Economic Policy

 the biblical and constitutional parameters for the particular policy  focus being discussed in this module. In other words, you must discuss  the “May” portion of the “May-Can-Should” approach to policy analysis  and implementation.  Remember to provide thoughts on what government should or should not do  from a biblical and constitutional perspective. Also discuss what other  groups, individuals, and organizations (possibly including state and  local government) should be doing within society to address the policy  issues discussed in this module. 

PADM 550

Discussion: Economic Policy Assignment Instructions

Overview

The purpose of this Discussion is to begin to analyze and formulate the “May” of governmental authority to enact policy from a Biblical worldview and Constitutional foundations.

Instructions

For this Discussion, you will interact in a free-flowing discussion of the biblical and constitutional parameters for the policy focus of federal economic or budgetary policy. The thread should be short and succinct (3-5 sentences at most per topic) and should encourage greater interaction with your classmates. Thus, you are to post according to the following guidelines:

·
Biblical: One paragraph (3-5 sentences) applying the Biblical principles (section one of the Synthesis Paper Assignment) such as natural law, inalienable rights, sphere sovereignty/covenant, the Sin/Crime distinction and the institutional separation of Church and State to a specific policy. Please remember that simply citing scripture does not constitute a Biblical worldview analysis. You must apply the Biblical principles as discussed in the course.

·
Constitutional: One paragraph (3-5 sentences) referencing the enumerated powers, Articles and Amendments from the Constitution which are relevant to the assigned policy area.
NOTE: Avoid the use of the General Welfare Clause as a justification for the legislation unless you can definitively demonstrate that the entire U.S. population will benefit from the legislation, or provide significant Supreme Court rulings to support the use of the clause.

·
There must be two separate paragraphs. Both paragraphs must focus on the general policy area for the assigned module. For instance, when the course module focuses on criminal justice, the Biblical post must focus on what the Bible says about what government may or may not do in fighting crime. Likewise, the Constitutional post must focus on what the Constitution says about what government may or may not do in fighting crime. Specific examples should be used and cited.

You must use the following sources:

1. the Bible,

2. relevant presentations and articles from Module 1: Week 1 – Module 2: Week 2 which focus on biblical and constitutional ideas, including the “Biblical Principles of Government” article,

3. the required reading from the assigned module, and

4. any additional relevant sources that you would like to use.

CHGAPER 7

Page 206 processes. As the year 2018 came to a close, we saw yet another government shutdown that started on December 22 and continued well into January, becoming the longest shutdown in American history. Congress and the president were unable to come to an agreement on a budget or continuing resolution to keep the government open. As is often the case with government shutdowns, this one had to do with strong disagreements between the branches and especially between the two major political parties. Over the years, and most notably in recent history, such gridlock and partisanship have been increasingly common in federal budgetary decisions, and they lead to government shutdowns or to the use of continuing resolutions and omnibus legislation to fund government operations at existing levels without going through normal congressional hearings and debate over federal spending priorities. In this case, though, there was a changing political dynamic that also entered the picture. The results of the 2018 midterm elections saw the Democrats capturing the House of Representatives by a historically wide margin, thus shifting the balance of power within Washington.

A meeting prior to the shutdown between President Donald Trump, Senate Minority Leader Chuck Schumer, and incoming House Speaker Nancy Pelosi showcased the changing dynamics. In an extraordinary session that was open to the press, these leaders spoke bluntly of their budgetary disagreements, particularly as they related to funding of a wall on the U.S. border with Mexico. The president had been seeking funding for the wall since the beginning of his term, even though during the campaign he often said that Mexico would pay for it. During the Oval Office meeting in December, the Democratic leaders held the line that such funding would not be forthcoming and the votes were not there to support it in either the House or the Senate. Nonetheless, President Trump continued to argue that the wall was critical to national border security and needed to be part of any budget agreement that he was prepared to sign. In yet another extraordinary situation, the president stated he would be “proud” to shut down the government over border wall funding, and thus take “blame” for the shutdown.

The government shutdown came at a particularly bad time for the U.S. economy and the Trump administration. The month of December had seen a highly volatile stock market that included at one point a nearly 12 percent drop in the market’s valuation.1 The Federal Reserve Board continued its increases in interest rates in an attempt to curb inflation. In addition, there continued to be questions regarding the various trade wars that the Trump administration had initiated, particularly with China and Canada. Many farmers suffered as a result of these trade policies, and in response the administration authorized an additional $12 billion in aid to offset the losses caused by its trade actions; the shutdown, however, kept at least some of that money from reaching the farmers.2 These events, along with uncertain turnover within the administration, increased uncertainty over the economy, and it appeared that the market responded to that uncertainty even though it later regained a good portion of its loss in the first two months of 2019. This breakdown in political dialogue that resulted in the late 2018–early 2019 shutdown was somewhat typical. Yet as the uncertainty of governmental operations dragged on, the nation and the economy suffered, illustrating once again the serious consequences of such partisan battles. In particular, the thorough debates and discussions that we expect over federal budget and policy priorities do not happen as they should. As a result, work doesn’t get done, time runs out, and Congress and the president then turn to omnibus legislation, often following threats of, or actual, federal government shutdowns. Yet these kinds of short-term fixes are no substitute for the critical debates over national funding needs and priorities that help to build legislative consensus and public support over governmental operations. Political legitimacy itself is harmed in the process. These concerns highlight the ongoing discussions regarding the size of government and government spending that often are brought up in the context of the federal deficit and national debt. Deficits occur when the amount expended by the government is greater than the revenue raised through taxes and other avenues. Almost everyone understands government spending on programs and projects. These expenditures can take many forms and may include items such as dollars to build infrastructure such as roads and bridges, military weapons contracts, or Pell Grants for low-income students attending college.

