Chapter 16: Domestic Policy

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Chapter 16 Vocabulary

bottom-up implementation

a strategy in which the federal government allows local areas some flexibility to meet their specific challenges and needs in implementing policy

Congressional Budget Office

the congressional office that scores the spending or revenue impact of all proposed legislation to assess its net effect on the budget

debt

the total amount the government owes across all years

deficit

the annual amount by which expenditures are greater than revenues

discretionary spending

government spending that Congress must pass legislation to authorize each year

distributive policy

a policy that collect payments or resources broadly but concentrates direct benefits on relatively few

entitlement

a program that guarantees benefits to members of a specific group or segment of the population

excise taxes

taxes applied to specific goods or services as a source of revenue

free-market economics

a school of thought that believes the forces of supply and demand, working without any government intervention, are the most effective way for markets to operate

Keynesian economics

an economic policy based on the idea that economic growth is closely tied to the ability of individuals to consume goods

laissez-faire

an economic policy that assumes the key to economic growth and development is for the government to allow private markets to operate efficiently without interference

libertarians

people who believe that government almost always operates less efficiently than the private sector and that its actions should be kept to a minimum

mandatory spending

government spending earmarked for entitlement programs guaranteeing support to those who meet certain qualifications

Medicaid

a health insurance program for low-income citizens

Medicare

an entitlement health insurance program for older people and retirees who no longer get health insurance through their work

policy advocates

people who actively work to propose or maintain public policy

policy analysts

people who identify all possible choices available to a decision maker and assess the potential impact of each

progressive tax

a tax that tends to increase the effective tax rate as the wealth or income of the tax payer increases

public policy

the broad strategy government uses to do its job; the relatively stable set of purposive governmental behaviors that address matters of concern to some part of society

recession

a temporary contraction of the economy in which there is no economic growth for two consecutive quarters

redistributive policy

a policy in which costs are born by a relatively small number of groups or individuals, but benefits are expected to be enjoyed by a different group in society

regressive tax

a tax applied at a lower overall rate as individuals’ income rises

regulatory policy

a policy that regulates companies and organizations in a way that protects the public

safety net

a way to provide for members of society experiencing economic hardship

Social Security

a social welfare policy for people who no longer receive an income from employment

supply-side economics

an economic policy that assumes economic growth is largely a function of a country’s productive capacity

top-down implementation

a strategy in which the federal government dictates the specifics of public policy and each state implements it the same exact way

On March 25, 2010, both chambers of Congress passed the Health Care and Education Reconciliation Act (HCERA). The story of the HCERA, which expanded and improved some provisions of the Patient Protection and Affordable Care Act (ACA), also known as Obamacare, is a complicated tale of insider politics in which the Democratic Party was able to force through sweeping health care and higher education reforms over Republican opposition and concerns about efficacy and cost. Some people laud the HCERA as an example of getting things done in the face of partisan gridlock in Congress; others see it a case of government power run amok. Regardless of your view, the HCERA vividly demonstrates public policymaking in action.

Each of the individual actors and institutions in the U.S. political system, such as the president, Congress, the courts, interest groups, and the media, gives us an idea of the component parts of the system and their functions. But in the study of public policy, we look at the larger picture and see all the parts working together to make laws, like the HCERA, that ultimately affect citizens and their communities.

What is public policy? How do different areas of policy differ, and what roles do policy analysts and advocates play? What programs does the national government currently provide? And how do budgetary policy and politics operate? This chapter answers these questions and more.

16.1 What Is Public Policy?

LEARNING OBJECTIVES

By the end of this section, you will be able to:

• Explain the concept of public policy
• Discuss examples of public policy in action

It is easy to imagine that when designers engineer a product, like a car, they do so with the intent of satisfying the consumer. But the design of any complicated product must take into account the demands of regulators, transporters, assembly line workers, parts suppliers, and myriad other participants in the manufacture and shipment process. And manufacturers must also be aware that consumer tastes are fickle: A gas-guzzling sports car may appeal to an unmarried twenty-something with no children; but what happens to product satisfaction when gas prices spike due to inflation or other market forces, or when individual gets married and has children and needs that gas money for food and clothing?

In many ways, the process of designing domestic policy isn’t that much different. The government, just like auto companies, needs to ensure that its citizen-consumers have access to an array of goods and services. And just as in auto companies, a wide range of actors is engaged in figuring out how to do it. Sometimes, this process effectively provides policies that benefit citizens. But just as often, the process of policymaking is muddied by the demands of competing interests with different opinions about society’s needs or the role that government should play in meeting them. To understand why, we begin by thinking about what we mean by the term “public policy.”

PUBLIC POLICY DEFINED

One approach to thinking about public policy is to see it as the broad strategy government uses to do its job. More formally, it is the relatively stable set of purposive governmental actions that address matters of concern to some part of society. This description is useful in that it helps to explain both what public policy is and what it isn’t. First, public policy is a guide to legislative action that is more or less fixed for long periods of time, not just short-term fixes or single legislative acts. Policy also doesn’t happen by accident, and it is rarely formed simply as the result of the campaign promises of a single elected official, even the president. While elected officials are often important in shaping policy, most policy outcomes are the result of considerable debate, compromise, and refinement that happen over years and are finalized only after input from multiple institutions within government as well as from interest groups and the public.

In addition to being thoughtful and generally stable, public policy deals with issues of concern to some large segment of society, as opposed to matters of interest only to individuals or a small group of people. Governments frequently interact with individual actors including citizens, corporations, or other countries. They may even pass highly specialized pieces of legislation, known as private bills, which confer specific privileges on individual entities. But public policy covers only those issues that are of interest to larger segments of society or that directly or indirectly affect society as a whole. Paying off the loans of a specific individual would not be public policy but creating a process for loan forgiveness available to certain types of borrowers (such as those who provide a public service by becoming firefighters) would certainly rise to the level of public policy.

A final important characteristic of public policy is that it is more than just the actions of government; it also includes the behaviors or outcomes that government action creates. Policy can even be made when the government refuses to act in ways that would change the status quo when circumstances or public opinion begin to shift. 

PUBLIC POLICY AS OUTCOMES

In a free society, governments rarely want to keep their policies a secret. Elected officials want to be able to take credit for the things they have done to help their constituents, and their opponents are all too willing to cast blame when policy initiatives fail. We can therefore think of policy as the formal expression of what elected or appointed officials are trying to accomplish. In passing the HCERA (2010), Congress declared its policy through an act that directed how it would appropriate money. The president can also implement or change policy through an executive order, which offers instructions about how to implement law under his or her discretion. Finally, policy changes can come as a result of court actions or opinions, such as Brown v. Board of Education of Topeka (1954), which formally ended school segregation in the United States.

