Kraft ch 7
Ch 7 objective: explains how the U.S. government uses economic policy tools—especially the budget—to address issues like the deficit while balancing competing goals, value conflicts, and policy choices through systematic policy analysis.
Background 344-345
Economic policy is critical to government
Economic policy underpins all other government functions — it affects the government’s ability to fund programs, respond to crises, and maintain public confidence.
The public often doesn’t recognize economic policy as clearly as other areas (environment, education, health care), because they don’t always connect actions like tax cuts to goals like reducing unemployment or stimulating growth.
Public attention spikes only during economic crises (e.g., 2008 recession, 2013 shutdown over ACA disagreements, debates over the debt ceiling).
Economic policymaking becomes front‑page news when the economy is unstable or when major actions like stimulus packages are debated.
Programs and policies to affect economic conditions
Economic policy includes specific programs and actions designed to influence conditions such as unemployment, inflation, and growth.
But other policy areas also shape the economy — for example:
Environmental regulations may slow growth (according to conservatives).
Environmentalists respond with the idea of sustainable development to reconcile economic and environmental goals.
Economic policy is therefore not isolated — it interacts with every other policy domain.
Fiscal policy and monetary policy tools
Fiscal Policy
Fiscal policy = taxing and spending decisions of the government.
Examples: tax cuts, infrastructure spending, stimulus packages.
Fiscal policy has major effects on growth, unemployment, and deficits.
Reagan’s 1981 tax cuts dramatically reduced government revenue, constraining congressional spending and contributing to soaring national debt.
Monetary Policy
Managed by the Federal Reserve Board (“the Fed”).
Tools include controlling the money supply and interest rates.
The public often focuses more on the Fed than on fiscal policy, even though both shape economic outcomes.
Regulation
Since the Great Depression, business regulation has expanded.
Increased further in the 1960s–70s as citizens demanded protections for health, safety, and the environment.
Regulations have major economic impacts and must be balanced with growth goals.
Maintaining economic growth in the 1990s
The U.S. experienced eight years of strong, sustained economic growth in the 1990s.
This period replaced large deficits with projected budget surpluses.
Policymakers sought ways to maintain this strength through balanced fiscal and monetary strategies.
After 2007, the economic downturn and slow recovery forced policymakers to focus on:
Stimulus spending
Tax cuts
Measures to restore growth
These choices directly affected the size of the deficit and long‑term fiscal outlook.
Additional context from the pages you provided
Deficits and debt as ongoing challenges
Managing deficits and debt is a continuous responsibility of the federal government.
The deficit-dominated economic policy debates in the late 20th century.
Large deficits in the 1980s and early 1990s limited the government’s ability to pursue new policy initiatives.
The CBO projected a $600 billion deficit in 2016, showing the persistence of the issue.
Economic conditions shift rapidly
Economic policy must adapt quickly to changing conditions:
1990s → strong growth
2001 → recession
2002 → slow recovery
2008 → major recession
2009 → stimulus debates
2013 → shutdown over ACA and budget disputes
Policymakers constantly balance short‑term needs with long‑term fiscal sustainability.
Goals of Economic Policy (pp. 346–358)
Goals of Economic Policy (1 of 6)
Economic Growth
• Increased production of goods/services.
– Growth means the economy is producing more overall, increasing national output.
• Rising gross domestic product (GDP).
– GDP is the main measure of economic growth, rising GDP signals expansion.
• Many benefits from economic growth.
– Higher incomes and living standards
– More jobs and business investment
– Stronger government capacity to fund programs
– Growth boosts public confidence and political stability
• Tax revenues, warning flags.
– Growth increases tax revenues even without raising tax rates.
– Warning flags: rapid growth can hide structural problems (inequality, inflation pressures).
Goals of Economic Policy (2 of 6)
Low Levels of Unemployment
• Full employment.
– Americans prefer work over public assistance; jobs are seen as the best anti‑poverty tool.
– Low unemployment benefits individuals and the broader economy.
• Deleterious effects on economy and the budget.
– Fewer workers → less income/Social Security tax revenue.
– More unemployed → higher spending on entitlements (Medicaid, food stamps, welfare).
– Entitlements must be paid to all who qualify, causing budget strain.
• Unemployment is unevenly distributed across the population.
– Rates vary by state, region, race, and age.
