Chapter 16

Domestic Policy
• The first part of this chapter focuses on public policy and the major
steps in public policy making.
• The second introduces economic policy and a number of basic terms
we use to discuss the economy.
•What is public policy?
• Public policy is a course of government action or inaction in response
to public problems. It is associated with formally approved policy
goals and means, as well as the regulations and practices of agencies
that implement programs.
• If we were to speak Shakespearean, we would define public policy as
“Whatever governments choose to do or not to do”
• Public policy is inherently political, it reflects the exercise of power in
our system of government, our economic system, and our society in
general. Think about it: you will vote this year for the first time and
the reason why you will vote for candidate X or Y will be because of
the policies they would like to implement once elected; you will hope
that the promises they made would become their policies to be
implemented. So a conservative will vote for a candidate whose
policies would be right-of-center, and a liberal for a candidate whose
policies would be left-of-center, therefore, public policy is inherently
political.
• Think about public policy as what comes after the equal sign in a mathematical
equation. The structure of government plus the political process form the
elements on the left side of the equation. The sum of these interactions equals
the policies that affect each citizen. Any change caused by the effects of the
policies (the right side of the equation) influences the structure of the
government and the political process (the left side of the equation) and vice
versa.

• Public opinion
• The Constitution
• Interest Groups + Institutions of Government = public policy
• Elections and Campaigns
• Some states are (rather) conservative, whereas others (rather) liberal.
• We sort of know which state is which, but we also have an empirical
way to measure it. Policy liberalism index is a measure of how liberal
or conservative a state is on some state policies.
• Do you know which is the most conservative state in America? What
about the most liberal state? See the next two slides. I wonder if you
know the answers and if you are somewhat surprised to see the
results. The results are based on many different political, economic,
social, and cultural criteria; some studies take over 200 factors into
consideration.
There are three major ways in which policies can affect
society – see below (they are explained in detail on the
following slides)
• Distribution – government providing things of value to specific groups
(economic development, it gives benefits to specific groups in a
society).
• Regulations – legal rules created by the government agencies base on
authority delegated by the legislature (it stops an action by a person,
organization, or group or mandates other behaviors or actions).
• Redistribution – government providing a broad segment of the society
with something of value (it resembles distribution in many ways, but a
much larger segment of society receives goods or services).
• 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.
• 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.
• A final type of policy is redistributive policy, so named because it
redistributes resources in society from one group to another. 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. 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 Steps of Policymaking
• 1. Identifying the problem – publicize a problem and demand
government action.
• Participants: media, interest groups, citizen initiatives, public opinion.
• Without a doubt, some problems simply cry out for action. Some
events that bring a problem to the attention of both the public and
policymakers are called focusing events – they capture attention and
highlight the existence of a problem. These events also serve as a
trigger mechanism – a means of propelling an established problem on
to the next stage of the policy process, setting an agenda.
• 2. Setting an agenda – decide what issues will be resolved and what matters government
will address (agenda – a list of issues and ideas up for discussion or actions to be
undertaken).
• Participants: elites, president, congress.
• People and groups who can best articulate their position or who have what it takes to
gain access to policymakers (such as money for reelection campaigns, the support of
group members, or well-connected lobbyists) will usually succeed in getting their
problem on the agenda.
• Once a problem is on the agenda, how do you keep it there? There is no guarantee that
policymakers will consistently treat an issue as a high priority, year in and year out.
• Issue-attention cycle: the pattern of problems quickly gathering attention but then
failing to remain in the spotlight.
• 3. formulating policy – develop policy proposals to resolve issues and
ameliorate problems.
• Participants: think tanks, presidents and executive office,
congressional committees, interest groups.
• Many actors both inside and outside of government can affect the
agenda-setting process. Once a problem makes it onto the agenda,
however, the political pathways haven’t reached their end. In fact, the
next phase of the policymaking process, formulation, is as politically
driven as agenda setting, if not more so.