Typically, elected and even high-ranking appointed officials lack either the specific expertise or tools needed to successfully create and implement public policy on their own. They turn instead to the vast government bureaucracy to provide policy guidance. For example, when Congress passed the Clean Water Act (1972), it dictated that steps should be taken to improve water quality throughout the country. But it ultimately left it to the bureaucracy to figure out exactly how ‘clean’ water needed to be. In doing so, Congress provided the Environmental Protection Agency (EPA) with discretion to determine how much pollution is allowed in U.S. waterways.

SIDEBAR: Note that government agencies are rightly and correctly limited in their scope. if these agencies overstep their boundaries or go to the point at which they are creating law rather than helping define terms of law and such, the Supreme Court has ruled that they are in violation and must cease doing so. A recent case where a government agency went beyond legal limits was recently ruled upon by the Supreme court. in West Virginia Vs. the EPA the court determined that the EPA was going further than defining and enforcing existing law and had instead crossed over into areas that were more appropriate for the Congress. This case will likely be cited going forward when government agencies are challenged in court for making policy that was not specifically defined by the legislature.

There is another way of thinking about policy outcomes: in terms of winners and losers. Almost by definition, public policy promotes certain types of behavior while punishing others. So, the individuals or corporations that a policy favors are most likely to benefit, or win, whereas those the policy ignores or punishes are likely to lose. Even the best-intended policies can have unintended consequences and may even ultimately harm someone, such as those who must pay for the policy through higher taxes. A policy designed to encourage students to go to liberal arts colleges may cause trade school enrollment to decline. Strategies to promote diversity in higher education may make it more difficult for qualified white or male applicants to get accepted into competitive programs. Efforts to clean up drinking water supplies may make companies less competitive and cost employees their livelihood. Even something that seems to help everyone, such as promoting charitable giving through tax incentives, runs the risk of lowering tax revenues from the rich (who in turn would contribute a much greater share of their income to charity). And while policy pronouncements and bureaucratic actions are certainly meant to rationalize policy, it is whether a given policy helps or hurts constituents (or is perceived to do so) that ultimately determines how voters will react toward the government in future elections.

The Social Safety Net

During the Great Depression of the 1930s, the United States created a set of policies and programs that constituted a social safety net for the millions who had lost their jobs, their homes, and their savings. Under President Franklin Delano Roosevelt, the federal government began programs like the Work Progress Administration and Civilian Conservation Corps to try to combat unemployment and the Home Owners’ Loan Corporation to refinance Depression-related mortgage debts. With the onset of WWII the effects of the Depression finally eased, and the government phased out some of these programs. Other programs, like Social Security or the minimum wage, remain a part of the way the government attempts to take care of the vulnerable members of its population while continuing to justify high levels of taxation. The federal government has also added many other ‘social support programs’, like Medicaid, Medicare, and the Special Supplemental Nutrition Program for Women, Infants, and Children, and of course have raised taxation rates in order to pay for them.

16.2 Categorizing Public Policy

LEARNING OBJECTIVES

By the end of this section, you will be able to:

• Describe the different types of goods in a society
• Identify key public policy domains in the United States
• Compare the different forms of policy and the way they transfer goods within a society

The idea of public policy is by its very nature a politically contentious one. Among the differences between American liberals and conservatives are the policy preferences prevalent in each group. Modern liberals tend to feel very comfortable with the idea of the government forcing progressive social and economic reforms, believing that these will lead to outcomes more ‘equitable’ and fair for all members of society. Conservatives, on the other hand, often find government involvement onerous and overreaching and frequently completely ineffective. They feel society would function more efficiently if oversight of most “public” matters were returned to the private sphere. Before digging too deeply into a discussion of the nature of public policy in the United States, let us look first at why so many aspects of society come under the umbrella of public policy to begin with.

DIFFERENT TYPES OF GOODS

Some economists use the term goods to describe the range of commodities, services, and systems that help us satisfy our wants or needs. This term can certainly apply to the food you eat or the home you live in, but it can also describe the systems of transportation or public safety used to protect them. Most of the goods you interact with in your daily life are private goods, which means that they can be owned by a particular person or group of people, and are excluded from use by others, typically by means of the price of ownership. For example, your home or apartment is a private good reserved for your own use because you pay rent or make mortgage payments for the privilege of living there. Further, private goods are finite and can run out if overused, even if only in the short term (remember the great toilet paper shortage of the pandemic!) The fact that private goods are excludable and finite makes them tradable. A farmer who grows corn, for instance, owns that corn, and since only a finite amount of corn exists, others may want to trade their goods for it if their own food supplies begin to dwindle.

Proponents of free-market economics believe that the market forces of supply and demand, working without much if any government involvement, are the most effective way for markets to operate. One of the basic principles of free-market economics is that for just about any good that can be privatized, the most efficient means for exchange is the marketplace. A well-functioning market will allow producers of goods to come together with consumers of goods to negotiate a trade. People facilitate trade by creating a currency—a common unit of exchange (in the United States this is the dollar)—so they do not need to carry around everything they may want to trade at all times. As long as there are several providers or sellers of the same good, consumers can negotiate with them to find a price they are willing to pay. As long as there are several buyers for a seller’s goods, providers can negotiate with them to find a price buyers are willing to accept. And if prices begin to rise too much, other sellers will enter the marketplace, offering lower prices.

A second basic principle of free-market economics is that it is largely unnecessary for the government to protect the value of private goods. Farmers who own land used for growing food have a vested interest in protecting their land to ensure its continued production. Business owners must protect the reputation of their business, or no one will buy from them. And, to the degree that producers need to ensure the quality of their product or industry, they can accomplish that by creating a group or association that operates outside government control. In short, industries have an interest in self-regulating to protect their own value. According to free-market economics, as long as everything we could ever want or need is a private good, and so long as every member of society has some ability to provide for themselves and their families, public policy regulating the exchange of goods and services is really unnecessary.

Many people in the United States argue that the self-monitoring and self-regulating incentives provided by the existence of private goods mean that sound public policy requires very little government action. Known as libertarians, these individuals believe government almost always operates less efficiently than the private sector (the segment of the economy run for profit and not under government control), and that government actions should therefore be kept to a minimum.

Even as many in the United States recognize the benefits provided by private goods, we have increasingly come to recognize problems with the idea that all social problems can be solved by exclusively private ownership. Geographic regions like forests have environmental, social, recreational, and aesthetic value that cannot easily be reserved for private ownership. Resources like migrating birds or schools of fish may have value if hunted or fished, but they cannot be owned due to their migratory nature. Finally, national security provided by the armed forces protects all citizens and cannot reasonably be reserved for only a few.

Without government regulation, someone can hunt all the migratory birds or deplete a fishery by taking all the fish, eliminating future breeding stocks that would maintain the population. The situation in which individuals exhaust a common resource by acting in their own immediate self-interest is called the tragedy of the commons.

A second problem with strict and complete adherence to free-market economics is that some goods are too large, or too expensive, for individuals to provide them for themselves. Consider the need for a marketplace: Where does the marketplace come from? How do we get the goods to market? Who provides the roads and bridges? Who patrols the waterways? Who provides security? Who ensures the regulation of the currency? No individual buyer or seller could accomplish this. The very nature of the exchange of private goods requires a system that has some of the openness of public or common goods but is maintained by either group of individuals or entire societies.