– Example: African American men had nearly double the unemployment rate of white men in 2015.
• Changing character of jobs.
– Shift from manufacturing to service sector jobs.
– Service jobs often pay less and offer fewer benefits.
– Automation and global competition reduce demand for skilled factory labor.
– Many displaced workers move into lower‑paying service jobs.
– Rise of two‑income households due to economic need and increased female workforce participation.
Goals of Economic Policy (3 of 6)
Low Levels of Inflation
• Increased costs of goods/services.
– Inflation = rising prices; policymakers aim to keep it around 3% or less.
– Inflation hurts those on fixed incomes most.
• US, good record on inflation.
– CPI ranged from –0.4% to 3.2% over the past decade.
– 2009 saw deflation (negative CPI).
• Consumer Price Index (CPI).
– Measures price changes in a “market basket” of goods/services.
– Includes categories like housing, food, transportation, medical care, etc.
– Some economists argue CPI overstates inflation (Boskin Commission: by ~1.1%).
• CPI between 1, 4 percent.
– Policymakers consider 1–4% inflation acceptable.
– CPI matters because Social Security and other programs adjust benefits based on it.
– Overstated CPI → higher government spending on cost‑of‑living adjustments.
Goals of Economic Policy (4 of 6)
Positive Balance of Trade
• Balance of trade.
– Goal: export more than import → positive trade balance.
– U.S. has had a large negative balance of trade for decades.
• Large negative balance of trade.
– Causes include:
– High oil imports
– Consumer preference for foreign goods
– Weak foreign economies are buying fewer U.S. goods
– Cheaper labor abroad → import of low‑cost goods
– Critics argue this leads to exporting U.S. jobs.
• “Protectionists,” reasons to rectify the situation.
– U.S. goods may be less competitive → industries/jobs at risk.
– National security concerns (e.g., steel production).
– Equity concerns: foreign tariffs/quotas disadvantage U.S. goods.
– Political pressure to protect domestic industries and unions.
• Argument: Negative balances are not problematic.
– Free traders argue that deficits are fine if trade is mutually beneficial.
– Comparative advantage:
– Countries should export what they produce efficiently.
– Import what they produce less efficiently.
– Example: U.S. overproducing wheat and exporting to countries like Saudi Arabia.
– Globalization intensifies these trade patterns.
Goals of Economic Policy (5 of 6)
Managing Deficits and Debt
• National debt.
– Debt = accumulation of all past deficits.
– Nearly $20 trillion by December 2016.
– Interest payments in 2015: $402 billion (interest only, no principal).
• Limiting deficits/debt serious goal.
– Shows fiscal responsibility (“living within one’s means”).
– High debt reduces money available for private investment.
– Interest payments crowd out spending on other programs.
• The US increased its debt ceiling.
– Debt ceiling = legal limit on how much the government can owe.
– Became a major political battle:
– Conservatives/Tea Party refused increases without spending cuts.
– Failure to raise the ceiling risked default with global consequences.
• Deficit policy.
– Debates over whether deficits harm the economy.
– Some argue balanced budgets are essential; others note deficits didn’t prevent growth.
– Bush‑era tax cuts without spending reductions increased deficits (unusual for conservatives).
– Future uncertainty: entitlement costs, growth rates, recession risks.
– Deficit reduction may again dominate policymaking.
Goals of Economic Policy (6 of 6)
Interrelationships of Economic Goals
• Inflation and full employment.
– Traditionally seen as conflicting:
– High unemployment → lower inflation
– Low unemployment → higher inflation
– 1970s stagflation (high inflation + high unemployment) challenged this view.
• Economic growth and inflation.
– Fed monitors this closely.
– Rapid growth → more spending → rising prices.
– The Fed may raise interest rates to slow the economy and control inflation.
• Federal deficits/debt, other economic indicators.
– High deficits/debt reduce funds for private investment.
– Can limit growth and worsen unemployment.
– Fiscal choices affect all other economic goals.
• Government must consider many factors.
– Economic goals interact and sometimes conflict.
– Policymakers cannot pursue goals in isolation; must balance trade‑offs.
• Increased production of goods/services.
– Growth means the economy is producing more overall, increasing national output.
• Rising gross domestic product (GDP).
– GDP is the main measure of economic growth; rising GDP signals expansion.
• Many benefits from economic growth.
