CHAPTER 12



CHAPTER 13

Making Domestic Policy

Chapter focus

This chapter provides an overview of policy development, who can make policy, and the political impact upon our society. Major topics include, but are not limited to, monetary and fiscal policy, government regulation, and policy analysis. After reading and reviewing the material in this chapter, you should be able to do each of the following:

1. Describe what is meant by the political agenda.

2. Explain the difference between monetary and fiscal policy.

3. Explain the difference between budget surpluses, deficits, and the national debt.

4. Discuss how certain economic indicators can hurt the president.

5. Describe the structure and operation of the Federal Reserve System.

6. Explain the theoretical background of both Keynesian and supply-side economics.

7. Discuss some of the political aspects of taxing and spending.

8. Discuss both the need for and rules changes in 1996’s Welfare Reform.

9. Discuss and give examples of government regulation.

10. Discuss how policy decisions are made and list the different types of entities that are involved in the process.

Chapter outline

I. The Political Agenda

A. Examples of criteria in order to get on the agenda

1. A crisis

2. A change in the political mood

B. Coalitions

C. Policy implementation

D. Policy evaluation

II. The Economy

A. Influence of the president

B. America has a “mixed economy”

C. Tools of economic policy

1. Monetary policy

2. Fiscal policy

D. Budget surpluses, deficits, and the national debt

E. Presidential support agencies

1. Office of Management and Budget (OMB)

2. Council of Economic Advisors (CEA)

III. Economic Numbers That Can Hurt the President

A. Rising unemployment

B. Declining gross domestic product (GDP)

C. Inflation

IV. The Federal Reserve Board

A. Manages monetary policy

B. Structure of the Federal Reserve

1. Chairman—appointed to a four year term

2. Seven other appointees—fourteen year terms

3. Twelve member banks

4. Federal Open Market Committee (FOMC)

C. Powers of the Federal Reserve

1. Buying and selling government securities

2. Regulating the amount of money a bank must keep on reserve

3. Changing the interest rate (discount rate)

V. Fiscal Policy

A. Party politics

B. Taxes

1. Liberal taxing philosophy

2. Conservative taxing philosophy

C. Economic theories

1. Keynesian theory

2. Supply-side theory

D. Taxation

E. Spending

1. Largest increase has been in payments to individuals (Social Security, Medicare, etc.)

a) Contributory

b) Noncontributory

2. Welfare reform

VI. Regulations

A. Examples

1. Pollution

2. Interstate commerce

3. Business enterprise

a) Economic regulation

b) Social regulation

B. External diseconomies

VII. Making Policy Decisions

A. Cost-benefit analysis

1. Majoritarian politics

a) 2003 Medicare Bill

b) Modifying Social Security

2. Client politics

a) Farm subsidies

b) Tax shelters

c) Welfare recipients

3. Interest group politics

a) Becoming more common in America (e.g., organized minority groups)

b) Labor unions

4. Entrepreneurial politics

a) Safety standards

b) Economic regulation

c) Policy entrepreneurs (e.g., Ralph Nader)

VIII. What These Political Differences Mean

A. No absolutes in politics

B. Risky to make generalizations

Key terms match

Match the following terms and descriptions.

|1. _____ A list of things on which people think the government |a. monetary policy |

|should act. |b. Federal Reserve |

|2. _____ The balance between what the government takes in by way |c. external diseconomies |

|of taxes and what it spends. |d. Keynesians |

|3. _____ A temporary alliance of political groups designed to |e. majoritarian politics |

|achieve some goal. |f. coalition |

|4. _____ Refers to the availability of money. |g. fiscal policy |

|5. _____ A relatively independent agency that manages monetary |h. political agenda |

|policy. |i. client politics |

|6. _____ Believe that having a government deficit will stimulate |j. regulation |