Economists consider goods like cable TV, cellphone service, and private schools to be toll goods. Toll goods are similar to public goods in that they are open to all and theoretically infinite if maintained, but they are paid for or provided by some outside (nongovernment) entity. Many people can make use of them, but only if they can pay the price. The name “toll goods” comes from the fact that, early on, many toll roads were in fact privately owned commodities. Even today, states from Virginia to California have allowed private companies to build public roads in exchange for the right to profit by charging tolls.

So long as land was plentiful, and most people in the United States lived a largely rural subsistence lifestyle, the difference between private, public, common, and toll goods was mostly academic. But as public lands increasingly became private through sale and settlement, and as industrialization and the rise of mass production allowed monopolies and oligopolies to become more influential, support for public policies regulating private entities grew. By the beginning of the twentieth century, the United States had begun to search for ways to govern large businesses that had managed to distort market forces by monopolizing the supply of goods. And, largely as a result of the Great Depression, people wanted ways of developing and protecting public goods that were fairer than had existed before. These forces and events led to the increased regulation of public and common goods, and a move for the public sector—the government—to administer the provision of many toll goods.

CLASSIC TYPES OF POLICY

Public policy, then, ultimately boils down to determining the distribution, allocation, and enjoyment of public, common, and toll goods within a society. While the specifics of policy often depend on the circumstances, two broad questions all policymakers must consider are a) who pays the costs of creating and maintaining the goods, and b) who receives the benefits of the goods? When private goods are bought and sold in a marketplace, the costs and benefits go to the participants in the transaction. Your landlord benefits from receipt of the rent you pay, and you benefit by having a place to live. But non-private goods like roads, waterways, and national parks are controlled and regulated by someone other than the owners, allowing policymakers to make decisions about who pays and who benefits.

In 1964, Theodore Lowi argued that it was possible to categorize policy based upon the degree to which costs and benefits were concentrated on the few or diffused across the many. One policy category, known as distributive policy, tends to collect payments or resources from many but concentrates direct benefits on relatively few. Highways are often developed through distributive policy. Distributive policy is also common when society feels there is a social benefit to individuals obtaining private goods such as higher education that offer long-term benefits, but the upfront cost may be too high for the average citizen.

One example of the way distributive policy works is the story of the Transcontinental Railroad. In the 1860s, the U.S. government began to recognize the value of building a robust railroad system to move passengers and freight around the country. A particular goal was connecting California and the other western territories acquired during the 1840s war with Mexico to the rest of the country. The problem was that constructing a nationwide railroad system was a costly and risky proposition. To build and support continuous rail lines, private investors would need to gain access to tens of thousands of miles of land, some of which might be owned by private citizens. The solution was to charter two private corporations—the Central Pacific and Union Pacific Railroads—and provide them with resources and land grants to facilitate the construction of the railroads. Through these grants, publicly owned land was distributed to private citizens, who could then use it for their own gain. However, a broader public gain was simultaneously being provided in the form of a nationwide transportation network.

The same process operates in the agricultural sector, where various federal programs help farmers and food producers through price supports and crop insurance, among other forms of assistance. These programs help individual farmers and agriculture companies stay afloat and realize consistent profits. They also achieve the broader goal of providing plenty of sustenance for the people of the United States, so that few of us have to “live off the land.”

It is important to note that not all large transportation, or other public-serving infrastructure, needs to be owned or administered by the government. Many thousands of examples of companies that preform specific public functions exist. However, unlike government programs, which seem to continue in perpetuity via the burdening of the taxpayers, when the services these private companies provide becomes obsolete or no longer serve a rational purpose, the private companies naturally go out of business. One very small example is the Yosemite Valley Railway. This railroad came about when roadway travel to Yosemite National Park was difficult at best. This short-line railroad sprung up and serviced thousands of passengers including U.S. Presidents for decades until the technological improvements of roads and vehicles made it no longer economical to continue running the railroad in 1945.

MILESTONE

The Hoover Dam: The Federal Effort to Domesticate the Colorado River

As westward expansion led to development of the American Southwest, settlers increasingly realized that they needed a way to control the frequent floods and droughts that made agriculture difficult in the region. As early as 1890, land speculators had tried diverting the Colorado River for this purpose, but it wasn’t until 1922 that the U.S. Bureau of Reclamation (then called the Reclamation Service) chose the Black Canyon as a good location for a dam to divert the river. Since it would affect seven states (as well as Mexico), the federal government took the lead on the project, which eventually cost $49 million and more than one hundred lives. The dam faced significant opposition from members of other states, who felt its massive price tag (almost $670 million in today’s dollars) benefited only a small group, not the whole nation. However, in 1928, Senator Hiram Johnson and Representative Phil Swing, both Republicans from California, won the day. Congress passed the Boulder Canyon Project Act, authorizing the construction of one of the most ambitious engineering feats in U.S. history. The Hoover Dam, completed in 1935, serves the dual purpose of generating hydroelectric power and irrigating millions of acres of land from the resulting reservoir (Lake Mead).

Was the construction of the Hoover Dam an effective expression of public policy?

Other examples of distributive policy support citizens’ efforts to achieve “the American Dream.” American society recognizes the benefits of having citizens who are financially invested in the country’s future. Among the best ways to encourage this investment are to ensure that citizens are highly educated and have the ability to acquire high-cost private goods such as homes and businesses. However, very few people have the savings necessary to pay upfront for a college education, a first home purchase, or the start-up costs of a business. To help out, the government has created a range of incentives that everyone in the country pays for through taxes but that directly benefit only the recipients. Examples include grants (such as Pell grants), tax credits and deductions, and subsidized or federally guaranteed loans.

Each of these programs aims to achieve a policy outcome. Pell grants exist to help students with college, whereas Federal Housing Administration mortgage loans lead to home ownership.

While distributive policy, according to Lowi, has diffuse costs and concentrated benefits, regulatory policy features the opposite arrangement, with concentrated costs and diffuse benefits. A relatively small number of groups or individuals bear the costs of regulatory policy, but its benefits are expected to be distributed broadly across society. As you might imagine, regulatory policy is most effective for controlling or protecting public or common resources. Among the best-known examples are policies designed to protect public health and safety, and the environment. These regulatory policies prevent manufacturers or businesses from maximizing their profits by excessively polluting the air or water, selling products they know to be harmful, or compromising the health of their employees during production.

In the United States, nationwide calls for a more robust regulatory policy first grew loud around the turn of the twentieth century and the dawn of the Industrial Age. Investigative journalists—called muckrakers by politicians and business leaders who were the focus of their investigations—began to expose many of the ways in which manufacturers were abusing the public trust. Although various forms of corruption topped the list of abuses, among the most famous muckraker exposés was The Jungle, a 1906 novel by Upton Sinclair that focused on unsanitary working conditions and unsavory business practices in the meat-packing industry. This work and others like it helped to spur the passage of the Pure Food and Drug Act (1906) and ultimately led to the creation of government agencies such as the U.S. Food and Drug Administration (FDA). The nation’s experiences during the depression of 1896 and the Great Depression of the 1930s also led to more robust regulatory policies designed to improve the transparency of financial markets and prevent monopolies from forming.

