Making Domestic Policy

I)       Making Domestic Policy

A)    Politics and the Economy—presidents try to achieve a healthy (growing) economy all of the time, but that is not always achievable. Whether employment is growing or falling, and whether business investment is growing is often beyond the control of the president in a free market, capitalist economy.

1)      What Economic Numbers Hurt the President?

(a)    Unemployment—rising unemployment figures or a decline in the gross domestic product makes even employed people less willing to support the incumbent government.

B)    How the Government Tries to Manage the Economy—despite the fact the president gets top-notch advice from the Council of Economic Advisors (CEA) and Congress from the Congressional Budget Office (CBO), it is impossible to know how the economy is going to perform more than a few month out—and we often can’t tell when a recession begins, or even ends, until months after the event.

1)      The Federal Reserve Board—the Fed is, in theory, a relatively free agent; 7 members are appointed for 14-year terms, with one appointed as the chair (and head of the New York City Federal Reserve Bank) for a 4 year term as the president of the Board. The Fed is charged largely to determine the interest rate it charges member banks for short-term loans that ensure liquidity in the credits system—the so-called “prime rate.” This in turn affects the interest rate banks charge customers for loans on houses, cars, and other consumer debt. This is how the money supply is regulated, which in turn is also used to control inflation; the higher the interest rate the Fed charges banks, the tighter the money supply, which in turn slows the growth of the economy—and vice versa.

2)      Fiscal Policy—the taxing and spending policies undertaken by government is known as fiscal policy. Ideally, in a recession, the government policy would entail increasing spending and decreasing taxation; in periods of inflation, the government would act to slow the economy by decreasing spending and increasing taxation. Obviously, the latter policy is not very popular with the American people, and therefore most politicians are reluctant to embrace it, even when it is needed. With the re-emergence of conservative small-government advocates in the late 1970s, it has gotten even more difficult to raise taxes—not only at the federal level, but at the state and local levels, as well.

(a)    Supply-side economics—part of the legitimization for the Reagan tax cuts was the theory of supply-side economics, which said that by decreasing tax rates, government could spur the economy enough to put more people to work, which would cause the economy to grow, putting more people to work, and actually increase tax revenue. The application of this theory, however, resulted in the Reagan Recession, which saw unemployment reach 25 percent in some areas, and the federal deficit to balloon to unheard of levels.

C)    Social Security and Medicare—although the federal government spends its (okay, actually our money) on many things, only 4 of them make up the largest share of the federal budget: Social Security, Medicare, national defense, and interest on the national debt.

1)      Changing Social Security—when Social Security began in 1935, there were 42 workers paying taxes for each beneficiary receiving a check; today, there are about 3.5 workers paying for each beneficiary. This means there is more money being paid out than there is coming in. Politicians have long been aware of this problem, and in fact in the mid-1980s took steps to remedy the situation by creating the Social Security Trust Fund, which took the money raised from a tax increase (during the Reagan Administration!) and investing it in the safest investment in the world—US Treasury notes, which are used to finance the federal government debt. Proposals for “solving” the Social Security “crisis” include:

(a)    Raise the retirement age

(b)   Reduce the benefits for high earners

(c)    Raise Taxes on all workers

(d)   Increase the wage cap

(e)    Let individuals make investments of some or all of their Social Security funds—also known as “privatizing” Social Security.

2)      Social Security Trust Fund—what you hear very little of from the talking heads on television is that the Social Security Trust Fund was set up to handle this shortfall—and the trustees, making the most conservative of estimates, guarantee that it can do so until 2036, according to the trustees latest report—when the last of the baby boomers will be 72 years old. Then the fund will only be able to pay out 75 percent of promised benefits. So, in reality, there is no crisis involving Social Security.

3)      Changing Medicare—when Medicare was passed in 1965, its sponsors said it would cost 12 billion dollars a year (that’s 82 billion in today’s dollars, by the way); in 2007 the government spent 440 billion dollars. These costs have become higher for several reasons: people are living longer (in part because of the better medical care they have been receiving); and new medical and surgical procedures are saving more lives, but often at very high prices.

(a)    Management of Medicare

(b)   Keeping costs low

(c)    Health Savings Account

D)    Making Policy Decisions—each policy has a cost and a benefit; a cost is the burden of a program (whether that be increased taxes, unpleasant regulations, or social stigma), while a benefit is a gain, whether financial or social, that flows to people. Whether a policy has a net benefit or a net cost greatly depends upon one’s ideological perspective or economic or social relationship to what the policy effects.

1)      Majoritarian Politics—politics that promotes widely distributed benefits and costs that make them appeal to a large portion of the populace—like Social Security and Medicare.

2)      Client Politics—helps prospective beneficiaries organize themselves. The best examples are subsidies paid to farmers and dairies, and regulations and tariffs concerning the import of certain food products. The farm lobby is very effective in gaining concessions for their objectives (which they sell as benefiting the family farm, even though most of the beneficiaries are actually corporate farms), but the costs are widely spread out. Sometimes that dynamic changes, however, like the dramatic reform of welfare.

3)      Interest-Group Politics—when a small group gets a lot of benefits and another small group pays most of the cost, both sides have strong incentives to form interest groups to advocate their positions; i.e. labor unions and management from the 1930s-1970s, consumer advocates and manufacturers in the 1960s-1970s.

4)      Entrepreneurial Politics—Often laws are passed that benefit society as a whole over the objections of a small interest group that is responsible for paying most of the cost. The best example are the many environmental and consumer protections laws passed during the 1970s.

E)     What These Political Differences Mean—majorities can be formed by each of these four types of politics. On any given issue, one or another group may be powerful, but no one group is powerful across all issues.