– Higher incomes and living standards
– More jobs and business investment
– Stronger government capacity to fund programs
– Growth boosts public confidence and political stability
• Tax revenues, warning flags.
– Growth increases tax revenues even without raising tax rates.
– Warning flags: rapid growth can hide structural problems (inequality, inflation pressures).
• Full employment.
– Americans prefer work over public assistance; jobs are seen as the best anti‑poverty tool.
– Low unemployment benefits individuals and the broader economy.
• Deleterious effects on economy, budget.
– Fewer workers → less income/Social Security tax revenue.
– More unemployed → higher spending on entitlements (Medicaid, food stamps, welfare).
– Entitlements must be paid to all who qualify, causing budget strain.
• Unemployment, unevenly distributed across population.
– Rates vary by state, region, race, and age.
– Example: African American men had nearly double the unemployment rate of white men in 2015.
• Changing character of jobs.
– Shift from manufacturing to service sector jobs.
– Service jobs often pay less and offer fewer benefits.
– Automation and global competition reduce demand for skilled factory labor.
– Many displaced workers move into lower‑paying service jobs.
– Rise of two‑income households due to economic need and increased female workforce participation.
• Increased costs of goods/services.
– Inflation = rising prices; policymakers aim to keep it around 3% or less.
– Inflation hurts those on fixed incomes most.
• US, good record on inflation.
– CPI ranged from –0.4% to 3.2% over the past decade.
– 2009 saw deflation (negative CPI).
• Consumer Price Index (CPI).
– Measures price changes in a “market basket” of goods/services.
– Includes categories like housing, food, transportation, medical care, etc.
– Some economists argue CPI overstates inflation (Boskin Commission: by ~1.1%).
• CPI between 1, 4 percent.
– Policymakers consider 1–4% inflation acceptable.
– CPI matters because Social Security and other programs adjust benefits based on it.
– Overstated CPI → higher government spending on cost‑of‑living adjustments.
• Balance of trade.
– Goal: export more than import → positive trade balance.
– U.S. has had a large negative balance of trade for decades.
• Large negative balance of trade.
– Causes include:
– High oil imports
– Consumer preference for foreign goods
– Weak foreign economies buying fewer U.S. goods
– Cheaper labor abroad → import of low‑cost goods
– Critics argue this leads to exporting U.S. jobs.
• “Protectionists,” reasons to rectify situation.
– U.S. goods may be less competitive → industries/jobs at risk.
– National security concerns (e.g., steel production).
– Equity concerns: foreign tariffs/quotas disadvantage U.S. goods.
– Political pressure to protect domestic industries and unions.
• Argument negative balances not problematic.
– Free traders argue deficits are fine if trade is mutually beneficial.
– Comparative advantage:
– Countries should export what they produce efficiently.
– Import what they produce less efficiently.
– Example: U.S. overproducing wheat and exporting to countries like Saudi Arabia.
– Globalization intensifies these trade patterns.
• National debt.
– Debt = accumulation of all past deficits.
– Nearly $20 trillion by December 2016.
– Interest payments in 2015: $402 billion (interest only, no principal).
• Limiting deficits/debt serious goals.
– Shows fiscal responsibility (“living within one’s means”).
– High debt reduces money available for private investment.
– Interest payments crowd out spending on other programs.
• US increased its debt ceiling.
– Debt ceiling = legal limit on how much the government can owe.
– Became a major political battle:
– Conservatives/Tea Party refused increases without spending cuts.
– Failure to raise ceiling risked default with global consequences.
• Deficit policy.
– Debates over whether deficits harm the economy.
– Some argue balanced budgets are essential; others note deficits didn’t prevent growth.
– Bush‑era tax cuts without spending reductions increased deficits (unusual for conservatives).
– Future uncertainty: entitlement costs, growth rates, recession risks.
– Deficit reduction may again dominate policymaking.
• Inflation and full employment.
– Traditionally seen as conflicting:
– High unemployment → lower inflation
– Low unemployment → higher inflation
– 1970s stagflation (high inflation + high unemployment) challenged this view.
• Economic growth and inflation.
– Fed monitors this closely.
– Rapid growth → more spending → rising prices.
– Fed may raise interest rates to slow the economy and control inflation.
• Federal deficits/debt, other economic indicators.