In deficit policy, one way to reduce the deficit is by decreasing such spending on government programs. On the other hand, government can address deficits by turning to the revenue side of the equation. For example, an increase in tax revenue or implementation of a user fee for entry into a national park might be such a choice. From a deficit reduction perspective, both reducing government spending and increasing revenue are economically neutral. In the former case, there is less expenditure, and in the other, the government generates more revenue. Both are perfectly acceptable economic tools for deficit reduction. Yet, politically, these choices are quite distinct. Conservatives have traditionally been much more interested in cutting spending than raising revenue, but frankly there has not been much concern given to the deficit in recent years where we have seen continued spending and tax policies that have decreased revenue.

The next election is never too far off, and the major parties are always reluctant to anger their base supporters. A sitting president never wants to see a suffering economy going into an election season. Presidents are often held accountable for economic hardships of the nation, yet they rarely receive any credit during economic boom times. The reality is that the economy is extremely complex, and presidential policies can only have a limited effect on it. Nevertheless, politicians will try to claim credit or avoid blame. As noted in the case above, politicians also use or do not use certain words (political spin or issue framing) in describing the economy. For example, the term recession is avoided like the plague and is sometimes referred to as the “R word” because of the potential implications that such an admission may carry.

The U.S. economy had been slowly recovering since President Obama’s election in 2008 by almost any of the traditional measures used. Yet, listening to the Republican candidates for president in 2016, you would think the nation had been in the midst of a depression. Nonetheless, the slow and uneven economic recovery had a big impact on the nation. It led to considerable anxiety, even anger, within much of the American public, which in turn likely contributed to the success of Donald Trump’s campaign in that year and, to a lesser extent, to Bernie Sanders’s surprising successes throughout 2016 in the contest for the Democratic Party nomination. President Trump’s proposed policies, particularly a large tax cut, were intended to address that perceived slowness of the economic recovery. It is clear from both the 2016 campaign and previous elections that the economy will continue to be a major issue in elections in the future as well.

Page 207 These debates will likely focus on several critical issues. The strength of the economy, and especially the economic status of the electorate, is certain to be one. The appropriate role of government in these situations is another. Democrats may well ask about the extent to which the much discussed Republican tax cuts enacted in late 2017 improved the economy. Perhaps more substantive are the longer-term issues associated with an increasing deficit and federal debt. While deficits decreased during the Obama administration, they have been increasing again since 2016. The fiscal year 2019 deficit was estimated at $896 billion, and Congressional Budget Office (CBO) projections show continued increases given current scenarios, with the deficit going over $1 trillion by 2029.3

Entitlement spending continues to eat up an increasing portion of the entire budget, and certain programs such as Medicare and Social Security in particular face dire financial straits in the future attributable to increasing demands by the very large baby boom generation that has begun to retire and collect benefits.4 Infrastructure funding is insufficient for the needs of the nation; emergency spending continues to be necessary, as the natural disasters associated with storms, flooding, and tornadoes over the past few years showed convincingly; and billions continue to be spent. It appears that the nation will be “in the red” for a long time to come. Not surprisingly, the parties remain quite far apart in terms of how to address the deficit.

The economic health of the nation and more specific concerns such as the federal deficit are highly dynamic, and they can change dramatically in a short period of time. For example, deficit projections can easily change because they are based on a series of assumptions that may not hold over time. Moreover, the projected deficits become less reliable as one begins to extend the forecasts out two, five, or even ten years. The CBO does provide such projections, however. As noted above, the United States saw an estimated $896 billion deficit in 2019 and can expect continued deficits in the coming years. Yet these budget projections are not necessarily reliable. As we discussed in chapter 6, long-term forecasting of this kind can be accurate only to the extent that the initial assumptions continue to be reasonable. What might change to make them unreasonable? For one thing, economic growth may be less than projected, which would lead to less revenue coming into the Treasury. For another, new laws could be enacted that would require more government spending, a decrease in taxes, or both. Or natural disasters such as a major hurricane or forest fire might require the federal government to spend a great deal more money to assist victims and reconstruct damaged areas. Or a prolonged recession and a change in political leadership may dictate particular economic policies. Any one of these scenarios could throw off future deficit (or surplus) projections.