|the economy and reduce unemployment. |k. policy entrepreneurs |

|7. _____ A license to do business. |l. supply-side economists |

|8. _____ Refers to producing harmful things for which the |m. debt |

|producer does not have to pay. |n. council of economic advisors |

|9. _____ A term used to describe widely distributed benefits and |o. implementation |

|widely distributed costs. |p. Medicaid |

|10. _____ Believe that cutting taxes will stimulate investment | |

|and encourage economic growth. | |

|11. _____ A term used to describe narrowly concentrated benefits | |

|and widely distributed costs. | |

|12. _____ This term describes people who from time to time can | |

|galvanize public and congressional support for a change. | |

|13. _____ Describes putting a policy into effect. | |

|14. _____ Describes the total accumulation of all our annual | |

|deficits. | |

|15. _____ Helps give the president reliable information on how | |

|the economy is working. | |

|16. _____ A health program for poor people of any age. | |

did you think that . . . ?

A number of misconceptions are listed below. You should be able to refute each statement in the space provided, referring to information or argumentation contained in this chapter. Sample answers appear at the end of the Study Guide.

1. “Monetary and fiscal policy pretty much mean the same thing.”

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

2. “The president has vast control over the Federal Reserve Board since he appoints the chairman.”

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

3. “In America, we live in a purely free-market economic system.”

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

4. “There are no clear-cut differences between liberals and conservatives when it comes to taxing and spending policies.”

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

True/false questions

Read each statement carefully. Mark true statements T. If any part of the statement is false, mark it F, and write in the space provided a concise explanation of why the statement is false.

1. T F The president has total control of the economy.

______________________________________________________________________

2. T F We live in a totally free-market system in America.

______________________________________________________________________

3. T F The federal government is prohibited from using deficit financing.

______________________________________________________________________

4. T F The Federal Reserve Board is responsible for trying to influence interest rates and the money supply.

______________________________________________________________________

5. T F Higher unemployment rates can help a president.

______________________________________________________________________

6. T F No matter which party is in power, Washington is reluctant to raise taxes.

______________________________________________________________________

7. T F Only Democrats want to cut taxes.

______________________________________________________________________

8. T F According to Keynes, a government deficit will stimulate the economy.

______________________________________________________________________

9. T F Liberal politicians want the government to spend more to take care of perceived unmet social needs.

______________________________________________________________________

10. T F The total tax bill that Americans pay is more than it is in many other democratic nations.

______________________________________________________________________

11. T F Most of our overall recent increase in spending involves payments to individuals.

______________________________________________________________________

12. T F Social Security is an example of a contributory program.

______________________________________________________________________

13. T F Noncontributory programs tend to be very popular.

______________________________________________________________________

14. T F Medicaid only serves those individuals over sixty-five years of age.

______________________________________________________________________

15. T F Congress can regulate almost all forms of business enterprise.

______________________________________________________________________

16. T F Economic regulation refers to how businesses conduct their business.

______________________________________________________________________

17. T F National defense would be an example of majoritarian politics.

______________________________________________________________________

18. T F Subsidies for farmers would be an example of interest group politics.

______________________________________________________________________

19. T F Many times, regulatory changes are a result of a dramatic crisis.

______________________________________________________________________

20. T F Most often policy entrepreneurs are private persons with a talent for leadership.

______________________________________________________________________

21. T F Sometimes an agency created to carry out an entrepreneurial policy is captured by the firms it set out to regulate.

______________________________________________________________________

22. T F It is never risky to generalize about politics.

______________________________________________________________________

23. T F The rich are the only ones who have influence in our process.

______________________________________________________________________

24. T F Ralph Nader is an example of a well-known policy entrepreneur.

______________________________________________________________________

25. T F It is safe to say that no single group is powerful across all issues.

______________________________________________________________________

Multiple choice questions

Circle the letter of the response that best answers the question or completes the statement.

