, and education policies have the goal of securing the United States’ competitive advantages.
Business stimulus and regulation policies must balance business’ needs for an economic edge with consumers’ need for protection from unfair or unsafe practices.
The United States spends billions of dollars on these programs.
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Types of Policy Makers
Two groups most engaged in making policy are policy advocates and policy analysts.
Policy advocates are people who feel strongly enough about something to work toward changing public policy to fix it.
Policy analysts, on the other hand, aim for impartiality.
Their role is to assess potential policies and predict their outcomes.
Although they are in theory unbiased, their findings often reflect specific political leanings.
The public policy process has four major phases: identifying the problem, setting the agenda, implementing the policy, and evaluating the results.
The process is a cycle, because the evaluation stage should feed back into the earlier stages, informing future decisions about the policy.
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Identifying the problem
First step in the public policy process is to outline the problem.
This involves not only recognizing that an issue exists, but also studying the problem and its causes in detail.
This stage involves determining how aware the public is of the issue, deciding who will participate in fixing it, and considering what means are available to accomplish a solution.
Answers to such questions often help policy makers gauge which policy changes, if any, are needed to address the identified problem.
The agenda — which problems are addressed — can be set by the public, special interest groups, or government officials, among others.
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Setting the agenda
After identifying and studying the problem, a new public policy may be formulated or developed.
This step is typically marked by discussion and debate between government officials, interest groups, and individual citizens to identify potential obstacles, to suggest alternative solutions, and to set clear goals and list the steps that need to be taken to achieve them.
This part of the process can be difficult, and often compromises will be required before the policy can be written.
Once the policy is developed, the proper authorities must agree to it; a weaker policy may be more likely to pass, where a stronger one that deals with the problem more directly might not have enough support to gain approval.
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Implementing the policy
A new policy must be put into effect, which typically requires determining which organizations or agencies will be responsible for carrying it out.
This is the third step of the public policy process, and one that can be difficult if the people who are tasked with carrying out the policy are not committed to complying with it.
During the policy development step, compromises may have been made to get the policy passed that those who are ultimately required to help carry it out do not agree with; as such, they are unlikely to enforce it effectively.
Clear communication and coordination, as well as sufficient funding, are also needed to make this step a success.
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Evaluating the results
The final stage in the public policy process, known as evaluation, is typically ongoing.
This step usually involves a study of how effective the new policy has been in addressing the original problem, which often leads to additional public policy changes.
It also includes reviewing funds and resources available to ensure that the policy can be maintained.
Historically, this step has not always been treated as very important, but policy makers are increasingly finding ways to make sure that the tools needed for evaluation are included in each step of the public policy process.
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Theories of Economic Policy
Laissez-faire roughly translates as "to leave alone," and it means that government should not interfere in the economy.
This theory favors low taxes and free trade, and it strongly holds that the market is self-adjusting — whatever happens will be corrected over time without the help of the government.
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Theories of Economic Policy
Keynesian economic theory argues that government should manipulate the economy to reverse the periodic downturns that take place in the market.
John Maynard Keynes, an English economist argues economic depressions are due to a lack of consumer demand.
This created excess inventories of goods that forced business to cut production and lay off workers, which led to fewer consumers and even lower demand.
The solution was to increase demand by increasing government spending and cutting taxes.
This fiscal policy, as it became known, left people with more money after taxes and basic obligations to use for goods and services.
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Theories of Economic Policy
Monetarism
In the late 1970s and early 1980s, Keynesian economics fell into disrepute because it did not offer a solution for dealing with unemployment and inflation at the same time.
To monetarists, inflation, unemployment, and stagnation were caused by policies that adversely affected an otherwise stable economy.
Milton Friedman, argued that the best way to create a healthy economy is to control the supply of money.
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Theories of Economic Policy
Supply-side economics
Another economic problem of the late 1970s was exploding budget deficits.
Because the budget is part of fiscal policy, not monetary policy, monetarism did not speak to this problem directly.
Another group, called supply-side economists, offered the surprising suggestion that government could raise more money by cutting taxes.
Their argument was fairly straightforward: High taxes were limiting national productivity, so lowering taxes would stimulate economic growth and eventually produce more revenue.
The Reagan administration accepted this approach, so much so that supply-side economics became Reaganomics.