This chapter explores how economic policy attempts to address such issues as the deficit and other goals of economic policy. It assesses economic policy in the United States through a broad review of the powers of government to influence the economy, including the role of the budget. The chapter concentrates on the major goals that policymakers attempt to promote while coping with the inevitable value conflicts and policy choices. The tools and approaches of policy analysis are as appropriate to assessing economic policy as they are to the other policy areas covered in the chapters that follow.

Background page 208

Managing national deficits and debt is only one of the economic and budgetary tasks to which the federal government must attend on a continuous basis. For much of the latter part of the twentieth century, the federal deficit dominated discussions regarding economic policy, and it clearly had major impacts on the nation’s capacity to support other policy actions. Indeed, massive tax cuts at the beginning of President Ronald Reagan’s administration in 1981 and the subsequent decline in government revenues greatly constrained spending by the U.S. Congress across a range of public programs. In addition, the U.S. national debt soared during the 1980s, and continues to do so.

Economic policy is critical to all other government functions, but most people probably do not recognize it as readily as they do other substantive policy areas such as the environment, education, health care, or welfare. One reason is that the general public does not connect actions such as tax cuts with attempts to influence economic growth or unemployment. In addition, so much attention is given to the Federal Reserve Board’s monetary policy and its impact on the economy that the public tends to forget that the government’s fiscal policies—its taxing and spending decisions—also have major impacts on the economy. A cut in tax rates or a decision to spend more money on highway construction—both forms of fiscal policy—can have significant effects on the nation’s economy. It is generally only during extremely difficult economic times that the population pays much attention to government activities as they relate to economic policy. For example, in 2008, as the nation’s economy continued in a recession, interest in tax rebates, the role of the government in the home mortgage crisis, and other economic policy issues became more salient. Continued disagreements regarding the Affordable Care Act led to an impasse in the federal budget process, which ultimately led to a government shutdown in 2013. And in 2017, Congress passed, and President Trump signed, a large tax cut bill, which became front-page news.

Economic policymaking is crucial to almost everything the government does. In a narrow sense, economic policy is the development of programs and policies that are intended to affect economic conditions in the nation, such as reducing unemployment or increasing economic growth. Public policy students should be aware, however, that the development and implementation of other public policies also have substantial effects on the economy and subsequently on the economic policies that the government pursues. For example, conservatives argue that too much government regulation to protect the environment retards economic growth. Because one of government’s major economic goals is to encourage such growth, conflict between the two policy goals is likely. For this reason, as well as others, environmentalists emphasize the idea of sustainable development, which they believe can help reconcile economic and environmental goals that may be at odds (K. Portney 2013).

Since the 1980s, the United States has generally been burdened by large federal deficits. As noted, the CBO projected a deficit of $896 billion for 2019, meaning that the government spent $896 billion more than it brought into the Treasury during the 2019 fiscal year. Economists often debate the potential impacts of deficits, and sometimes politicians will make choices knowing that little money is available. But in recent history, there seems to have been little done around the deficit issue. The tax cuts of 2017 ushered in greater deficits that tended to be ignored. There were some discussions that the increasing deficits would provide Republicans with the excuse needed to cut entitlement programs such as Medicare and Medicaid, but the 2018 elections that shifted the House to Democratic control will likely halt such talk. A strong economy can often address such deficit concerns. And while most traditional measures showed the economy improving during the Obama administration, there continued to be a sense of unease regarding the recovery and its impact, particularly for those on the lower rungs of the economic ladder.

To achieve its economic goals, the government uses fiscal policy—the sum of all taxation and spending policies—as well as the monetary policy tools of the Federal Reserve Board (the Fed, as it is called) to influence the U.S. economy. It does so with varying degrees of success. In addition, government regulation of business has become prevalent since the Great Depression of the 1930s. Business regulation also increased in the 1960s and 1970s, as citizens demanded more government assurances that health, safety, and the environment would be protected. These regulations have major effects on the budget and economic goals of the United States. The looming deficits in the late twentieth century worried public officials and introduced another major goal for them to consider as they developed economic policy.

When the traditional indicators of economic growth suggested a healthy economy during the 1990s, policymakers were eager to find ways to maintain that strength. With the economic downturn since 2007 and the slow recovery, policymakers were just as concerned with making policy choices that could return the nation to economic good times, particularly with the consideration of tax cuts and government spending to stimulate economic growth. Both options have a significant impact on the size of the projected deficit over the next several years and the extent to which this deficit is reduced or increased.