1. For an item to get on the political agenda these must be a ___________ or a change in the political mood.

a. consensus

b. crisis

c. coalition

d. evaluation

e. implementation

2. After an issue gets on the agenda, various political groups and politicians try to form a:

a. special political party.

b. political machine.

c. policy evaluation process.

d. permanent interest group.

e. coalition.

3. After a new idea is adopted by Congress and signed by the president, the policy must be:

a. reviewed.

b. sent to a conference committee.

c. politicized.

d. implemented.

e. put under judicial review.

4. Economists like to divide the government’s economic tools into two categories:

a. deficits and surpluses.

b. monetary and fiscal policy.

c. surpluses and debts.

d. budgets and taxes.

e. taxing and spending.

5. The president has tried to coordinate a large array of economic policy agencies by using the:

a. Congressional Budget Office.

b. Treasury Department.

c. Federal Reserve Bank.

d. Office of Technology Assessment.

e. Office of Management And Budget.

6. The following is an economic number that can really hurt the president.

a. credit card debt

b. balanced budget

c. unemployment

d. trade surplus

e. budget surplus

7. If the government brings in more money through taxes than it spends, there is a _________.

a. financial clarity.

b. federal impoundment.

c. budget surplus.

d. budget deficit.

e. public debt.

8. The following is an example of a Federal Reserve Board power:

a. printing currency.

b. lowering taxes.

c. raising taxes.

d. deficit spending.

e. buying and selling government securities.

9. When Congress considers lowering or raising taxes, the dominant political issue is:

a. who it helps or hurts.

b. the budget deficit.

c. social security.

d. job creation.

e. interest rates.

10. _______________ believe that having a government deficit will stimulate the economy and reduce unemployment.

a. Monetarists

b. Keynesians

c. Supply-side economists

d. Federal reservists

e. none of the above

11. Conservative politicians tend to want the government to:

a. spend less in order to encourage economic enterprise.

b. spend more to meet unmet social needs.

c. spend more to bolster national defense.

d. spend less only when we have a deficit.

e. spend more but only when there is a balanced budget.

12. There are many points at which the creation of a new program can be blocked. Which of the following is not one of those points?

a. congressional committees

b. presidential veto

c. Supreme Court ruling

d. legislative veto

e. none of the above

13. The Great Depression and _____ marked a great increase in federal spending.

a. World War I

b. the Korean conflict

c. the Vietnam conflict

d. World War II

e. the Spanish-American War

14. Payments to individuals take one of two forms: ___________ and __________.

a. voluntary and involuntary.

b. contributory and noncontributory.

c. subsidies and regulations.

d. economic and social.

e. external and internal.

15. The following are all key aspects of the Personal Responsibility and Work Opportunity Act except for which of the following?

a. No person would receive welfare benefits for more than five years.

b. TANF recipients had to find work within two years.

c. Unmarried mothers under the age of eighteen must live with their parents or be under adult supervision.

d. Each state receives a fixed federal grant and freedom to run it own TANF program.

e. Each state would be immune to most lawsuits.

16. After welfare reform, the number of people getting welfare:

a. dropped dramatically.

b. grew dramatically.

c. did not change.

d. would not be known until the next census.

e. might not ever be known.

17. Among the most politically difficult spending and regulatory decisions the government makes are _____ and _____.

a. technology and ethics.

b. ethics and morals.

c. health and the environment.

d. defense and social services.

e. airport security and housing.

18. Recently Congress passed and the president signed a bill authorizing the Medicare program to:

a. pay for additional social security coverage.

b. pay the cost of prescription drugs.

c. oversee interstate commerce.

d. allow patients to sue HMO’s

e. include all nonresidents.

19. There are two kinds of business regulation: economic and _____.

a. policy driven.

b. social.

c. fiscal.

d. monetary.

e. obligatory.

