Chapter 10:

Economic Policy:
Challenging
Incrementalism
 Outlines
 Incremental and Non incremental Policymaking
 Fiscal and Monetary Policy
 Economic Theories as Policy Guides
 Measuring the Performance of the American Economy
 Financial Crisis and Non incremental Policy Change
 The Economic Stimulus Package
 The Fed at Work
 The Growth of Government Spending
 Government Deficits and the National Debt
 A Balanced Budget Amendment?
 The Regulatory State
 Economic Freedom
 Introduction
• Economic policy refers to the actions that
governments take in the economic field
• It covers the systems for setting interest rates and
government budget as well as the labor market,
national ownership, and many other areas of
government interventions into the economy.
• There are four major goals of economic policy:
stable markets, economic prosperity, business
development and protecting employment.
• Government influences the economy through
fiscal policies and monetary policy
 Incremental and Non incremental
Policymaking
• Incremental
– The most common policy approach
– Decision makers concentrated their attention on
modest changes-increases or decreases
• Non- incremental
– More common in crises
– Policymakers to search for new policies and make
dramatic changes in spending and deficit levels
 FISCAL AND MONETARY POLICY
• Both monetary and fiscal policy are
macroeconomic tools used to manage or
stimulate the economy.
• Fiscal Policy
– Policy concerning revenue (taxation) and spending, it
is generally determined by government legislation
• Monetary Policy
– Policy to do with the money supply, including
adjustment of interest rates , and it is generally
managed by a central bank.
ECONOMIC THEORIES AS POLICY GUIDES

• The goals of economic policy are widely

shared: growth in economic output and
standards of living, full and productive
employment of the nation's work force, and
stable prices with low inflation.
• Classical Theory
• Keynesian Theory
• Supply-Side Economics
 Cont..
Classical Theory

• Classical economists generally view a market economy

as a mechanism that will self adjusting achieve an
equilibrium of full employment, maximum
productivity, and stable prices if left alone by the
government.
• The price mechanism will adjust to bring into balance
the supply and demand of goods and labor
• classical economic theory relies on the free
movement of prices to counter both recession and
inflation
 Cont..

Keynesian Theory

• According to the British economist John

Maynard Keynes, economic instability was a
product of fluctuations in demand
• Keynesian theory suggested that the economy
could fall into a recession and stay there.
• Only government could take the necessary
countercyclical steps to expand demand by
spending more money itself and lowering taxes.
 Cont..
Supply-Side Economics

• Supply-side economists argue that attention to long-term

economic growth is more important than short-term
manipulation of demand
• Most supply-side economists believe that the free market is
better equipped than government to bring about lower prices
and more supplies of what people need and want
• Government taxing, spending, and monetary policies have
promoted immediate consumption instead of investment in the
future
• High taxes penalize hard work, creativity, investment, and
savings
• Government regulations should be minimized to increase
productivity and growth.
• The government should act to stimulate production and supply
rather than demand and consumption
Measuring the Performance of the
American Economy

Economic
Unemployment
Growth

Inflation Recession
 FINANCIAL CRISIS AND NONINCREMENTAL
POLICY CHANGE
• Wall Street Bailout
• Treasury’s TARP(Troubled Asset Relief
Program)
• Mortgage Modification
• Public-Private Investment Program
• GM Bankruptcy
• Fed Responses
 THE ECONOMIC STIMULUS PACKAGE
• A massive economic stimulus plan, officially called
the American Recovery and Reinvestment Act of
2009, was the centerpiece of President Barack
Obama's early policy agenda
• Its combination of spending increases and tax cuts
totaled $787 billion

Spending Priorities

“Making Work Pay”

Financial Regulation
 THE FED AT WORK

The Federal Understanding

Reserve Monetary
System Policy

Fed Fed Responses

Independence to Recession
 The Growth of
Government Spending
• Government spending grows in all presidential
administrations, regardless of promises to “cut
government spending.” Total federal spending grew
from $480 billion in 1959 to $3.9 trillion in 2015
– Challenging Incrementalism
– "Entitlement" Spending
– Incrementalism in Entitlements
– Indexing of Benefits
– Increasing Costs of In-Kind Benefits
– Backdoor Spending
Government Deficits and the National Debt

• The federal government regularly spends more than

it receives in revenues
• These annual deficits have driven up the
accumulated debt of the United States government
to over $18 trillion
• The national debt now exceeds $50,000 for every
man, woman, and child in the nation!
• The national debt is owed mostly to American
banks and financial institutions and private citizens
who buy U.S. Treasury bonds
 Cont.
• Politics, Surpluses, and Deficits
• The Burdens of Government Debt
• Bringing Spending Under Control?
• The President’s Deficit Reduction Commission
• Ignoring the Commission's Report
• Republican "Path to Prosperity“
• Obama’s Response
• Gridlock and Continued Deficit Spending
 A Balanced Budget Amendment?
• A balanced budget is a budget in which revenues are
equal to expenditures.
• A balanced budget amendment to the U.S. Constitution
would limit federal government spending to an amount
equal to or less than the revenue it receives each year.
• A balanced budget amendment challenges Keynesian
economics, which teaches that federal spending and
borrowing should counter economic cycles.
• Proponents of a balanced budget argue that only a
constitutional amendment can protect future
generations against the politicians self interested
 The Regulatory State
• Federal regulations cost Americans approximately $2
trillion per year.
• This is over half of the federal government’s annual
budget, but does not show on the budget itself, rather
it represents direct costs to the American people
• Rules pronounced by all federal agencies are published
in the Federal Register, now over 80,000 pages long.
• The numbers are staggering: over 3,600 rules were
issued in 2013, while the Congress passed only 72 laws.
• This means there were 52 new rules promulgated for
every law passed by the Congress.
 Economic Freedom
• Economic freedom has generally been on the
rise throughout the world, except in the
United States
• Overall, the global economy is judged to be
“moderately free,” with a majority of
countries gaining in overall scores in 2014.
• But the United States continues to lose
ground to its competitors in the advancement
of economic freedom and prosperity
End