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MANDATORY SPENDING
Mandatory spending is the larger, consisting of about $2.5 trillion of the projected 2017 budget, or roughly 59 percent of all federal expenditures.
The overwhelming portion of mandatory spending is earmarked for entitlement programs guaranteed to those who meet certain qualifications, usually based on age, income, or disability.
These programs, discussed above, include Medicare and Medicaid, Social Security, and major income security programs such as unemployment insurance and SNAP.
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DISCRETIONARY SPENDING
Discretionary spending Congress must pass legislation to authorize money to be spent each year.
About 50 percent of the approximately $1.2 trillion set aside for discretionary spending each year pays for most of the operations of government, including employee salaries and the maintenance of federal buildings.
It also covers science and technology spending, foreign affairs initiatives, education spending, federally provided transportation costs, and many of the redistributive benefits most people in the United States have come to take for granted.
The other half of discretionary spending—and the second-largest component of the total budget—is devoted to the military. (Only Social Security is larger.) Defense spending is used to maintain the U.S. military presence at home and abroad, procure and develop new weapons, and cover the cost of any wars or other military engagements in which the United States is currently engaged.
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Debt/Deficit
Deficit—the amount by which expenditures are greater than revenues—by more than half.
However, the amount of money the U.S. government needed to borrow to pay its bills in 2016 was still in excess of $400 billion.
Debt—the amount of money the government owes its creditors—at the end of 2015, according to the Department of the Treasury.
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TAX POLICY
All governments must raise revenue in order to operate.
The most common way is by applying some sort of tax on residents (or on their behaviors) in exchange for the benefits the government provides.
As necessary as taxes are, however, they are not without potential downfalls.
First, the more money the government collects to cover its costs, the less residents are left with to spend and invest.
Second, attempts to raise revenues through taxation may alter the behavior of residents in ways that are counterproductive to the state and the broader economy.
Excessively taxing necessary and desirable behaviors like consumption (with a sales tax) or investment (with a capital gains tax) will discourage citizens from engaging in them, potentially slowing economic growth.
The goal of tax policy, then, is to determine the most effective way of meeting the nation’s revenue obligations without harming other public policy goals.
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Progressive taxes
Progressive taxes systems that increase the effective tax rate as the taxpayer’s income increases.
This policy leaves those most likely to spend their money with more money to spend.
For example, in 2015, U.S. taxpayers paid a 10 percent tax rate on the first $18,450 of income, but 15 percent on the next $56,450 (some income is excluded).
The rate continues to rise, to up to 39.6 percent on any taxable income over $464,850.
These brackets are somewhat distorted by the range of tax credits, deductions, and incentives the government offers, but the net effect is that the top income earners pay a greater portion of the overall income tax burden than do those at the lowest tax brackets.
According to the Pew Research Center, based on tax returns in 2014, 2.7 percent of filers made more than $250,000. Those 2.7 percent of filers paid 52 percent of the income tax paid.
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Regressive Tax
Supply-siders, on the other hand, prefer regressive tax systems, which lower the overall rate as individuals make more money.
This does not automatically mean the wealthy pay less than the poor, simply that the percentage of their income they pay in taxes will be lower.
Consider, for example, the use of excise taxes on specific goods or services as a source of revenue.
Sometimes called “sin taxes” because they tend to be applied to goods like alcohol, tobacco, and gasoline, excise taxes have a regressive quality, since the amount of the good purchased by the consumer, and thus the tax paid, does not increase at the same rate as income.
A person who makes $250,000 per year is likely to purchase more gasoline than a person who makes $50,000 per year.
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THE FEDERAL RESERVE BOARD AND INTEREST RATES
Financial panics arise when too many people, worried about the solvency of their investments, try to withdraw their money at the same time. Such panics plagued U.S. banks until 1913, when Congress enacted the Federal Reserve Act.
The act established the Federal Reserve System, also known as the Fed, as the central bank of the United States.
The Fed’s three original goals to promote were maximum employment, stable prices, and moderate long-term interest rates.
All of these goals bring stability.
The Fed’s role is now broader and includes influencing monetary policy (the means by which the nation controls the size and growth of the money supply), supervising and regulating banks, and providing them with financial services like loans.
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THE END
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