• 4. legitimizing policy – select a proposal, generate political support for
it, enact it into law, and rule on its Constitutionality.
• Participants: interest groups, president, congress, courts.
• Legitimacy implies fairness, formal rules, and the ability to see the
process in action help ensure fairness. When legitimacy is established,
people are willing to accept policies – even if they dislike them.
• At the heart of legitimacy is the notion that both the policy and the
process by which the policy was made conformed to the rules of the
system.
• 5. policy implementation – organize departments and agencies, provide payments
or services, and levy taxes.
• Participants: president and the White House.
• Executive departments and agencies.
• Once policies have been created, someone actually has to do something with
them. As its name implies, the executive branch of government is charged with
executing or implementing the policies made by a legislature, the courts, or the
executive branch itself.
• The other two branches, however, also influence how the policies they make are
carried out. Add to this the openness of the government to citizen activity, and a
picture emerges of implementation as a highly political process.
• Discretion – the power to apply policy in ways that fit particular circumstances.
• 6. policy evaluation – report outputs of government programs,
evaluate policy impact on target and non-target groups, and propose
changes and reforms.
• Participants: executive departments and agencies, congressional
oversight committees, mass media, think tanks, interest groups.
• Do the policies work?
• Unlike the world of business where ultimate success can be
determined by bottom line measures such as profit and losses,
evaluation of policy effectiveness is more complex and often less
conclusive.
A major problem with policies/statues/laws
• Since all democratic legislatures, including the U.S. Congress, are
bodies in which majorities are needed to pass laws, legislation is often
written in ways designed to attract wide support among the diverse
membership. One way to do this is to write a vaguely worded policy
that allows legislators to read their own interests and the interests of
their constituents into the proposal.
• This is the end of the first part of this chapter.
You can now take the first chapter 16 quiz which
covers slides 3 through 21– good luck!
• This second part of the chapter focuses on economic policy
• Economic policy – public policies and economics are deeply
intertwined. Almost every type of policy has some type of financial
implication for either the government that creates the policies or the
citizens that are affected by the policies themselves.
• How much money do you think our federal government spends
yearly? What do you think are the biggest expenditures? See the next
slide.
As you see, the federal government spent $3.8 trillion in2015.
This number has been increasing – it has been increasing for a
number of years now, as a matter of fact.
• You can also see that the biggest
expenditures are:
• 1. Social security
• 2. Health care (including
Medicare and Medicaid)
• 3. The military
• 4. Interest on the debt we owe
(since our debt increases with
every year, that number goes up
too)
You should also notice that we differentiate between
‘discretionary’ spending which has to be authorized by
Congress and ‘mandatory’ spending which is on ‘autopilot’.
• That means that even if we have a government shut
down, many expenditures are not affected. For
example, social security deposits will be made, though
funding for discretionary items might run out.
• 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.
weapons, and cover the cost of any wars or other military engagements in
which the United States is currently engaged.
• Here is the president’s
discretionary budget request
from 2018 along with its major
components.
The expenditures defined below are parts of mandatory
spending. We also call them entitlements.
• Entitlements – government expenditures required by law. An entitlement
program guarantees benefits to a particular group, and virtually everyone
will eventually qualify for the plan given the relatively low requirements for
enrollment.
• Medicare – health coverage for seniors.
• Medicaid – health coverage for the poor.
• Social security – a program established in 1935 to provide a minimal
pension for older Americans, it now includes retirement-age surviving
spouses, dependents, and disabled working-age people. Full retirement age
was originally set at sixty-five, although changes in legislation have
increased it to sixty-seven for workers born after 1959.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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.
• 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 which would stimulate the economy.
• This approach became quite popular among some members of the Obama
Administration. It is also popular among some members of the Trump Administration,
hence the stimulus package recently passed by Congress and signed into law by Mr.
Trump. The actions of both the Obama administration and the Trump administration
result in deficit spending.
• 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.