Goals of Economic Policy

Policymakers try to promote various goals and objectives in relation to economic policy. Government officials in Congress, the White House, and the Treasury Department, and those who sit on the independent Federal Reserve Board, have a number of tools to use in pursuing these goals. What is taking place at the federal level is paralleled in states and localities, as their public officials attempt to promote certain economic goals, such as the growth of local and regional businesses. State and local governments also regulate business practices related to health, safety, the environment, and consumer protection, much as the federal government does. Recent concerns regarding listeria contamination of frozen vegetables remind us of the role that government plays in ensuring safety for certain products, including medications. Yet such regulation may impose costs on businesses, influence economic competition, and affect a range of other economic values. Yet the major economic goals that government attempts to promote are nonetheless fairly constant. They are economic growth, low levels of unemployment, low levels of inflation, a positive balance of trade, and management of deficits and debt.

Economic Growth

Economic growth means an increase in the production of goods and services each year, and it is expressed in terms of a rising gross domestic product (GDP). Such growth usually means that, on average, people’s incomes increase from year to year. Many benefits flow from economic growth. First, a strong economy is likely to add to the government’s tax revenues. The last time the government had budget surpluses was in the late 1990s and early 2000s, and it was largely due to strong economic growth that generated increased tax revenues. A low rate of economic growth can be a sign of an impending recession, which is generally defined as negative growth over two or more consecutive quarters. Like the federal government, many state governments benefited from economic growth for years and enjoyed budget surpluses. We subsequently saw between 2007 and 2011 economic slowdowns in the states and declining tax revenues, prompting budget cuts in many programs, including higher education.

Second, economic growth may make redistributive programs palatable because people are more likely to accept policies that redirect some of their money to others if they have experienced an increase in their own wealth. Economic growth also allows more people to receive benefits or increases in existing benefits from government programs. For a simple explanation, imagine the government is dealing with four areas of expenditures in a given year. If in the following year the economy grows, the budget pie becomes larger. From a budgeting perspective, this means that each of the four areas also can become larger. But if there is little or no economic growth, in order for one program to gain, it must take from one or more of the other three programs, which will likely cause political conflict.

Percent changes in the GDP over the past twenty years have ranged from a low of −2.0 (2009) to a high of 6.7 (2005). The rate of growth since 2010 has remained somewhat consistent at 3.5 to 5.4 percent per year in current dollars—that is, unadjusted for inflation.5 Vigorous economic growth and the resulting tax revenues, while obviously welcome news, also send up warning flags. If the economy grows too fast, it could lead to damaging levels of inflation, which the government seeks to avoid. Theoretically, high levels of growth cause wages to go up; and, if people have more money, they can spend more on houses, cars, and other goods. Higher prices usually follow strong consumer demand, particularly for products or services in scarce supply. A high level of economic growth may lead to a budget surplus, at which point government needs to make decisions regarding how to deal with it. Should spending be increased? Should taxes be cut? Should surplus funds be used instead to reduce the federal debt? Or perhaps we need some combination of such policy decisions. On the other hand, low levels of growth can contribute to a budget deficit, which raises different questions on how to address the budget shortfall. We turn to these policy challenges in the focused discussion at the end of the chapter.

Low Levels of Unemployment PAE211

Low unemployment, or full employment, has obvious benefits to the economy as well as to individuals. In the United States, jobs and people’s ability to help themselves are regarded as better alternatives to government social programs to assist the poor. Americans are generally more comfortable than citizens of many other nations in helping individuals find jobs and use their abilities to improve their standard of living than they are providing public assistance; therefore, Americans have chosen low levels of unemployment as a policy goal.

Unemployment not only harms the people without jobs but also has two deleterious effects on the economy and the government’s budget. First, the higher the number of people who are unemployed, the lower the number of people who are paying income or Social Security taxes, and that means less revenue is coming into the Treasury to pay for government programs. Second, the unemployed may be eligible for a number of government programs geared toward people with low incomes, such as Medicaid, food stamps, or welfare payments. So the government needs to pay out more money when unemployment levels rise. Most of these programs are entitlements, meaning that the government is required to pay all those who are eligible. If this number is higher than expected, budget estimates will be thrown off. For most of our recent history, the United States has succeeded in keeping unemployment levels at a reasonable rate. Unemployment in the United States stayed between 4 and 6 percent between 1997 and 2008, but it increased to over 9 percent in 2009 and continued at these higher rates for a few years before showing a continuous decline since 2011, getting as low as 3.7 percent in late 2018 before rising to 4.0 percent in early 2019.6 These rates, of course, can vary greatly from state to state and city to city. When unemployment rates are very low, businesses may find it difficult to hire qualified employees. For a recent college graduate, that is good news; jobs are plentiful, and opportunities abound. But low unemployment levels can be problematic for local or state economies because businesses cannot expand without an available labor supply, and that constrains economic development. Businesses may be forced to offer generous incentives to attract and keep their most valued employees. In turn, the businesses may demand that local and state policymakers reduce their tax burdens or provide some other financial benefits. It is probably safe to say, though, that policymakers very much prefer a situation of unemployment being too low compared to being too high.