20. Regulating the amount of air pollutants in the atmosphere would be an example of __________ regulation:

a. economic

b. domestic

c. social

d. international

e. external

21. Majoritarian politics describes:

a. widely distributed benefits and widely distributed costs.

b. narrowly concentrated benefits and widely distributed costs.

c. narrowly concentrated benefits and narrowly concentrated costs.

d. widely distributed benefits and narrowly concentrated costs.

e. equally distributed benefits.

22. Client politics describes:

a. widely distributed benefits and widely distributed costs.

b. equally concentrated benefits and distributed costs.

c. narrowly concentrated benefits and narrowly concentrated costs.

d. widely distributed benefits and narrowly concentrated costs.

e. narrowly concentrated benefits and widely distributed costs.

23. Interest group politics describes:

a. widely distributed benefits and widely distributed costs.

b. narrowly concentrated benefits and widely distributed costs.

c. widely distributed benefits and narrowly concentrated costs.

d. narrowly concentrated benefits and narrowly concentrated costs.

e. equally distributed benefits.

24. Entrepreneurial politics describes:

a. widely distributed benefits and widely distributed costs.

b. widely distributed benefits and narrowly concentrated costs.

c. narrowly concentrated benefits and narrowly concentrated costs.

d. equally distributed benefits.

e. narrowly concentrated benefits and widely distributed costs.

25. Today only _____ workers pay for each retired person in the Social Security System.

a. 42

b. 3.4

c. 8.9

d. 10.1

e. 15

26. Subsidies paid to farmers and dairies are classic examples of:

a. majoritarian politics.

b. interest group politics.

c. entrepreneurial politics.

d. partisan politics.

e. client politics.

27. Members of Congress often dislike interest group politics because it can:

a. give them special access to certain monies.

b. force them to make hard choices.

c. expose conflicts of interest in the executive branch

d. upset the system of checks and balances.

e. place in their hands too much power.

28. Often policy entrepreneurs are:

a. the people with the most money.

b. already well-known in Washington politics.

c. private persons with a talent for leadership.

d. former members of Congress.

e. activists within their respective political party.

29. To try to avoid having an agency “captured” by the client firms it regulates, agencies are often:

a. responsible for a wide variety of firms instead of just one industry.

b. not allowed to correspond with any interest group.

c. not allowed to testify on behalf of any interest group.

d. responsible for just one firm or interest group.

e. restricted in reporting on firms to Congress.

30. On any given issue:

a. the rich always have their way.

b. businesses exert an enormous amount of control.

c. party bosses determine exclusively who wins and who loses.

d. labor unions always have the final say.

e. certain groups may be powerful, but no one group is powerful on all issues.

Essay questions

Practice writing extended answers to the following questions. These test your ability to integrate and express the ideas that you have been studying in this chapter.

1. What can a president do to influence the economy? What economic numbers can hurt a president? Do you believe the president should have more direct authority over the economy? Why or why not?

2. List and discuss several types of government regulation in the marketplace. Do you believe we need more or less regulation of American business? Why or why not?

3. Differentiate between monetary and fiscal policy. Discuss the role of Congress and the Federal Reserve Board in reference to each respective area.

4. List and discuss some of the stated differences in taxing philosophy between conservatives and liberals. Who do you believe should bear the largest portion of the tax burden in America—lower, middle, or upper class Americans? Why?

5. Constitutionally who has more power over the economy: Congress or the President? In reality who do you believe has more power and why?

Applying What You’ve Learned

The previous chapter showed how small a degree of control the president actually has over the economy. If the president cannot directly control both fiscal and monetary policy in America, then why does he make campaign promises in areas such as lowering the national debt, tax reductions, and reducing unemployment? Should presidents stop making such promises in light of the realization that they can’t just snap their fingers and make these things happen? If presidents represent all Americans, then why don’t they have more economic authority? The assignment is to identify ways to strengthen the president’s authority over the U.S. economy.

1. Currently both the Federal Reserve Board and Congress play very large roles in determining both monetary and fiscal policy. How could these roles be better shared with the president? Is this constitutional tinkering? What dangers could this pose to our system of checks and balances?