Those who do not support Keynesian Economics
are likely to support supply-side economics.
• Supply-side economics 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. This view was prevalent among
Republicans in the 1980s, also known as “trickle-down economics,”
according to which benefits for the wealthy trickle down to everyone
else. It was also known as “Reaganomics,” named after President
Ronald Reagan.
How much money does our federal government have?
It all depends on how much it collects every year.
• In 2015, the U.S. government
collected about $3.18 trillion in
revenue. The largest portion of
that total came from taxes on
individual income, at $1.48
trillion. Then, from payroll taxes
– a tax on earnings that funds
social security and Medicare.
Corporate income taxes come in
third.
• When economists gauge the economy’s performance, they usually
focus on five figures: inflation, unemployment, gross domestic
product, the balance of trade, and the budget deficit (or surplus).
• Income tax is a progressive tax – the more money you make, the
higher the percentage you pay in taxes, up to a top rate of 37 percent.
• A progressive tax – a tax structured such that higher-income
individuals pay a larger percentage of their income in taxes.
• A regressive tax – a tax structured such that higher-income individuals
pay a lower percentage of their income in taxes.
• Marginal tax bracket – the tax rate you pay on the last dollar that you
earn in a given year.
• Inflation – an increase in prices
over time.
• Deflation – dropping prices.
• Consumer Price Index (CPI) –
figure representing the cost of a
specific set of goods and services
tracked at regular intervals by the
Department of Labor. It helps us
measure inflationary/deflationary
trends in the economy.
• Unemployment rate – the
percentage of Americans who
are currently not working but
are seeking jobs.
• Those who have given up
looking for jobs are not counted,
either as employed or
unemployed, undocumented
(illegal) workers are left out as
well.
• The balance of trade measures
the difference between imports
and exports (trade surplus v.
trade deficit). The United States
has been running a significant
trade deficit for years, though it
fell from $840 billion in 2008 to
$558 billion in 2011.
• Gross domestic product (GDP):
the value of all goods and
services produced in a nation.
• The budget deficit – the amount by which a government’s
expenditures exceed its revenues.
• The budget surplus – the amount by which a government’s revenues
exceed its expenditures.
• National debt – the nation’s cumulative deficits.
• Fiscal policy – taxation and spending decisions made by the
government.
• If you look at revenue and
spending in 2018, you will see
that we spent more than we
collected in revenue. It means
we had a budget deficit in 2018.
Had it been the other way
around, we would have had a
budget surplus. What about
2019 – do the numbers project a
budget deficit or surplus?
Our national debt stands at around $23 trillion and is projected to continue to
increase. This chart, however, does not include the recent Covid-19-related
spending which might add up to $6 trillion this year alone.
 Compare this slide (from 2015) with the next one. Has the general
government debt per capita (per person) in the United States been going up
or down?
• General Government Gross Debt
per Capita in 2015
• This number represents the
amount of money each of us
would have to give the federal
government to help it
completely pay off our national
debt in 2015.
2018
• If you ever wondered why the loan you obtained to buy a car has a high
interest rate or why the interest rate is so low on your savings account right
now, it has a lot to do with the Federal Reserve. Currently, the interest rate
is close to zero. This is done to stimulate lending and increase overall
spending throughout the economy. That is also why financial experts advise
Americans to re-finance their mortgages right now, because the rates are so
low. Thus, the federal interest rate is a benchmark for interest rates on
credit cards, mortgages, and bank loans, and the main tool the nation's
central bank uses to influence the U.S. economy. If it goes down, you might
obtain a lower interest rate on your mortgage or car. If it goes up, your
credit car might charge you a higher interest rate, but your savings account
might also pay you a higher interest rate.
• 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 (this is how the checks you wrote
recently were cleared).
The Federal Reserve System (the
Fed) – the independent 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.
• We are done with the chapter. Please take the second chapter 16 quiz
which covers slides 23 through 59. Good luck!