Although the overall unemployment rate has been low in recent years, the rate is not distributed evenly across the population. There are often geographic, ethnic, and age differentiations in these unemployment data. The Bureau of Labor Statistics compiles these kinds of data for the Labor Department. See the box “Steps to Analysis: Employment and Unemployment Statistics,” where you can explore variations in unemployment statistics by demographics and geographic location, particularly differences among the states. Another aspect of employment that influences public policy is the changing character of jobs in the U.S. economy and in other advanced, industrialized nations. During most of the twentieth century, many of the best jobs for those without a college education were in manufacturing, but a shift from this traditional sector to the service economy has occurred, and, in general, jobs in the service sector do not pay as much as factory jobs. Workers at fast-food restaurants or sales personnel in retail stores may earn the minimum wage or just a little more. Many workers who had jobs that paid quite well, often supported by unions, now see fewer positions of this kind, as competition from abroad and greater efficiencies in production have reduced the need for skilled labor. Some of these workers have been forced to move to the service sector to find employment.

Low Levels of Inflation PAGE 214

A simple definition of inflation is an increase in the costs of goods and services. Inflation is an inevitable part of the U.S. economy, but policymakers try to keep it under control—that is, no more than about 3 percent a year. If wages are increasing at the same rate, the rising prices of goods and services carry little significance to most people. They would be of greater concern, understandably, for those on fixed incomes. If inflation continues and grows worse, however, it eventually affects all citizens, which is probably why government policymakers often seem more concerned with inflation than unemployment. To demonstrate this tendency, one has only to check the various government responses and political rhetoric that have occurred as gasoline prices rise. In some cases, state policymakers proposed suspending their state gasoline taxes, and even members of Congress suggested that the federal government partially suspend its excise taxes. These actions were in direct response to the public outcry about the rising price and the potential political fallout of not doing anything about it.

In the recent past, the United States had a good record on inflation. During the past ten years, inflation, as measured by the Consumer Price Index (CPI), was between −0.4 percent and 3.2 percent, although in 2009 the CPI actually was a negative number, suggesting deflation in the economy. A CPI between 1 and 4 percent is one that most government policymakers can accept as tolerable. What is interesting is that many believe that even this small number may overstate the actual level of inflation because of the way the CPI is calculated. A commission headed by Michael Boskin, who served as President George H. W. Bush’s chief economic adviser, found that the CPI overstates inflation by about 1.1 percent.7 Why should this seemingly small discrepancy matter? Many government programs such as Social Security are tied directly to the CPI as the official measure of inflation. Increases in Social Security benefits are based on the calculated CPI. If these inflation estimates were reduced by 1 percent, it would save the government a substantial amount of money in cost-of-living adjustments over a sustained period. The box “Working with Sources: The Consumer Price Index” explains how the CPI is calculated.

Tools of Economic Policy PAGE 217

Governments have a variety of policy tools to help them achieve their goals and deal with economic issues. Fiscal policy is a term that describes taxing and spending tools, but governments have other mechanisms, such as regulations or subsidies, that can also be effective. In addition, monetary policy, which is the Fed’s responsibility, is another major tool of economic policy. The Fed receives quite a bit of media attention compared to other economic policymakers in the federal government (besides the president), but it is only part of the picture. This section examines the various tools used to influence the economy and some of the consequences invariably associated with these choices.

Fiscal Policy

PAGE 218

The president and Congress conduct fiscal policy when they make decisions concerning taxing and spending. At the federal level, major changes in fiscal policy often start with a presidential initiative. The president cannot act alone in this area but must work with Congress to make any major changes. The primary tool of fiscal policy is the budget process that the government goes through every year. During this process, policymakers decide how much money should be spent on government programs ranging from highway building and maintenance to national defense and education. Policymakers frequently reconsider provisions of the tax code, reducing some taxes and raising others. Tax changes and government expenditures are the major tools of fiscal policy, and policymakers use them to achieve certain economic and other public policy goals. In a recession, for example, government policymakers typically would attempt to stimulate economic growth. To do this, the president and Congress have one basic choice: cut taxes or increase spending. Reducing the federal income tax puts more money into citizens’ pockets—and, with that extra cash, people will likely buy more goods. The demand for products, in turn, requires companies to increase their production, which means hiring additional employees, driving down unemployment, and giving people paychecks so they can make purchases. Theoretically, these activities should promote economic growth and pull the nation out of recession. Similar to a tax cut, a tax rebate has been used in recent years to provide citizens with additional money in response to an economic downturn. A boost in government spending would have a similar impact. The increase in spending—for example, to build new highways—creates jobs, and these new workers are able to buy goods and services. Thus the cycle begins again. The Obama economic stimulus package in 2009, as one important example, included a number of provisions to rebuild infrastructure and invest in energy conservation activities that could produce jobs. When the economy is running “too hot,” government can use the opposite tactics to address the situation. Raising taxes takes disposable income away from individuals and limits their purchasing power. The subsequent decrease in demand should reduce the level of inflation.