– High deficits/debt reduce funds for private investment.
– Can limit growth and worsen unemployment.
– Fiscal choices affect all other economic goals.
• Government must consider many factors.
– Economic goals interact and sometimes conflict.
– Policymakers cannot pursue goals in isolation; must balance trade‑offs.
Tools of Economic Policy (1 of 6) 359-367
• Policy tools to achieve goals.
Governments use multiple tools to manage the economy and pursue goals like growth, low inflation, and employment.
Tools include fiscal policy, monetary policy, regulation, subsidies, and tax policy.
Each tool influences the economy differently and carries trade‑offs.
• Fiscal policy.
Taxing and spending decisions made by the president and Congress.
Implemented through the annual federal budget process.
• Monetary policy, Fed’s responsibility.
Conducted by the Federal Reserve, which controls the money supply.
Independent from Congress and the president to avoid political influence.
Acts faster than fiscal policy and often behind closed doors.
Tools of Economic Policy (2 of 6)
Fiscal Policy
• President, Congress conduct fiscal policy.
Major changes usually begin with a presidential initiative, but Congress must approve.
Budget decisions determine spending on highways, defense, education, etc.
• Decisions concerning taxing and spending.
Policymakers adjust tax rates and government expenditures to influence the economy.
Tax code revisions are a key part of fiscal policy.
• In recession, stimulate economic growth.
Two main strategies:
Cut taxes → more disposable income → higher demand → more production → more jobs.
Increase government spending → job creation (e.g., infrastructure projects).
Tax rebates also used to boost consumer spending.
When economy overheats, government can raise taxes to reduce demand and control inflation.
• Elected officials and fiscal policy.
Politicians love tax cuts (popular).
Politicians avoid tax increases (unpopular), even when economically necessary.
Political incentives often conflict with sound economic management.
Tools of Economic Policy (3 of 6)
Monetary Policy
• Monetary policy versus fiscal policy.
Fiscal = taxes + spending (Congress + president).
Monetary = money supply (Federal Reserve).
Monetary policy acts faster and is more insulated from politics.
• Federal Reserve Board, influencing economy.
Fed increases money supply during recessions to stimulate growth.
Fed decreases money supply during inflation to cool the economy.
Fed is typically an inflation hawk — prioritizes price stability.
• Three primary tools for Fed.
Open‑market operations — buying/selling Treasury bonds.
Discount rate — interest rate charged to banks borrowing from the Fed.
Reserve requirements — percentage of deposits banks must hold in reserve.
• Fed as unbiased, apolitical actor.
Designed to be independent from political pressure.
Decisions occur behind closed doors, which is controversial in a democracy.
Example: Bernanke’s rare 2009 60 Minutes interview to reassure the public during the financial crisis.
Tools of Economic Policy (4 of 6)
Regulation
• Years government used regulatory policies.
Began with economic regulation (e.g., Interstate Commerce Commission, 1887).
Expanded massively during the New Deal to manage the economy and prevent monopolies.
• More social, protective regulatory policies.
Since the 1970s, focus shifted to social regulation:
Clean air and water
Workplace safety (OSHA)
Safe food supply
These regulations apply to multiple industries, not just one.
• Conservative claims, excessive environmental regulation.
Critics argue regulations raise business costs → reduce competitiveness → slow growth.
Led to antiregulatory movements and calls for rollbacks (e.g., early Trump administration signals).
• Government decree forcing/preventing particular activity.
Regulation = any government rule that requires or prohibits an activity.
Minimum wage laws are an example:
Higher minimum wage → possible layoffs or reduced hiring
But also → higher incomes, more spending, potential inflation
These effects are economic consequences, even if not the policy’s stated goal.
Tools of Economic Policy (5 of 6)
Incentives, Subsidies, and Support
• Local government actions, encourage growth.
Cities/states offer tax breaks to attract businesses.
Goal: job creation and economic development.
Sometimes benefits outweigh lost revenue; sometimes they do not.
• Tax expenditures.
Federal subsidies and tax incentives (“corporate welfare”).
Cost taxpayers ~$100 billion per year (Cato estimate).
Example: $25 billion in agricultural subsidies, mostly to large agribusinesses.
• Influence on economic policy.
Subsidies affect:
Federal budget (increase spending).
Tax revenue (reduce collections).
Industry performance (boost growth + employment).