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

2. Since the Federal Reserve Board is not directly elected by the people, do they constitute an unrepresentative body that greatly affects the lives of Americans? What changes would you suggest in order to make the Federal Reserve more accountable to the people? What are the advantages or disadvantages?

______________________________________________________________________________

______________________________________________________________________________

______________________________________________________________________________

research and resources

Suggested Readings

Friedman, Milton. Monetary History of the United States 1867–1960. Princeton University Press, 1963.

Iwan, Morgan W. Deficit Government: Taxing and Spending in Modern America. National Book Network, 1995.

Jaikaran, Jacques S. Debt Virus. Glenbridge Publishing Ltd., 1992.

Mayer, Thomas. The Political Economy of American Monetary Policy. Cambridge University Press, 1993.

Phillips, Kevin. The Politics of Rich and Poor. New York: Random House, 1990.

Resources on the World Wide Web

Economic Policy:





Federal Reserve:

answers

Key Terms Match

1. h

2. g

3. f

4. a

5. b

6. d

7. j

8. c

9. e

10. l

11. i

12. k

13. o

14. m

15. n

16. p

Did You Think That…?

1. Monetary policy has to do with the money supply and interest rates while fiscal policy deals with taxing and spending.

2. The president may appoint the chairman but has no direct authority over Federal Reserve policy.

3. As the chapter relates, we live in a largely free-market system but not an absolute one (mixed economy).

4. In general, liberal politicians want the government to spend more to take care of unmet social needs. Conservatives want the government to spend less so that individual enterprise is encouraged.

True/False Questions

1. F. The president can only shape the economy up to a point.

2. F. We do not have an absolutely free-market system due to government regulation.

3. F. It is not prohibited as evidenced by our national debt.

4. T

5. F. It is just the opposite.

6. T

7. F. In general, the Republicans tend to be the largest advocates of tax cuts.

8. T

9. T

10. F. It is just the opposite.

11. T

12. T

13. F. They are often unpopular because they mainly go to recipients who do not pay for them.

14. F. It can serve people of any age.

15. T

16. F. This would fall under social regulation.

17. T

18. F. They are examples of client politics.

19. T

20. T

21. T

22. F. There are no absolutes in government; therefore, generalizations are not wise.

23. F. Businesses and party leaders are examples of other groups with influence.

24. T

25. T

Multiple Choice Questions

1. b

2. e

3. d

4. b

5. e

6. c

7. c

8. e

9. a

10. b

11. a

12. d

13. d

14. e

15. b

16. a

17. c

18. b

19. b

20. c

21. a

22. e

23. d

24. b

25. b

26. e

27. b

28. c

29. a

30. e

Applying What You’ve Learned

1. The president’s powers could be enhanced, for example, by giving him a type of veto power over Federal Reserve power. However, the Founding Fathers were clear that all taxing, borrowing, and spending should be placed in the hands of Congress. Ceding more power to the president would be a move toward the type of dictatorship the Founders worried about. It probably would be constitutional tinkering to move more power in these areas to the president. From an accountability standpoint, the people already hold the president accountable for the state of the nation’s economy—regardless of his actual power.

2. Some people expect that in a representative democracy most government officials should be elected by the people. However, the chief advantages of an appointment process are that it removes election year politics as well as serving to largely insulate those in authority from public opinion. This frees up our officials to make decisions apart from election promises. Monetary policy affects the lives of all Americans and is therefore extremely important. The Fed is only “unrepresentative” in the sense that members are not directly chosen by the people. Fed members could conceivably be directly elected; however, we must remember that the current system was chosen for a reason. In short, we appoint federal judges, ambassadors, and Federal Reserve chairmen in order to try and select the best people for the job—not the most popular. Popularity doesn’t always equate to being knowledgeable and effective.

................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download