Although using fiscal policy makes sense from an economic perspective and appears to be a logical way to manage or control swings in the economy, elected officials may see the matter differently. A politician campaigning for office finds it easy to support lower taxes “to get the economy moving again,” but what happens to a politician who campaigns on a platform of controlling inflation by raising taxes? The individual will probably face a hostile public and lose the election, even if the economic policy decision is sound in terms of its impact on the nation’s economy.

The Budget Process and Its Effect on Economic Policy

PAGE 224

The budget process is so complex that even a book-length treatment of how it works would not exhaust the topic. The short introduction to the process provided here is intended to make the public policy student aware of the multitude of decisions that are made each year during the budget process and their implications. In addition, the politics of the budget often leads to activities that occur outside of the stated process. For example, high-level meetings and negotiations, often behind closed doors, may occur among congressional leaders and the administration and may include the president himself. These kinds of activities, if they occur, will drive the rest of the budgetary process. The federal government’s fiscal year begins on October 1 and ends on September 30 of the following year, but at any given time policymakers and government staff may be working on two or three different budgets for various years. Figure 7-2 provides a sketch of the major sequences of decisions in this process.

Economic Policy: Successes and Failures

PAGE 228

In the past few decades, a number of economic policies have been proposed and implemented. These policies have enjoyed varying degrees of success in achieving their stated goals. Some also have had unintended consequences—that is, impacts that were neither planned nor foreseen when the policies were designed and implemented. This section considers several of the most significant of these economic policy actions.

Significant Income Tax Cuts

PAGE 229

Tax cuts are always politically popular with citizens, but presidents will also make economic arguments for proposing such policies. When President Reagan took office in 1981, he faced an economy that by many measures was in a recession. Economic growth was low, both inflation and unemployment were high, the deficit was rising, and the country’s morale was low. The Reagan administration introduced a different form of fiscal policy in 1981. Officials argued that a shortage of investment in the United States was the cause of the sluggish economy and rising deficits, and that the answer was supply-side economics. According to this theory, the government could increase economic growth by cutting taxes, especially for the richest individuals. The largest tax cuts went to the wealthy because, the administration assumed, they would use the additional resources to invest in the economy—building or expanding businesses, hiring more employees, and so forth—which would stimulate the economy, decrease unemployment, and increase the tax revenue collected. This theory continues to be supported by many conservatives.

Economic Issues

and Challenges

PAGE 233

Looking at economic policy is always interesting because of the new or renewed challenges that must be faced from year to year. Market swings occur all the time, and changes in economic growth and inflation can affect the overall economy. In addition, what is termed consumer confidence plays a role in the health of the economy because consumer spending accounts for about 70 percent of economic activity in the United States. All of these factors point to the dynamic nature of the economy and economic policy. What might this term hold in regard to economic challenges and issues for the United States? In addition to the changing nature of budgetary politics, where surpluses can become deficits in a matter of months, there are many other issues to consider.

Maintaining Economic Growth PAG 233

America’s years of strong, sustained economic growth in the 1990s produced many positive benefits: tax receipts were up, unemployment was low, the deficit was eliminated, and there were decreases in the national debt. People across the nation saw the benefits of a strong economy as their wages rose and opportunities for personal advancement expanded. It is clear, however, that this kind of sustained growth does not go on forever.

Growth is a cornerstone not only of a strong economy but also of a satisfied electorate, which can translate to a stable political system. The economic growth of the 1990s facilitated action on many of the nation’s problems such as the deficit. The strong economy also made possible the action on welfare reform in 1996 and related policies. Many analysts point out that states were able to meet the caseload reduction requirements of the law because of the strong economy and its effect on employment. When jobs are plentiful, people can move off the welfare rolls. The strong economy also allowed Congress to spend money on highway construction and maintenance, budget items that had been deferred because of deficits. These expenditures not only help local communities but also allow members of Congress to score political points with their constituents.

The real challenge for the United States and its economy is what to do when economic growth begins to lose momentum or the nation enters a recession. The economic slowdown that started in 2001—and eventually led to an economic recession—demonstrates that it is not realistic to expect a high level of growth to continue indefinitely. Changing economic conditions should cause policymakers to evaluate priorities and perhaps make changes. But doing so forces them to confront difficult political choices, and not everyone necessarily agrees on the best way to get the economy moving again. What types of expenditures might be directly linked to job creation and economic development? Is increased spending for higher education an investment in economic development, or is the effect too indirect? How do policymakers balance a perceived need for government intervention with an ever-increasing deficit? How does one cut or eliminate popular programs backed by an alert and powerful constituency? Can and should revenue be raised through tax increases? How much emphasis should be placed on reducing the federal deficit and debt? These are the kinds of questions policymakers ask when budget problems exist. The box “Working with Sources: Views on Economics and Budgeting” provides some additional sources of information from a variety of organizations interested in budget and economic policy.

Economic Issues

PAGE239

The economic issues associated with how to decrease the federal budget deficit may be a bit different from those of the other public policy areas discussed in the following chapters. Here, the discussion does not necessarily attempt to address a problem of a market failure, such as a negative externality, but the budget has obvious economic implications that should be understood when considering the alternatives provided.