International trade (help domestic firms compete abroad).
These tools shape economic outcomes and can improve competitiveness.
Tools of Economic Policy (6 of 6)
Tax Policy
• Several ways to raise revenue.
Income taxes, property taxes, sales taxes, payroll taxes.
Goal: raise enough revenue to fund government services.
• Susceptible to policy analysis.
Analysts evaluate taxes using:
Effectiveness
Efficiency
Equity
Political feasibility
Administrative feasibility
Tax policy must balance fairness, revenue needs, and public acceptance.
• Regressive tax.
Same rate for everyone → heavier burden on low‑income individuals.
Examples:
Sales taxes
Payroll taxes (Social Security, Medicare)
• Progressive tax.
Higher earners pay higher rates and more dollars.
Income tax is generally progressive.
Recent reforms lowered brackets → system became less progressive.
The Budget Process and Its Effect on Economic Policy (1 of 5) 368-374
Assumptions and Planning
• Setting budget’s major taxing/spending goals.
This stage begins many months before the budget is implemented.
Executive branch analysts and top policymakers set the overall taxing and spending targets for the upcoming fiscal year.
• Assumptions about country’s economic conditions.
Analysts must predict:
Economic growth
Unemployment levels
Inflation
Expected tax revenues
These assumptions shape the entire budget framework.
• Conditions can change after implementation.
If assumptions are wrong, the budget is affected.
Example: If unemployment is assumed to be 4% but becomes 6%, revenue falls and spending on benefits rises.
Once assumptions are set, agencies receive guidance to begin drafting their own budgets.
The Budget Process and Its Effect on Economic Policy (2 of 5)
Agency Budget Development
• Preparing estimates for funding.
Agencies prepare detailed funding requests based on:
Current programs
New initiatives they want to launch
This is where most of the technical budget work occurs.
• Budget preparation begins with bureaus/subagencies.
Subagencies draft initial requests → move up the hierarchy → finalized by agency leadership.
• Incrementalism.
Agencies typically request slightly higher budgets each year.
They know some agencies will “win” and others will “lose” depending on presidential priorities.
Once finalized, the agency’s proposal goes to OMB.
The Budget Process and Its Effect on Economic Policy (3 of 5)
OMB Budget Review
• Office of Management and Budget (OMB).
A presidential agency responsible for reviewing all agency budgets.
Ensures agency requests align with the president’s agenda.
• Hearings, each agency defends budget.
OMB holds hearings where agencies justify their programs and funding needs.
Negotiations occur because agencies usually request more than OMB plans to allow.
• Agency heads unhappy with OMB.
If OMB cuts too deeply, agency heads may appeal directly to the president.
• President/White House advisors complete review.
After revisions, the president finalizes the executive budget.
The budget signals presidential priorities (e.g., more environmental spending, less defense spending).
The president then submits the budget to Congress.
The Budget Process and Its Effect on Economic Policy (4 of 5)
Congressional Review
• House and Senate Budget Committees.
Congress uses a two‑step process to review the president’s budget.
Step 1: Budget Committees draft a concurrent budget resolution.
• Concurrent budget resolution.
Sets:
Total spending
Total revenues
Expected surplus or deficit
Allocates spending across 19 functional categories.
Guides the Appropriations Committees in writing detailed spending bills.
• Congress passes, bill to president.
Congress passes 12 separate appropriations bills.
The president can sign or veto them — but cannot veto individual items.
• Line-item veto.
Presidents have long wanted this power.
Congress granted a version to Clinton in 1996, but the Supreme Court struck it down as unconstitutional.
Without a line‑item veto, presidents must accept or reject entire bills.
Additional Congressional Dynamics
Budget politics often become contentious, especially under divided government.
Failure to pass a budget by October 1 leads to a government shutdown.
Example: 2013 shutdown over disputes about Obamacare.
Congress often resorts to:
Omnibus bills (large packages combining many programs)
Continuing resolutions (CRs) to keep government operating temporarily
The Budget Process and Its Effect on Economic Policy (5 of 5)
Budget Execution and Control
• Agencies spend money, implement programs.
After approval, agencies execute the budget by funding personnel, operations, and program payments (e.g., Social Security, farm supports).
Agencies choose how to spend funds within legal boundaries.
• Government Accountability Office (GAO).
