Pearson Longman PoliticalScience Interactive

1. Pearson LongmanPoliticalScienceInteractive Shea, Green, and Smith Living Democracy, Second Edition Chapter 17: Making Economic Policy

2. Economic Basics Adam Smith (1723–1790), The Wealth of Nations John Maynard Keynes (1883–1946) Supply-side economists Monetarists

3. The Big Five: Measuring Performance Inflation Unemployment Gross Domestic Product Balance of Trade Budget deficit or surplus

4. Student Profile: Jonathan Upright • As employee of Cingular Wireless, saw his commissions cut in half • Organized workers, and he and his co-workers joined the Communications Workers of America

5. Fiscal Policy: Major Actors • Congress • President • Congressional Budget Office • Council of Economic Advisers • Office of Management and Budget (pre-1974)

6. Revenue: Income Taxes Tax Brackets, 2005

7. Revenue

8. Tax Analysis Arthur Laffer

9. Tax Equity Should the wealthy be taxed at a higher rate—a progressive rate— in order to provide more services for the poor?

10. Intended and Unintended Consequences: Dynamic Modeling Dynamic Modeling Tries to take into account the effects of tax changes by examining how a tax increase in one area impacts revenue in another area How could an increase in cigarette taxes affect revenues from alcohol sales?

11. Expenditures: Social Security • Established in 1935 during the Great Depression • Technically, an independent, off-budget program • In 1970s, started to run a deficit

12. Expenditures: Defense Each Nimitz class aircraft carrier costs about $4.5 billion, with annual operating expenses of $160 million.

13. Expenditures: Income Security The government tries to provide a safety net for the most vulnerable members of society through the following programs Earned-income credit Child tax credit Supplemental Security Income Unemployment compensation Food stamps

14. Health insurance for retired people (beginning at age 65), as well as for disabled young people Health insurance for the economically disadvantaged Expenditures: Medical Care Medicare Medicaid Both programs were established in the mid-1960s as part of Lyndon B. Johnson’s Great Society.

15. Expenditures: Interest and Other Spending • In 2005, interest on the national debt totaled $182 billion, almost 7 percent of the total budget. • Budgets for other programs: • Department of Education: $71 billion • NASA’s budget: $16 billion • National Science Foundation: $5.5 billion • Department of Justice: $21 billion • Department of Transportation: $58 billion • Environmental Protection Agency: $8 billion

16. Long-Term Budget Challenges: The Coming Storm

17. Addressing the Problem • Medicare: should we • raise the age of eligibility? • increase premiums or cap payments? • tie the government’s contribution to a set percentage of GDP? • Medicaid: should we • reduce the share that the federal government pays and increase that of the states? • require co-pays?

18. Addressing the Problem • Social Security: Should we • reduce benefits? • tie future initial benefits to the consumer price index? • reduce cost of living allowances? • raise the retirement age?

19. Pathways of Action: The AARP • 35 million members • Key focus: prescription drug medicine for seniors • Nonpartisan

20. Monetary Policy: The Federal Reserve Board The Federal Reserve System is designed to be politically neutral. Federal Open Market Committee (FOMC) is the Fed’s policymaking arm.

21. The Fed in Action The “Misery Index” is the sum of the unemployment and inflation rates.

22. Pathways Profile: Alan Greenspan “Since I have become a central banker, I have learned to mumble with great incoherence. If I seem unduly clear to you, you must have misunderstood what I said.”

23. Regulatory Policy • Through Roosevelt’s New Deal and Johnson’s Great Society, government regulation became more common and more accepted. • By the 1970s, a move toward deregulation began.

24. Trade Policy and Globalization World Trade Organization meetings have often touched off vehement protest from activists who believe that free trade represses poor nations.

25. Pathways of Change From Around the World:Mercado Global • Founded by Ruth DeGolia in 2002 • Mission: help women artisans market their goods at fair prices