Chapter Summary

Economic policy, the development of programs and policies to affect economic conditions, is critical to almost everything government does. At the same time, policy decisions on the health care, the environment, or the national security impact the federal budget and economic priorities.

The federal government has five interrelated economic goals. The first, economic growth, is an increase in production of goods and services (measured by the gross domestic product [GDP]). Growth adds to the government’s revenues and enables redistributive tax policies. Another goal is full employment, benefiting individuals while reducing government spending on welfare programs. A third goal is low inflation, or cost increases for goods and services, measured by the Consumer Price Index (CPI). Fourth, the government seeks a positive balance of trade. Manageable national deficits and debts are the final economic goal.

The government has many economic tools available. Fiscal policy refers to two broad tools—taxing and spending approaches. The Federal Reserve Board (Fed), among the nation’s most powerful agencies, implements monetary policy independent of Congress, impacts the economy quickly, and makes decisions behind closed doors. The Fed pays a great deal of attention to keeping inflation low, manages the nation’s money supply, and regulates banking. Regulation is an indirect economic policy tool that tends to address issues affecting multiple industries, such as family leave or workplace safety. The federal government can utilize tools such as incentives, subsidies, and support to promote particular industries or sectors. Tax policy is a tool with the goal of collecting enough revenue to support expenditures, yet it is difficult to agree on how to apply it. Regressive taxes are those that apply the same rate to everyone, regardless of income while progressive taxes apply higher tax rates to those with higher incomes.

The budget process begins with developing assumptions about the economic conditions of the country and sketching out major taxing and spending goals. Government agencies develop budgets, the Office of Management and Budget (OMB) reviews them, and Congress deliberates over them. Once Congress passes a budget, the president signs it. Many governors (but not the president) have line-item veto power enabling them to strike specific items from a budget bill. Once a budget is approved, it is executed and controlled by the Government Accountability Office (GAO). The polarized disagreements in Congress have prevented passage of annual budgets in recent years.

Through the late 20th century until today, governments have tried to address the deficit. In 1990, Congress passed the Budget Enforcement Act, a “pay-as-you-go” policy requiring taxing and spending to be deficit neutral. In the 2011 Budget Control Act, Congress mandated automatic program cuts if a federal budget were not passed. The American Recovery and Reinvestment Act of 2009 attempted to address the home mortgage and financial industry crises of 2008. Opinions of its effectiveness are mixed. Entitlement programs, in which any person who meets eligibility requirements receives benefits, account for a large and growing portion of the federal budget. State governments face similar budget challenges. A final budgetary concern is growing income inequality.