After the fiscal year ends, GAO audits agency spending.
Ensures funds were spent legally and properly.
• Ensuring money spent legally, properly.
GAO reports findings to Congress.
Congress may reward agencies or hold them accountable for mismanagement.
• GAO reports findings to Congress.
These audits influence future budget decisions and oversight.
When the process breaks down
Increasingly common: Congress cannot agree on a new budget.
Result: Continuing resolutions keep spending frozen at last year’s levels.
Policy impact:
No ability to adjust priorities
No opportunity to update programs
Political impact:
Lawmakers avoid difficult decisions
Conflicts are postponed rather than resolved
Economic Policy: Successes and Failures (1 of 4) 375-380
Significant Income Tax Cuts
• President Reagan, economy in recession.
When Reagan took office in 1981, the economy was struggling:
Low growth
High inflation
High unemployment
Rising deficits
Reagan introduced a new fiscal approach grounded in supply‑side economics.
• Supply-side economics.
Core idea: economic stagnation was caused by insufficient investment.
Solution: cut taxes, especially for the wealthy, to encourage investment.
Logic:
Wealthy individuals invest → businesses expand → jobs increase → growth rises → tax revenue increases.
This theory shaped Reagan’s 1981 Economic Recovery Tax Act:
$162 billion tax cut
23% reduction in personal income taxes
Major cuts to top tax rates and business taxes
Short‑term results:
Growth resumed in 1983
Unemployment fell
Inflation stabilized
Long‑term consequence:
Massive deficit and debt growth (from ~$1 trillion to >$5 trillion by late 1990s).
• President Bush, similar tax policies.
Bush (2001) also faced a weak economy and pushed across‑the‑board tax cuts.
Significant portions again went to the wealthiest Americans.
Policies included:
Lower tax brackets
Rebate checks ($300–$600)
Additional cuts in 2008
Efforts to repeal the estate tax
Politically popular and intended to stimulate growth.
• Tax Cuts and Jobs Act (TCJA).
While not covered in the textbook pages, your slide references TCJA (2017).
It fits the pattern: large tax cuts, especially for corporations and high‑income earners.
Continues the long‑term debate over whether such cuts stimulate growth or worsen deficits.
Economic Policy: Successes and Failures (2 of 4)
Responses to the Deficit
• Tax cuts consequence, deficit growth.
Reagan and Bush tax cuts contributed to major increases in the federal deficit.
Fixing deficits is theoretically simple (raise taxes or cut spending) but politically difficult.
• President Reagan against tax increases.
Reagan refused to support significant tax increases.
Democrats refused to cut social programs.
Result: no political will to reduce deficits.
• Bush, Budget Enforcement Act (BEA).
In 1990, President George H. W. Bush and Congress passed the Budget Enforcement Act (BEA).
Key features:
PAYGO rule: new spending or tax cuts must be offset.
Spending caps on discretionary categories (defense, domestic, international).
Sequestration if caps were exceeded.
Effectiveness debated:
Some credit BEA + Clinton’s extension for 1990s surpluses.
Others credit strong economic growth.
Over time, policymakers expanded “emergency” exemptions, weakening the law.
Additional deficit responses
1985 Gramm‑Rudman‑Hollings Act: attempted forced deficit reduction through sequestration.
Struck down in Bowsher v. Synar (1986).
Revised in 1987 but still ineffective.
2011 Budget Control Act: mandated sequestration if no budget deal.
Many programs exempt → cuts fell mostly on discretionary spending → limited impact.
Economic Policy: Successes and Failures (3 of 4)
American Recovery and Reinvestment Act of 2009
• Response to the sluggish economy.
Passed in response to:
Housing market collapse
Financial crisis
Deep recession
Obama signed ARRA in 2009 as a major fiscal stimulus.
• Purposes of the act.
Save or create jobs
Spur economic activity
Increase accountability in government spending
Tools included:
Tax cuts
Federal spending (education, entitlements)
Grants, contracts, and loans
• Success of the ARRA debated.
CBO (2013) estimated ARRA:
Increased GDP by 0.4% to 4.1% (2009–2012)
Increased employment by up to 4.7 million jobs
Gary Burtless (Brookings):
Called ARRA a success
Gave it a “B+”
Argued the economy would have been worse without it
• Stimulus’ opponents’ claims, wasteful spending.