A final type of policy is redistributive policy, so named because it redistributes resources in society from one group to another. That is, according to Lowi, the costs are concentrated and so are the benefits, but different groups bear the costs. Most redistributive policies are intended to have a sort of “Robin Hood” effect; their goal is to transfer income and wealth from one group to another such that everyone enjoys at least a minimal standard of living even if they do not earn it – even by choice. Typically, the wealthy and middle class pay into the federal tax base, which then funds need-based programs that support low-income individuals and families.

A few examples of redistributive policies are Head Start (education), Medicaid (health care), Temporary Assistance for Needy Families (TANF, income support), and food programs like the Supplementary Nutritional Aid Program (SNAP).

The following videos show you what these policies are:

The government also uses redistribution to incentivize specific behaviors or aid small groups of people. Pell grants to encourage college attendance and tax credits to encourage home ownership are other examples of redistribution.

16.3 Policy Arenas

LEARNING OBJECTIVES

By the end of this section, you will be able to:

• Identify the key domestic arenas of public policy
• Describe the major social safety net programs
• List the key agencies responsible for promoting and regulating U.S. business and industry

In practice, public policy consists of specific programs that provide resources to members of society, create regulations that protect U.S. citizens, and attempt to equitably fund the government. We can broadly categorize most policies based on their goals or the sector of society they affect, although many, such as food stamps, serve multiple purposes. Implementing these policies costs hundreds of billions of dollars each year and understanding the goals of this spending and where the money goes is of vital importance to citizens and students of politics alike.

SOCIAL WELFARE POLICY

The U.S. government began developing a social welfare policy during the Great Depression of the 1930s. By the 1960s, social welfare had become a major function of the federal government—one to which most public policy funds are devoted—and had developed to serve several overlapping functions. First, social welfare policy is designed to theoretically ensure some level of equity in a democratic political system based on competitive, free-market economics. During the Great Depression, many politicians came to fear that the high unemployment and low-income levels plaguing society could threaten the stability of democracy, as was happening in European countries like Germany and Italy. The assumption in this thinking is that democratic systems work best when poverty is minimized. In societies operating in survival mode, in contrast, people tend to focus more on short-term problem-solving than on long-term planning. Second, social welfare policy is supposed to create an automatic stimulus for society by building a safety net that can catch members of society who are suffering economic hardship through no fault of their own. For an individual family, this safety net makes the difference between eating and starving; for an entire economy, it could prevent an economic recession from sliding into a broader and more damaging depression.

Second, and of particular concern, were urban widows. During their working years, most American women stayed home to raise children and maintain the household while their husbands provided income. Should their husbands die or become injured, these women had no wage-earning skills with which to support themselves or their families.

Social Security addresses these concerns with three important tools. First and best known is the retirement benefit. After completing a minimum number of years of work, American workers may claim a form of pension upon reaching retirement age. Despite Social Security being a government-forced contributory plan, it is still often called an entitlement program because it guarantees benefits to a particular entitled group, and virtually everyone will eventually qualify for the plan given the relatively low requirements for enrollment. The amount of money a worker receives is based loosely on his or her lifetime earnings. Full retirement age was originally set at sixty-five, although changes in legislation have increased it to sixty-seven for workers born after 1959. An added benefit is that, under certain circumstances, this income may also be claimed by the survivors of qualifying workers, such as spouses and minor children, even if they themselves did not have a wage income or contribute to the program.

A second Social Security benefit is a disability payout, which the government distributes to workers who become unable to work due to physical or mental disability. To qualify, workers must demonstrate that the injury or incapacitation will last at least twelve months. A third and final benefit is Supplemental Security Income, which provides supplemental income to adults or children with considerable disability or to the elderly who fall below a certain income threshold.

During the George W. Bush administration, Social Security became a highly politicized topic as the Republican Party sought to find a way of preventing what experts predicted would be the impending collapse of the Social Security system. In 1950, the ratio of workers paying into the program to beneficiaries receiving payments was 16.5 to 1. By 2013, that number was 2.8 to 1 and falling. Most predictions in fact suggest that, due to continuing demographic changes including slower population growth and an aging population, by 2034, the amount of revenue generated from payroll taxes will no longer be sufficient to cover Social Security’s costs.

There are a number of ways that the crisis may be averted – some with more risk to political careers than others.

The Bush administration proposed avoiding this by privatizing the program, in effect, taking it out of the government’s hands and making individuals’ benefits variable instead of defined. The effort ultimately failed, and Social Security’s long-term viability continues to remain uncertain. Numerous other plans for saving the program have been proposed, including raising the retirement age, increasing payroll taxes, and reducing payouts for wealthier retirees. None of these proposals have been able to gain traction, however.

While Social Security was designed to provide cash payments to sustain the aged and disabled, Medicare and Medicaid were intended to ensure that vulnerable populations have access to health care. Medicare, like Social Security, is an entitlement program funded through individual payroll taxes. Its purpose is to make sure that senior citizens and retirees have access to low-cost health care they might not otherwise have, because most U.S. citizens get their health insurance through their employers. Medicare provides three major forms of coverage: a guaranteed insurance benefit that helps cover major hospitalization, fee-based supplemental coverage that retirees can use to lower costs for doctor visits and other health expenses, and a prescription drug benefit. Medicare faces many of the same long-term challenges as Social Security, due to the same demographic shifts. Medicare also faces the problem that health care costs are rising significantly faster than inflation. In 2018, Medicare cost the federal government $750.2 billion.

Medicaid is a formula-based, health insurance program, which means beneficiaries must demonstrate they fall within a particular income category. Individuals in the Medicaid program receive a fairly comprehensive set of health benefits, although access to health care may be limited because fewer providers accept payments from the program (it pays them less for services than does Medicare). Medicaid differs dramatically from Medicare in that it is partially funded by states, many of which have reduced access to the program by setting the income threshold so low that few people qualify. The ACA (2010) sought to change that by providing more federal money to the states if they agreed to raise minimum income requirements. Many states have refused, which has helped to keep the overall costs of Medicaid lower, even though it has also left many people without health coverage they might receive if they lived elsewhere. Total costs for Medicaid in 2014 were about $492 billion, about $305 billion of which was paid by the federal government.

Here are two different opinions about government run healthcare (ideas like Medicaid/Medicare for All, etc.):

Collectively, Social Security, Medicare, and Medicaid make up the lion’s share of total federal government spending. In 2021, $1.135 trillion was spent on Social Security, $709 billion on Medicare, and $521 billion on Medicaid.