As stated earlier, one of the biggest economic arguments for decreasing entitlement spending is the overall size of this part of the budget. Of course, there are many entitlements from which to choose, including such popular programs as Social Security and Medicare, as well as a number of agricultural subsidies. Social Security is the government’s largest program, and according to the CBO, the percentage of people sixty-five and older will be 19 percent of the total population by 2026. This will increase the number of beneficiaries for programs such as Social Security and Medicare.33 There are a number of options available to reduce outlays for it. One would be to raise the full retirement age for Social Security eligibility. Currently, the age of eligibility for full retirement is 65–67 depending on when you were born. One could continue to increase the age (two months per birth year) up to 70. Such an option would reduce the lifetime benefits because people would have to wait longer to begin claiming their full benefits. This option would reduce outlays by $28 billion by 2028, but by 2048, the reduction would be 8 percent less than what it would be under current law.34 The argument for such an option is that people will typically live much longer and having them wait for their benefits, and potentially continue to pay into the system if they continue to work, makes some sense given the changing demographics. The downside could be that more people are eligible to apply for and receive Social Security disability benefits. The option could lead to more elderly poverty if those affected did not make adjustments to the change in the retirement age. For Medicare, some have argued for an increase in the age at which one becomes eligible for the program, similar to the way Social Security works. Such a change in Medicare could substantially reduce the program’s outlays. Another idea would be to increase the premiums paid by beneficiaries.

Of course, reducing any of these entitlement programs may have economic impacts beyond reducing the deficit. Raising interest rates on federal student loans may decrease the number of students attending college, which would limit their future earning potential. The real problem with changing any entitlement program is that in order to make these adjustments, legislators have to change the authorizing statute. All of these programs either are very popular or have a well-represented constituency that benefits from the programs, which makes such changes difficult to make.

Reducing discretionary spending is another option. The CBO report stated that discretionary spending represents about 30 percent of federal outlays compared to 1973, when it represented 53 percent of the outlays. Caps already exist on most discretionary spending as a result of the Budget Control Act of 2011, and there are assumptions that future legislation will adhere to these caps. Because of the relatively small percentage of the full budget, achieving any significant deficit reduction through cuts in discretionary spending can have dramatic effects on existing programs. Another issue is that the country rarely budgets for natural disaster assistance, though billions are spent every year in this area. A large variety of programs are categorized as discretionary, and it would be impossible to discuss every one of them as a proposal for elimination or decrease. Some have argued that too much is spent on military expenditures, which make up a sizable portion of the budget.

One option suggested by CBO would reduce the Department of Defense (DOD) budget over three years so that it would be 10 percent less than planned. Such a reduction would still keep the DOD budget in line with historical levels but would produce cumulative (ten years) savings of $591 billion. Reduction in military spending is often difficult because of the strong support such spending generates from many in Congress as well as the DOD. In addition, military spending acts as a major economic boost for local communities. A related area is homeland security. Military spending increased following the attacks of September 11 and the subsequent activities in Afghanistan and Iraq. Troop drawdowns may provide some budget relief, but it is unclear how much. Other choices for military savings include decreasing spending for specific programs such as reducing the building of hardware such as aircraft carriers or long-range bombers. These choices raise questions regarding the actual need of these programs, but also the economic impact of reducing spending

Another CBO option would eliminate human space exploration programs out of NASA. Such a budget elimination would save $89 billion over nine years. CBO argues that with changing technology, including the advancement of robotics, the need for humans to fly in space is much less today than in earlier decades. Using technology can save significant dollars and complexity of missions (no longer a need to bring food, water, etc.) and reduce risk to human life.

As noted, there have been limited increases in discretionary spending in recent years. Because discretionary spending is just that—discretionary—it is easier for policymakers to ignore the needs of these areas compared to entitlement programs. As such, while some of these programs may have seen some increases in funding, the level of the increase may not have met program needs. A good example may be infrastructure funding. By just about every measure, the United States is underinvesting in maintaining its infrastructure. One often hears stories regarding the safety of the thousands of bridges on our nation’s highways. These expenditures and others, such as for education and job training, may represent investments that could improve the nation’s economic performance in the future. Others, such as environmental spending, protect important resources and the health of the nation’s citizens, which also have economic value even if they are not calculated as part of the budget. In some situations, one could argue that the amount budgeted for an activity is insufficient to alleviate the existing market failure. For example, perhaps the amount budgeted for environmental protection is inadequate to address the negative externalities associated with the production of goods and services. Another example may be that the funds to ensure a capable military are currently insufficient and that it is the government’s responsibility to provide this pure public good. All of this is to say that many times these decisions come down to the political priorities of those in office.