Many conservatives opposed the expansion of government spending.
Critics argued:
Unemployment remained high
Spending was wasteful
Debt increased without clear progress
Both parties used political messaging to frame ARRA as success or failure.
Economic Policy: Successes and Failures (4 of 4)
Pandemic Policies
• Policies to lessen economic impact.
During COVID‑19, the government implemented large‑scale economic interventions to prevent collapse.
• Stimulus checks to stimulate economy.
Direct payments to individuals to boost consumption and stabilize household finances.
• Support provided to businesses.
Programs such as:
Paycheck Protection Program (PPP)
Emergency loans and grants
Goal: prevent mass layoffs and business closures.
• Student loan payments also suspended.
Federal student loan payments paused to reduce financial strain on borrowers.
Part of a broader strategy to stabilize household budgets during the crisis.
Economic Issues and Challenges (1 of 2) 381-384
Maintaining Economic Growth
• When economic growth loses momentum.
The U.S. economy is dynamic — growth rises and falls due to:
Market swings
Inflation changes
Shifts in consumer confidence (which drives ~70% of U.S. economic activity)
The strong economic growth of the 1990s brought major benefits:
Higher tax revenues
Low unemployment
Elimination of the deficit
Reduction in national debt
Rising wages and expanded opportunities
But sustained growth never lasts forever.
• When nation enters a recession.
Early 2000s slowdowns showed how quickly growth can stall.
Recessions force policymakers to reconsider priorities and adjust spending.
Economic downturns raise difficult questions about:
Job creation
Government intervention
Deficit spending
Tax increases
Cutting or protecting popular programs
• Policymakers confront difficult political choices.
During slowdowns, policymakers must decide:
Which expenditures directly create jobs?
Is higher education funding an economic investment or too indirect?
Should government intervene more aggressively or pull back?
How much deficit growth is acceptable during a recession?
These choices are politically sensitive because every option has winners and losers.
• Not everyone agrees.
Policymakers disagree on:
The best tools for stimulating growth
Whether to prioritize deficit reduction or economic expansion
How much government should intervene
Strong constituencies resist cuts to their preferred programs, making consensus difficult.
Economic Issues and Challenges (2 of 2)
Growth of Entitlements
• Entitlement program.
An entitlement program guarantees benefits to anyone who meets eligibility requirements.
Benefits are determined by law, not by annual budget decisions.
Example: Social Security — eligibility is based on age, not yearly appropriations.
• Anyone eligible receives benefits.
Agencies do not set annual budgets for entitlements the way they do for discretionary programs.
To change spending levels, Congress must amend the authorizing law, not just adjust the budget.
• Half federal budget, entitlement programs.
Entitlements have grown dramatically:
1968: ~28% of the federal budget
Today: over 60%
Growth is driven by:
Aging population (especially baby boomers)
Rising costs of Social Security and Medicare
As entitlements grow, they crowd out discretionary spending, including:
Defense
Environmental programs
National parks
Air traffic control upgrades
Infrastructure
• Major concern about entitlement programs.
Economic concern:
Entitlements limit policymakers’ control over the budget.
They reduce flexibility to shift spending toward new priorities.
Equity concern:
Some argue no program should receive “special treatment” by being shielded from annual review.
Political reality:
Entitlements are extremely popular and politically protected.
Constituents rely on them, interest groups defend them, and politicians fear backlash.
This makes reform very difficult, even if economically desirable.
Deficits and Debt 385-389
Income Inequality
• National economy during Obama administration.
• Who benefited from economic uptick.
• Recovery going well for super‑rich.
• Less so for lower/middle classes.
Budgetary Shortfall
• CBO (2016) projected nearly $600 billion annual deficit.
• Deficits expected to continue for many years.
• Earlier deficit‑reduction goals disrupted by major events (Katrina, Medicare drug costs, 2007–08 crisis, stimulus packages).
• Quick fixes unlikely; long‑term strategy required.
• Brookings “Fiscal Ship” illustrates difficulty of balancing the budget.
• Obama’s Simpson–Bowles Commission proposed reforms but lacked full support.
• 2011 deficit‑reduction talks stalled due to partisan disagreement.
• Efficiency improvements alone cannot solve deficit (waste exists but too small to matter).
Options for Reducing the Deficit
• Three main approaches:
– Decrease entitlement (mandatory) spending.