Several other smaller programs also provide income support to families. Most of these are formula-based, or means-tested, requiring citizens to meet certain maximum income requirements in order to qualify. A few examples are TANF, SNAP (also called food stamps), the unemployment insurance program, and various housing assistance programs.

SCIENCE, TECHNOLOGY, AND EDUCATION

After World War II ended, the United States quickly realized that it had to address two problems to secure its fiscal and national security future. The first was that more than ten million servicemen and women needed to be reintegrated into the workforce, and many lacked appreciable work skills. The second problem was that the United States’ success in its conflict with the Soviet Union depended on the rapid development of a new, highly technical military-industrial complex. To confront these challenges, the U.S. government passed several important pieces of legislation to provide education assistance to workers and research dollars to industry. As the needs of American workers and industry have changed, many of these programs have evolved from their original purposes, but they still remain important pieces of the public policy debate.

The overwhelming portion of the government’s education money is spent on student loans, grants, and work-study programs. Resources are set aside to cover job-retraining programs for individuals who lack private-sector skills or who need to be retrained to meet changes in the economy’s demands for the labor force. National policy toward elementary and secondary education programs has typically focused on increasing resources available to school districts for nontraditional programs (such as preschool and special needs), or helping poorer schools stay competitive with wealthier institutions.

BUSINESS STIMULUS AND REGULATION

A final key aspect of domestic policy is the growth and regulation of business. The size and strength of the economy is very important to politicians whose jobs depend on citizens’ believing in their own future prosperity. At the same time, people in the United States want to live in a world where they feel safe from unfair business practices. These desires have forced the government to perform a delicate balancing act between programs that help grow the economy by providing benefits to the business sector and those that protect consumers, often by curtailing or regulating the business sector.

When it comes to regulation, the federal government has created several agencies responsible for providing for everything from worker safety (OSHA, the Occupational Safety and Health Administration), to food safety (FDA), to consumer protection, where the Bureau of Consumer Protection ensures that businesses do not mislead consumers with deceptive or manipulative practices. Another prominent federal agency, the EPA, is charged with ensuring that businesses do not excessively pollute the nation’s air or waterways. A complex array of additional regulatory agencies governs specific industries such as banking and finance, which are detailed later in this chapter.

Unchecked by government regulation, basic safety, or even labelling requirements, they put profit before the health of their customers. By some estimates, in New York City alone, thousands of children were killed by “embalmed milk” every year. Citizens–activists, journalists, scientists, and women’s groups–began agitating for change. But even as protective measures were enacted in Europe, American corporations blocked even modest regulations. Then, in 1883, Dr. Harvey Washington Wiley, a chemistry professor from Purdue University, was named chief chemist of the agriculture department, and the agency began methodically investigating food and drink fraud, even conducting shocking human tests on groups of young men who came to be known as, “The Poison Squad.”

Over the next thirty years, a titanic struggle took place, with the courageous and fascinating Dr. Wiley campaigning indefatigably for food safety and consumer protection. Together with a gallant cast, including the muckraking reporter Upton Sinclair, whose fiction revealed the horrific truth about the Chicago stockyards; Fannie Farmer, then the most famous cookbook author in the country; and Henry J. Heinz, one of the few food producers who actively advocated for pure food, Dr. Wiley changed history. When the landmark 1906 Food and Drug Act was finally passed, it was known across the land, as “Dr. Wiley’s Law.”

Blum brings to life this timeless and hugely satisfying “David and Goliath” tale with righteous verve and style, driving home the moral imperative of confronting corporate greed and government corruption with a bracing clarity, which speaks resoundingly to the enormous social and political challenges we face today.

LINK TO LEARNING

The policy areas we’ve described so far fall far short of forming an exhaustive list. This site contains the major topic categories of substantive policy in U.S. government, according to the Policy Agendas Project. View subcategories by clicking on the major topic categories.

16.4 Policymakers

LEARNING OBJECTIVES

By the end of this section, you will be able to:

• Identify types of policymakers in different issue areas
• Describe the public policy process

Many Americans were concerned when Congress began debating the Affordable Care Act. As the program took shape, many people felt the changes it proposed were being debated too hastily, would be implemented too quickly, or would summarily give the government control over an important piece of the U.S. economy—the health care industry. Ironically, the government has been heavily engaged in providing health care for decades on some level. More than 50 percent of all health care dollars spent were being spent by the U.S. government well before the ACA was enacted. As you have already learned, Medicare was created decades earlier. Despite protesters’ resistance to government involvement in health care, there is no keeping government out of Medicare; the government IS Medicare. But should the government “be” healthcare?

Since the passage of the ACA most people have found that their health insurance payments have skyrocketed. While provisions that have broad support, like keeping insurance companies from turning people away for pre-existing conditions, other portions that require people to accept coverage they do not need have resulted in much higher insurance premiums for all and a bloating of the system that arguably serves people worse than before.

What many did not realize is that few if any of the proposals that eventually became part of the ACA were original. While the country was worried about problems like terrorism, the economy, and conflicts over homosexual rights, armies of individuals were debating the best ways to fix the nation’s health care delivery. Two important but overlapping groups defended their preferred policy changes: policy advocates and policy analysts.

POLICY ADVOCATES

Take a minute to think of a policy change you believe would improve some condition in the United States. Now ask yourself this: “Why do I want to change this policy?” Are you motivated by a desire for justice? Do you feel the policy change would improve your life or that of members of your community? Is your sense of morality motivating you to change the status quo? Would your profession be helped? Do you feel that changing the policy might raise your status?

One way to think about policy advocates is to recognize that they hold a normative position on an issue, that is, they have a conviction about what they believe should or ought to be done. The best public policy, in their view, is one that accomplishes their specific goal or outcome. For this reason, advocates often begin with an objective and then try to shape or create proposals that help them accomplish that goal. Facts, evidence, and analysis are important tools for convincing policymakers or the general public of the benefits of their proposals. Private citizens often find themselves in advocacy positions, particularly if they are required to take on leadership roles in their private lives or in their organizations. The most effective advocates are usually hired professionals who form lobbying groups or think tanks to promote their agenda.

A lobbying group that frequently takes on advocacy roles is AARP (formerly the American Association of Retired Persons). AARP’s primary job is to convince the government to provide more public resources and services to senior citizens, often through regulatory or redistributive politics. Chief among its goals are lower health care costs and the safety of Social Security pension payments. These aims put AARP in the Democratic Party’s electoral coalition, since Democrats have historically been stronger advocates for Medicare’s creation and expansion. In 2002, for instance, Democrats and Republicans were debating a major change to Medicare. The Democratic Party supported expanding Medicare to include free or low-cost prescription drugs, while the Republicans preferred a plan that would require seniors to purchase drug insurance through a private insurer. The government would subsidize costs, but many seniors would still have substantial out-of-pocket expenses. To the surprise of many, even the AARP supported the Republican proposal.

