Chapter 18:
Economic Policy
Synopsis
The theories of economic policy provide policymakers with
simplifying assumptions that help them choose between
policies. The advice one economist gives is contradicted
by that of another economist. Both are often contradicted
by the economic reality itself.
Several economic theories are important in explaining how
today's market economies work. Laissez-faire
economics advocates minimal government interference with
the laws of the free market, Laissez-faire policies,
however, have been unsuccessful in solving the problems
associated with the business cycles in market economies.
Keynesian theory holds that government fiscal and
monetary policies can smooth out these business cycles,
thus preventing economic depressions or raging inflation.
Most democratic governments in the twentieth century have
used some Keynesian techniques. Monetarists
question the political utility of Keynesian fiscal
policies. Fiscal spending to boost a depressed economy is
generally untimely, and spending programs, once started,
can rarely be stopped again. The monetarists recommend
that the economy be regulated through monetary policies
that are controlled by the politically independent board
of governors of the Federal Reserve System. Finally,
supply-side economics represents the latest return
to traditional laissez-faire policies based on less
government regulations and taxation.
Policymakers rely on the budget as the tool by which
decisions about policies are made. Since 1921, the
president has been responsible for drafting and
submitting the budget to Congress. The actual preparation
of the budget is supervised by the Office of Management
and Budget (OMB). Since the 1970s, however, Congress has
regained some control over the budget process by creating
new Budget Committees and the Congressional Budget
Office. Congress resorted to more drastic measures in
order to reduce the exploding budget deficit with the
passing of the Gramm-Rudman-Hollings bill in 1985. In
1996, the Congress gave the President the Line Item Veto,
which will allow the President to veto specific
provisions of a bill without vetoing the whole bill.
Tax and spending policies are continually changing to
meet the goals of policymakers. The sweeping tax reform
of 1986 represents the most dramatic change in recent tax
history. Americans however, remain relatively apathetic
about changing the present tax system.
Public concern over the national deficit has prompted
politicians to attempt to reduce public expenditures.
Several factors militate against successful reductions in
many programs. First, incremental budgeting
produces a sort of bureaucratic momentum that continually
pushes federal spending up. Second, most government
spending programs cannot be reduced very easily because
they were enacted by existing laws that no politician in
his or right mind would attempt to modify. Third,
Americans have become accustomed to large domestic
spending projects but are reluctant to have their taxes
increased.
Despite massive government spending on social programs,
the gap in income between rich and poor changed very
little between 1964 and 1989. This highly unequal
distribution of wealth has prompted some critics to argue
that spending and tax policies are dominated by pluralist
politics, which favor well-funded interest groups and the
wealthy. They call for the introduction of majoritarian
principles in taxation and spending policies that would
improve the distribution of income in society. Americans
in general are not willing to expand the use of
progressive taxation policies.
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