Chapter 13: Making Domestic Policy 1

Chapter 13: Making Domestic Policy 1

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.Describe the government’s role in determing 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.Discuss some of the political aspects of taxing and spending.

7.Discuss solutions to the social security dilemma..

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

Chapter outline

I.Taxing and spending

A.Deficits / National debt

B.Gross domestic product

C.Politics of spending

II.The Economy

A.Influence of the president

B.America has a “mixed economy”

C.Economic numbers that hurt the president

1.Unemployment

2. Inflation

D.Presidential support agencies

1.Office of Management and Budget (OMB)

2.Council of Economic Advisors (CEA)

III.The Federal Reserve Board

A.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)

B.Fiscal policy

1.Taxation

2.Spending

a)Social Security

b)Medicare

IV.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)

V.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._____The total value of all goods and services the nation produces.
2._____The balance between what the government takes in by way of taxes and what it spends.
3._____Any burden, monetary or nonmonetary, that some people must bear or think they must bear, if a policy is adopted.
4._____Prepares the president’s budget and tries to ensure the government agencies follow the president’s lead.
5._____A relatively independent agency that manages monetary policy.
6._____Allows people to invest and then draw down what they need each year.
7._____A license to do business.
8._____The program that helps retired persons and was created in 1965.
9._____A term used to describe widely distributed benefits and widely distributed costs.
10._____Political authority conferred by law or public opinion.
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._____Any satisfaction, monetary or non-monetary that people believe they will enjoy if a policy is adopted.
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. / a.Office of Management and Budget (OMB)
b.Federal Reserve
c.cost
d. benefit
e.majoritarian politics
f.deficit
g.fiscal policy
h. gross domestic product
i.client politics
j. legitmacy
k.policy entrepreneurs
l. health savings accounts
m.debt
n.council of economic advisors
o. social security
p. Medicare

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.”The government can guarantee a strong economy.”

______

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.TFThe president has total control of the economy.

______

2.TFWe live in a totally free-market system in America.

______

3.TFThe federal government is prohibited from using deficit financing.

______

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

______

5.TFHigher unemployment rates can help a president.

______

6.TFThere are no limits to what the government can do to make the economy run better.

______

7.TF Politics makes it very hard to cut spending or raise taxes.

______

8.TF States have to compete with each other to attract businesses.

______

9.TF Medicare now helps to pay for prescription drugs.

______

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

______

11.TFMost of our overall recent increase in spending involves payments to individuals.

______

12.TFSocial Security is an example of a contributory program.

______

13.TFNoncontributory programs tend to be very popular.

______

14.TFMedicaid only serves those individuals over sixty-five years of age.

______

15.TFAn employer pays all of an employee’s social security tax.

______

16.TFRaising the retirement age would solve the solvency issues in regard to social security.

______

17.TFNational defense would be an example of majoritarian politics.

______

18.TFSubsidies for farmers would be an example of interest group politics.

______

19.TFGood examples of majoritarian politics are Social Security and Medicare.

______

20.TFMost often policy entrepreneurs are private persons with a talent for leadership.

______

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

______

22.TFIt is never risky to generalize about politics.

______

23.TFThe rich are the only ones who have influence in our process.

______

24.TFRalph Nader is an example of a well-known policy entrepreneur.

______

25.TFIt 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.If someone suggests cutting taxes, ______will denounce this as “helping the rich.”

a. liberals

b. conservatives

c.veterans

d. all of the above

e. none of the above

2.If someone suggests increasing taxes, ______will denounce this as “hurting the producers.”:

a. liberals

b.conservatives

c.veterans

d.all of the above

e.none of the above

3.The three programs that the government spends the most on are:

a. social security, national defense and the postal system

b.social security, national defense and medicare

c.medicaid, medicare and national defense

d. national defense, medicaid and social security.

e.social security, national defense and interest on the national debt.

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.The following is one of five items the author suggests in order for social security to remain solvent.

a. lower taxes

b. increase government spending.

c. reduce benefits for high-earners

d. raise the minimum wage

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.Allowing people to invest health funds and then draaw donw what they need each year is known as a (n) ______.

a.individual retirement account

b.401 K

c.noncontributory program

d.earned income tax credit

e.health savings account

15.Each policy has a ______and each has a ______.

a.cost; hidden tax

b.cost; benefit

c.recipient: beneficiary

d.benefit: policy entrepreneur

e.none of the above

16.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.

17.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.

18.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.

19.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.

20.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

21.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.

22.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.

23.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.

24.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.

25.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.Discuss fiscal policy. Discuss the role of Congress and the Federal Reserve Board in reference to this 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 fiscal 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 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

Resources on the World Wide Web

Economic Policy:

Federal Reserve:

answers

Key Terms Match

1.h

2.f

3.c

4.a

5.b

6.l

7.j

8.o

9.e

10.j

11.i

12.k

13.d

14.m

15.n

16.p

Did You Think That…?

1.To a large degree, the economy is controlled by individual workers, companies and investors.

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.F. Even the government’s economic tools are limited.

7.T.

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.F. Half is paid by the employer.

16.F. It is only one of many items that might help.

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.a

2.b

3.e

4.b

5.e

6.c

7.c

8.e

9.a

10.c

11.a

12.d

13.d

14.e

15.b

16.a

17.e

18.d

19.b

20.b

21.e

22.b

23.c

24.a

25.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.

Chapter 13: Making Domestic Policy 1

Applying What You’ve Learned

research and resources

Suggested Readings

Resources on the World Wide Web