While Democrats argued that their position would have provided a better deal for individuals, AARP reasoned that the Republican plan had a much better chance of passing. The Republicans controlled the House and looked likely to reclaim control of the Senate in the upcoming election. Then-president George W. Bush was a Republican and would almost certainly have vetoed the Democratic approach. AARP’s support for the legislation helped shore up support for Republicans in the 2002 midterm election and also help convince a number of moderate Democrats to support the bill (with some changes), which passed despite apparent public disapproval. AARP had done its job as an advocate for seniors by creating a new benefit it hoped could later be expanded, rather than fighting for an extreme position that would have left it with nothing.

Not all policy advocates are as willing to compromise their positions. It is much easier for a group like AARP to compromise over the amount of money seniors will receive, for instance, than it is for an evangelical religious group to compromise over issues like abortion. Nor are women’s rights groups likely to accept pay inequality. It is easier to compromise over potential future financial issues than over our individual views of morality or social justice.

POLICY ANALYSTS

A second approach to creating public policy can be a bit more objective if done honestly and fairly. Rather than starting with what ought to happen and seeking ways to make it so, policy analysts should try to identify all the possible choices available to a decision maker and then gauge their impacts if implemented. The goal of the analyst isn’t really to encourage the implementation of any of the options; rather, it is to make sure decision makers are fully informed about the implications of the decisions they do make.

Understanding the financial and other costs and benefits of policy choices requires analysts to make strategic guesses about how the public and governmental actors will respond. For example, when policymakers are considering changes to health care policy, one very important question is how many people will participate. If very few people had chosen to take advantage of the new health care plans available under the ACA marketplace, it would have been significantly cheaper than advocates proposed, but it also would have failed to accomplish the key goal of increasing the number of insured. But if people who currently have insurance had dropped it to take advantage of ACA’s subsidies, the program’s costs would have skyrocketed with very little real benefit to public health. Similarly, had all states chosen to create their own marketplaces, the cost and complexity of ACA’s implementation would have been greatly reduced.

Because advocates have an incentive to understate costs and overstate benefits, policy analysis tends to be a highly politicized aspect of government. It is critical for policymakers and voters that policy analysts provide the most accurate analysis possible. A number of independent or semi-independent think tanks have sprung up in Washington, DC, to provide assessments of policy options. Most businesses or trade organizations also employ their own policy-analysis wings to help them understand proposed changes or even offer some of their own. Some of these try to be as impartial as possible. Most, however, have a known bias toward policy advocacy. The Cato Institute, for example, is well known and very highly respected policy analysis group that both liberal and conservative politicians have turned to when considering policy options. But the Cato Institute has a somewhat libertarian bias; most of the problems it selects for analysis have the potential for private sector solutions.

LINK TO LEARNING

The RAND Corporation has conducted objective policy analysis for corporate, nonprofit, and government clients since the mid-twentieth century. What are some of the policy areas it has explored?

Both the Congress and the president have tried to reduce the bias in policy analysis by creating their own theoretically nonpartisan policy branches. In Congress, the best known of these is the Congressional Budget Office, or CBO. Authorized in the 1974 Congressional Budget and Impoundment Control Act, the CBO was formally created in 1975 as a way of increasing Congress’s independence from the executive branch. The CBO is responsible for scoring the spending or revenue impact of all proposed legislation to assess its net effect on the budget. In recent years, it has been the CBO’s responsibility to provide Congress with guidance on how to best balance the budget. The formulas that the CBO uses in scoring the budget have become an important part of the policy debate, even as the group has tried to maintain its nonpartisan nature.

In the executive branch, each individual department and agency is technically responsible for its own policy analysis. The assumption is that experts in the Federal Communications Commission or the Federal Elections Commission are best equipped to evaluate the impact of various proposals within their policy domain. Law requires that most regulatory changes made by the federal government also include the opportunity for public input so the government can both gauge public opinion and seek outside perspectives.

Executive branch agencies are usually also charged with considering the economic impact of regulatory action, although some agencies have been better at this than others. Critics have frequently singled out the EPA and OSHA for failing to adequately consider the impact of new rules on business. Within the White House itself, the Office of Management and Budget (OMB) was created to “serve the President of the United States in implementing his [or her] vision” of policy. Policy analysis is important to the OMB’s function, but as you can imagine, it frequently compromises its objectivity during policy formulation.

LINK TO LEARNING

How do the OMB and the CBO compare when it comes to impartiality?

THE POLICY PROCESS

The policy process contains four sequential stages: (1) agenda setting, (2) policy enactment, (3) policy implementation, and (4) evaluation. Given the sheer number of issues already processed by the government, called the continuing agenda, and the large number of new proposals being pushed at any one time, it is typically quite difficult to move a new policy all the way through the process.

Alternative specification, the second subphase of agenda setting, considers solutions to fix the difficulty raised in problem identification. For example, government officials may agree in the problem subphase that the increase in childhood obesity presents a societal problem worthy of government attention. However, the solution can be complex, and people who otherwise agree might come into conflict over what the best answer is. Alternatives might range from reinvestment in school physical education programs and health education classes, to taking soda and candy machines out of the schools and requiring good nutrition in school lunches. Agenda setting ends when a given problem has been selected, a solution has been paired with that problem, and the solution goes to the decision makers for a vote. Acid rain provides another illustration of agenda setting and the problems and solutions subphases. Acid rain is a widely recognized problem that did not make it on to the governmental policy agenda until Congress passed the Air Quality Act of 1967, long after environmental groups started asking for laws to regulate pollution.

In the second policy phase, enactment, the elected branches of government typically consider one specific solution to a problem and decide whether to pass it. This stage is the most visible one and usually garners the most press coverage. And yet it is somewhat anticlimactic. By the time a specific policy proposal (a solution) comes out of agenda setting for a yes/no vote, it can sometimes be something of a foregone conclusion that it will pass.

Once the policy has been enacted—usually by the legislative and/or executive branches of the government, like Congress or the president at the national level or the legislature or governor of a state—government agencies do the work of actually implementing it. On a national level, policy implementation can be either top-down or bottom-up. In top-down implementation, the federal government dictates the specifics of the policy, and each state implements it the same exact way. In bottom-up implementation, the federal government allows local areas some flexibility to meet their specific challenges and needs.

Evaluation, the last stage of the process, should be tied directly to measuring the policy’s desired outcomes. Evaluation essentially asks, “How well did this policy do what we designed it to do?” The answers can sometimes be surprising.

16.5 Budgeting and Tax Policy

LEARNING OBJECTIVES

By the end of this section, you will be able to:

• Discuss economic theories that shape U.S. economic policy
• Explain how the government uses fiscal policy tools to maintain a healthy economy
• Analyze the taxing and spending decisions made by Congress and the president
• Discuss the role of the Federal Reserve Board in monetary policy

The decision to put some policymaking functions out of the reach of Congress also reflects economic philosophies about the best ways to grow, stimulate, and maintain the economy. The role of politics in drafting the annual budget is indeed large, but we should not underestimate the challenges elected officials face as a result of decisions made in the past.