Increasing revenue through an increase in taxes or fees also has obvious economic implications. In a deficit situation, there is not enough revenue to meet expenditure demands, so one might think the best course of action would be to increase revenues. As discussed earlier in the chapter, a change in fiscal policy that increases taxes takes money out of the pockets of individuals. This could then lead to less spending and potentially a slowing down of the economy. Slower economic growth can then translate to less revenue generated through taxes. This is why many conservatives and antitax groups suggest decreasing taxes in order to increase economic growth and as an alternative way to increase revenue. Still, one option noted by CBO would simply raise tax rates by 1 percent, and this relatively minor change would generate $905 billion over ten years. Another option noted by many who support the simplification of the tax code calls to expand the tax base by eliminating most tax expenditures. Naturally, there are definite political implications to the tax question. These will be addressed in the next section.

Political Issues

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To say that politics drives most of the debate surrounding the budget deficit alternatives would be a vast understatement. All of the alternatives being discussed have strong advocates and opponents both within government and in the interest group community. In addition, while sometimes the deficit itself does not generate much public interest, cutting desired programs or proposals to increase taxes will quickly gain the public’s attention.

From a political standpoint, suggesting cuts to existing entitlement programs may be the most volatile option. This is especially true since many of these programs are projected to be underfunded in the future and not able to provide the current level of benefits. The political debate in cutting these programs is certain to be highly contentious, and because cuts in entitlement programs would require changes to the law itself, there is an extra burden placed on Congress for enacting such cuts. It is no secret that any suggestions to reform programs such as Social Security and Medicare are often met with accusations that the supporters of the so-called reforms are trying to harm senior citizens—a common accusation during political campaigns. By suggesting cuts in these popular entitlement programs, proponents are opening the door to intense criticism from politically active groups such as AARP. In addition, elected policymakers, because of the political sensitivity, are reluctant to suggest decreases in these programs for fear of losing the next election. Balancing the budget on the backs of the elderly is usually not seen as politically acceptable. It is a foregone conclusion that presidential backing is necessary for changes in these types of entitlements. During the budget talks in the summer of 2011, President Obama appeared willing to entertain discussion of and possible changes to what are often considered sacred programs such as Social Security and Medicare as long as Republicans were willing to consider revenue enhancers (for example, tax increases and/or reforms of the tax code) as well.

The same can be said for many other entitlement programs, such as agricultural subsidies. Policymakers do not want to be labeled “antifarmer,” especially in a country that holds the family farmer in such high regard. It tends not to matter that a large proportion of these subsidies go not to the family farmer but to agribusiness. Significant cuts were made to the Agricultural Act of 2014, known as the Farm Bill, but a large portion of the cuts were in the Supplemental Nutrition Assistance Program (SNAP) or food stamp program that provides nutritional funding for the low-income population. On the other hand, because of the size of many entitlement programs, one could gain a lot of benefits with relatively modest changes, which can be appealing. In addition, since many people are not currently eligible for these entitlements, there could be a chance to gain public support for the cuts. Regardless, is it any wonder why policymakers tend to shy away from these kinds of choices?

Political debate about cutting discretionary programs can also be contentious. Generally, though, these debates are more limited because the programs are smaller and, depending on the program, may have less support and even some opposition. For example, a proposal to decrease spending in environmental protection programs will generate an uproar, particularly from environmental interest groups, but industry and property rights groups, as well as others who want to see limited government intervention, may applaud such a proposal. Likewise, suggestions to cut funding to advance the use of Amtrak and other high-speed railroad systems will be a concern to a few focused organizations but may be supported by the automobile and airline industries, which are worried about competition.

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A cut in manned space missions, as discussed earlier, might generate concerns from the scientific community as well as space enthusiasts, but often funding for pure research is not held dear by many significant interest groups or the general public. The extent to which any discretionary spending can be labeled as “pork” or “wasteful” tends to maximize the chance of it being slashed. What constitutes “wasteful” is also up for political debate. Cuts in military spending or homeland security are politically more difficult. Policymakers do not want to be labeled weak on defense, and as noted earlier, the economic effects of some of this spending can be substantial. In addition, politicians are not likely to stop trying to “bring home the bacon.” More so than entitlements, discretionary programs are left to the preferences of those who are in power.

Raising taxes is never seen as a savvy political proposal, even if the result ultimately leads to a better economic outcome. Politicians have seen the political benefits of proposing tax cuts and the dire consequences for those who suggest tax increases. As such, this proposal may politically be the most difficult one to enact as a way to decrease the deficit. Such proposals are easy to attack in thirty-second sound bites, especially in an era where it appears that any budgetary problem should be addressed by a tax cut. On the interest group front, a number of organizations such as Americans for Tax Reform and the National Taxpayers Union continuously advocate for smaller government and lower taxes. These groups are also joined by conservative think tanks such as the Cato Institute and the Heritage Foundation. On the other hand, one rarely hears of interest groups that advocate for tax increases. The general public seems to share distaste for tax increases, but when asked more specific questions regarding the use of tax increases, particularly on the rich, as a way to address the country’s economic concerns, a significant majority of the population agrees that this option should be part of the overall package.35