– Decrease discretionary spending.
– Increase revenue.
Decrease Entitlement Spending
• Entitlements = over 60% of federal spending.
• Includes Social Security, Medicare, Medicaid.
• Large potential savings.
• Politically sensitive; little progress despite calls for reform.
Decrease Discretionary Spending
• Includes education, environment, foreign aid, domestic programs.
• Defense spending also discretionary (separate category).
• Discretionary spending shrinking for decades.
• Critics target this category for “waste.”
• 2009 stimulus plan largely discretionary.
Increase Revenue
• Could occur through economic growth.
• More likely requires higher taxes or fees.
• Calls to reduce/eliminate tax expenditures (tax breaks).
• Supporters: U.S. taxes low compared to other industrialized nations.
• Critics: higher taxes may slow growth or increase spending.
Criteria for Evaluating Deficit‑Reduction Options
• Economic: short‑ and long‑term economic impacts.
• Political: role of federal government; political feasibility.
• Ethical/Equity: who bears the burden; fairness of distribution.
Focused Discussion: Fiscal Policy and Economic Recovery (1 of 3) 390-398
Economic Issues
• Increased government expenditures during 2021/2022.
Large federal spending increases (stimulus, pandemic recovery, infrastructure) raised concerns about deficits.
Similar to earlier periods, increased spending can stimulate the economy but also expands the deficit.
• Republicans/economists argued government overspent.
Many conservatives and economists argue that excessive government spending fuels inflation and worsens deficits.
They often claim the government should reduce spending rather than expand it.
• Recent history of tax changes.
Debates mirror long‑standing arguments:
Conservatives argue tax cuts stimulate growth and indirectly increase revenue.
Others argue eliminating tax expenditures (loopholes, deductions) would broaden the tax base and simplify the code.
Raising taxes is politically difficult, even when deficits grow.
• Typical argument against increasing taxes.
Raising taxes reduces disposable income → lowers consumer spending → slows economic growth.
Slower growth can reduce tax revenue, undermining the purpose of the tax increase.
Anti‑tax groups (Americans for Tax Reform, National Taxpayers Union) strongly oppose tax hikes.
Focused Discussion: Fiscal Policy and Economic Recovery (2 of 3)
Political Issues
• Often fall along party divisions.
Deficit debates are intensely partisan.
Republicans typically emphasize spending cuts; Democrats often emphasize revenue increases or mixed approaches.
Entitlement reform is especially polarizing.
• Increases in infrastructure expenditures needed.
Many argue infrastructure has been underfunded for decades.
Bridges, highways, and public systems are deteriorating.
Supporters say infrastructure spending boosts long‑term economic performance.
• Perceived political nature, more opposition.
Cuts to discretionary programs (environment, education, Amtrak, etc.) spark political fights.
Some states rejected high‑speed rail funding as “wasteful,” showing how political framing shapes support.
Defense and homeland security cuts are politically risky — no one wants to appear “weak on defense.”
• Decreasing versus raising taxes.
Tax increases are politically toxic and easy to attack in campaigns.
Politicians prefer proposing tax cuts, even when deficits rise.
Public dislikes taxes in general, but majorities support raising taxes on the wealthy when asked specifically.
Focused Discussion: Fiscal Policy and Economic Recovery (3 of 3)
Equity and Other Ethical Issues
• Different ideas of fair, moral.
People disagree on what is fair:
Is it fair to raise taxes?
Is it moral to cut promised entitlements?
Social Security and Medicare are seen as contracts — cutting them feels like breaking a promise.
• Proponents of infrastructure spending argument.
Supporters argue discretionary programs (infrastructure, education, job training) have been underfunded for decades.
These investments promote long‑term economic growth and public well‑being.
Cutting them further is seen as unfair and harmful.
• Increase or decrease of taxes.
Equity debates arise over who should bear the tax burden:
Some argue the wealthy should get the biggest cuts because they pay the most.
Others argue cuts should help the poor because they benefit most.
Eliminating tax expenditures is also framed as an equity issue (fiscal neutrality).
• Hope result spurs economic growth.
Policymakers often hope economic growth will solve the deficit without painful cuts or tax increases.
But relying on growth alone is risky — projections can be wrong, and unexpected events (wars, disasters, recessions) change budget needs.