APPROACHES TO THE ECONOMY

Until the 1930s, most policy advocates argued that the best way for the government to interact with the economy was through a hands-off approach formally known as laissez-faire economics.

These policymakers believed the key to economic growth and development was the government’s allowing private markets to operate efficiently. Proponents of this school of thought believed private investors were better equipped than governments to figure out which sectors of the economy were most likely to grow and which new products were most likely to be successful. They also tended to oppose government efforts to establish quality controls or health and safety standards, believing consumers themselves would punish bad behavior by not trading with poor corporate citizens. Finally, laissez-faire proponents felt that keeping government out of the business of business would create an automatic cycle of economic growth and contraction. Contraction phases in which there is no economic growth for two consecutive quarters, called recessions, would bring business failures and higher unemployment. But this condition, they believed, would correct itself on its own if the government simply allowed the system to operate.

The Great Depression challenged the laissez-faire view, however. When President Franklin Roosevelt came to office in 1933, the United States had already been in the depths of the Great Depression for several years, since the stock market crash of 1929. Roosevelt sought to implement a new approach to economic regulation known as Keynesianism. Named for its developer, the economist John Maynard Keynes, Keynesian economics argues that it is possible for a recession to become so deep, and last for so long, that the typical models of economic collapse and recovery may not work. Keynes suggested that economic growth was closely tied to the ability of individuals to consume goods. It didn’t matter how or where investors wanted to invest their money if no one could afford to buy the products they wanted to make. And in periods of extremely high unemployment, wages for newly hired labor would be so low that new workers would be unable to afford the products they produced.

Keynesianism counters this problem by increasing government spending in ways that improve consumption. Some of the proposals Keynes suggested were payments or pension for the unemployed and retired, as well as tax incentives to encourage consumption in the middle class. His reasoning was that these individuals would be most likely to spend the money they received by purchasing more goods, which in turn would encourage production and investment. Keynes argued that the wealthy class of producers and employers had sufficient capital to meet the increased demand of consumers that government incentives would stimulate. Once consumption had increased and capital was flowing again, the government would reduce or eliminate its economic stimulus, and any money it had borrowed to create it could be repaid from higher tax revenues.

Keynesianism dominated U.S. fiscal or spending policy from the 1930s to the 1970s. By the 1970s, however, high inflation began to slow economic growth. There were a number of reasons, including higher oil prices and the costs of fighting the Vietnam War. However, some economists, such as Arthur Laffer, began to argue that the social welfare and high tax policies created in the name of Keynesianism were overstimulating the economy, creating a situation in which demand for products had outstripped investors’ willingness to increase production. 

They called for an approach known as supply-side economics, which argues that economic growth is largely a function of the productive capacity of a country. Supply-siders have argued that increased regulation and higher taxes reduce the incentive to invest new money into the economy, to the point where little growth can occur. They have advocated reducing taxes and regulations to spur economic growth. When this has been done, usually during conservative administrations, it has worked until such time as tax policy has changed – with a reversing hike in taxes which undermines the principle of supply-side theory and never allowing it to fully blossom.

SIDEBAR: Recently, a similar situation occurred again. In 2022, the economy heated up so much that supply could not keep up with demand. This was due, in huge measure, to the government’s repeated stimulus payments made to every U.S. citizen during the years surrounding the COVID pandemic. Giving no-strings-attached money to millions of individuals who were not producing goods and services incentivized massive spending. People demanded products of all kinds and, because workers were not in factories earning the money and producing the goods as normal, the cost of goods skyrocketed while at the same time the supply chain could not keep up with demand. This inflationary policy caused very serious nation-wide and even global inflation. As of the editing of this textbook in early 2023 this situation has yet to fully play out. A deep recession is very possible, and the recession of 2022 saw the prices of fuel, food, building materials and other necessities go through the roof in an inflation spiral not seen since the 1970s and 1980s.

MANDATORY SPENDING VS. DISCRETIONARY SPENDING

The desire of Keynesians to create a minimal level of aggregate demand, coupled with a Depression-era preference to promote social welfare policy, led the president and Congress to develop a federal budget with spending divided into two broad categories: mandatory and discretionary. Of these, mandatory spending is the larger, consisting of about $1.5 trillion of the projected 2022 budget.

The overwhelming portion of mandatory spending is earmarked for entitlement programs guaranteed to those who meet certain qualifications, usually based on age, income, or disability. These programs, discussed above, include Medicare and Medicaid, Social Security, and major income security programs such as unemployment insurance and SNAP. The costs of programs tied to age are relatively easy to estimate and grow largely as a function of the aging of the population. Income and disability payments are a bit more difficult to estimate. They tend to go down during periods of economic recovery and rise when the economy begins to slow down, in precisely the way Keynes suggested. A comparatively small but significant piece of the mandatory spending pie, about 14 percent, is devoted to benefits designated for former federal employees, including government y retirement and many Veterans Administration programs.

Congress is ultimately responsible for setting the formulas for mandatory payouts, but as we saw in the earlier discussion regarding Social Security, major reforms to entitlement formulas are difficult to enact. As a result, the size and growth of mandatory spending in future budgets are largely a function of previous legislation that set the formulas up in the first place. So long as supporters of particular programs can block changes to the formulas, funding will continue almost on autopilot. Keynesians support this never-ending mandatory spending, along with other elements of social welfare policy, because Keynesians believe this helps maintain a minimal level of consumption that should, in theory, prevent recessions from turning into depressions.

Supply-siders and other economic theorists, on the other hand, believe that continual reinvestment of money saved from tax cutting by businesses and citizens alike will make such severe contractions or depressions nearly impossible. Their opinion is that because tax cuts create a healthy economic environment where ongoing and increasing demand is the norm because of the increase in individual spending capacities – in absence of an economic ‘black swan event’.

Many are opposed to Keynesian economics. The following video briefly explains why.

Portions of the budget not devoted to mandatory spending are categorized as discretionary spending because Congress must pass legislation to authorize money to be spent each year. About 50 percent of the approximately $1.2 trillion set aside for discretionary spending each year pays for most of the operations of government, including employee salaries and the maintenance of federal buildings. It also covers science and technology spending, foreign affairs initiatives, education spending, federally provided transportation costs, and many of the redistributive benefits most people in the United States have come to take for granted. The other half of discretionary spending—and the second-largest component of the total budget—is devoted to the military. (Only Social Security is larger.) Defense spending is used to maintain the U.S. military presence at home and abroad, procure and develop new weapons, and cover the cost of any wars or other military engagements in which the United States is currently engaged.

In theory, the amount of revenue raised by the national government should be equal to these expenses, but with the exception of a brief period from 1998 to 2000, that has unfortunately not been the case. The economic recovery from the 2007–2009 recession, and budget control efforts implemented since then, have managed to cut the annual deficit—the amount by which expenditures are greater than revenues—by more than half. However, the amount of money the U.S. government needed to borrow to pay its bills in 2016 was still in excess of $400 billion. This was in addition to the country’s over $30 trillion of total national debt—the amount of money the government owes its creditors—as of 2022, according to the Department of the Treasury.

Click here to visit the US Debt Clock and see the current debt amount in real time!

Balancing the budget has been given lip-service for decades by both the Republican and Democratic parties. Somehow it never seems to happen. While citizens are expected to balance their individual budgets, somehow congress never manages to do so.

One frequently offered solution, particularly among supply-side advocates, is to simply cut spending. This has proven to be much easier said than done. If Congress were to try to balance the budget only through discretionary spending, it would need to cut about one-third of spending on programs that might include a tremendous number odsocial programs, and even some defense, higher education, agriculture, police enforcement, transportation, and general government operations. Given the number and popularity of many of these programs, it is difficult to imagine this would be possible politically – unless enough of congress was willing to lose their jobs in order to save the future economy of the United States. To use spending cuts alone as a way to control the deficit, Congress will almost certainly be required to cut or control the costs of mandatory spending programs, possibly even Social Security and Medicare—a radically unpopular step. Instead the debt-clock just continues to roll its way upward by the trillions – thus bequeathing an increasingly unpayable debt to future generations.

TAX POLICY

Excessively taxing necessary and desirable behaviors like consumption (with a sales tax) or investment (with a capital gains tax) will discourage citizens from engaging in them, potentially slowing economic growth. The goal of tax policy, then, is to determine the most effective way of meeting the nation’s revenue obligations without harming other public policy goals.

As you would expect, Keynesians and supply-siders disagree about which forms of tax policy are best. Keynesians, with their concern about whether consumers can really stimulate demand, prefer progressive taxes systems that increase the effective tax rate as the taxpayer’s income increases. For example, in 2015, U.S. taxpayers paid a 10 percent tax rate on the first $18,450 of income, but 15 percent on the next $56,450 (some income is excluded). The rate continues to rise, to up to 39.6 percent on any taxable income over $464,850. These brackets are somewhat distorted by the range of tax credits, deductions, and incentives the government offers, but the net effect is that the top income earners pay a greater portion of the overall income tax burden than do those at the lowest tax brackets. According to the Pew Research Center, based on tax returns in 2014, 2.7 percent of filers made more than $250,000. Those 2.7 percent of filers paid 52 percent of the income tax paid.

Supply-siders, on the other hand, prefer regressive tax systems, which lower the overall rate as individuals make more money. This does not automatically mean the wealthy pay less than the poor, simply that the percentage of their income they pay in taxes will be lower. Consider, for example, the use of excise taxes on specific goods or services as a source of revenue. Sometimes called “sin taxes” because they tend to be applied to goods like alcohol, tobacco, and gasoline, excise taxes have a regressive quality, since the amount of the good purchased by the consumer, and thus the tax paid, does not increase at the same rate as income. A person who makes $250,000 per year is likely to purchase more gasoline than a person who makes $50,000 per year.

Another example of a regressive tax paid by most U.S. workers is the payroll tax that funds Social Security. While workers contribute 7.65 percent of their income to pay for Social Security and their employers pay a matching amount, in 2015, the payroll tax was applied to only the first $118,500 of income. Individuals who earned more than that, or who made money from other sources like investments, saw their overall tax rate fall as their income increased.

SIDEBAR: One government revenue-increasing proposal very often proposed by politicians, especially during election years, is to ‘raise taxes on businesses and corporations‘. This myopic idea plays on the ignorance of the general population who think that the taxes that pay for their favorite programs will be absorbed by the corporations themselves. While this could be true for a few short months, in the long run, nothing could be further from the truth. Corporations must pass the increased production costs for their products onto the consumer. If steel, or plastic, or food goes up in price, the automobile company, computer chip maker, or restaurant chain will have to pass those costs on to consumers or risk going out of business. Similarly, if taxes go up, those costs too must be passed onto consumers and the general public in the form of increased prices for goods, and services.

In 2021, the United States raised about $3.8 trillion in revenue. Income taxes contributed $1.932 trillion. Another $1.373 trillion came from payroll taxes. This included $1.011 trillion for Social Security, $308 billion for Medicare, and $43 billion for unemployment insurance. Corporate taxes added another $284 billion.

THE FEDERAL RESERVE BOARD AND INTEREST RATES

Such panics plagued U.S. banks until 1913, when Congress enacted the Federal Reserve Act. The act established the Federal Reserve System, also known as the Fed, as the central bank of the United States. The Fed’s three original goals to promote were maximum employment, stable prices, and moderate long-term interest rates. All of these goals bring stability. The Fed’s role is now broader and includes influencing monetary policy (the means by which the nation controls the size and growth of the money supply), supervising and regulating banks, and providing them with financial services like loans.

The Federal Reserve System is overseen by a board of governors, known as the Federal Reserve Board. The president of the United States appoints the seven governors, each of whom serves a fourteen-year term (the terms are staggered). A chair and vice chair lead the board for terms of four years each. The most important work of the board is participating in the Federal Open Market Committee to set monetary policy, like interest rate levels and macroeconomic policy. The board also oversees a network of twelve regional Federal Reserve Banks, each of which serves as a “banker’s bank” for the country’s financial institutions.

The influence of the Fed cannot be overstated. Just a few words from the chairman can cause the stock market to go into a severe downward spiral or buoy the confidence of investors resulting in a significant bounce upwards of stock prices.

INSIDER PERSPECTIVE

The Role of the Federal Reserve Chair

The role of the Fed chair is one of the most important in the country. By raising or lowering banks’ interest rates, the chair has the ability reduce inflation or stimulate growth. The Fed’s dual mandate is to keep inflation low (under 2 percent) and unemployment low (below 5 percent), but efforts to meet these goals can often lead to contradictory monetary policies.

The Fed, and by extension its chair, have a tremendous responsibility. Many of the economic events of the past five decades, both good and bad, are the results of Fed policies. In the 1970s, double-digit inflation brought the economy almost to a halt, but when Paul Volcker became chair in 1979, he raised interest rates and jump-started the economy. After the stock market crash of 1987, then-chair Alan Greenspan declared, “The Federal Reserve, consistent with its responsibilities as the nation’s central bank, affirmed today its readiness to…support the economic and financial system.” His lowering of interest rates led to an unprecedented decade of economic growth through the 1990s. In the 2000s, consistently low interest rates and readily available credit contributed to the sub-prime mortgage boom and subsequent bust, which led to a global economic recession beginning in 2008.

SIDEBAR: In June of 2022, the inflation rate was an incredible 9.1%, the highest it’s been since the 1970s. Combine that with a 7 percent overall inflation rate in 2021 and you can see how severely American ‘s buying power has been cut and why it costs so much more to even go out to eat your favorite fast-food meal. Economic policy has played a huge role in the well-being of all American citizens.

Link to Learning

Look at this link and compare how the inflation rates for previous years have run compared to the year you are in while taking this course.

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