Unit 5: Public Policy To Do List

Study Break

In this section, we're going to discuss some of the most important domestic issues confronting the federal government: cotton tariffs, railroad construction, and negotiations with Indian tribes.

Okay, we're not. But those were among the most important federal issues not so long ago. If they've slipped off of your radar, that's because they've also slipped off of Washington's radar. The issues that preoccupy Congress today don't look anything like the issues that were debated a century ago. The federal government had very little to do with the economy until the twentieth century, and did not fully embrace the issue until the 1930s. We paid little attention to civil rights before the 1950s, and we didn't "discover" poverty until the 1960s. Until recently, education was something for the states to worry about. And health care was something "between you and your doctor."

Who knows what topics we'll be covering a century from now, when Shmoop will be beamed straight into your frontal cortex? Probably Newt Gingrich's plan for making the Moon the 51st state. (No, we're not making that up.)

Hey, it's time for everyone's single favorite thing about the gummint—taxes! They're like Uncle Sam hitting you with a stick!

There's no denying it—taxes are muy unpleasant. Hopefully you won't need to fill out an IRS Form 1040 for many, many more years (or ever, if you put all of your money in an offshore account in Barbados). But taxes are also necessary, if you enjoy things like "roads" and "not getting invaded by Canada."

Policymaking is a lot about deciding what money goes where—but to obtain the money in the first place, the government largely relies on income taxes. An income tax was first levied during the Civil War. But this method of taxation was deemed constitutionally suspect until the ratification of the 16th Amendment in 1913. Currently, individual income taxes make up the lion's share of federal government revenue, about 45%.

The individual income tax code is progressive, based on the ability-to-pay-principle (the richer you are, the higher your rate). Corporate taxes produce about 12% of the government's income. The federal government also collects payroll taxes to fund certain specified programs such as Social Security and Medicare; these payroll taxes represent 36% of all federal government revenue. Import taxes and excise taxes (taxes on some "luxury" goods) generate about 3% apiece. And estate taxes (taxes on inheritance for the richest Americans) yield 1% percent.

Taxes aren't only how the government pays its bills—they're an important way to set policy, too. The federal government frequently uses tax credits and deductions (which lower your total tax bill) to promote behaviors it wants to encourage. For instance, the government wants to promote homeownership and higher education, so you get tax deductions for interest paid on your mortgage and for paying college tuition. More controversially, the tax code also includes large tax incentives to encourage oil companies to drill more. All of these incentives in the tax code shape public policy—but they also make America's tax code the most complex in the world (and keep your neighborhood H&R Block in business).

Once again, we turn to that indispensable guide to American politics—no, not the Federalist Papers. The Simpsons:

[everyone boos] Bill defeated. [bangs gavel]

You know all of the wrangling you see on the news over the most controversial parts of Congress's budget—"bridges to nowhere," funding for Planned Parenthood, "funding for the perverted arts," and so on? Budget-wise, it's all a sideshow.

All those high-publicity arguments concern only a small fraction of government spending. Every year, most government spending is non-negotiable or mandatory. Almost 60% of the budget goes to entitlements(programs like Social Security and Medicare, in which benefits are guaranteed if you meet certain eligibility requirements); another 6% or so goes to make interest payments on the national debt (just like you need to make interest payments on a credit card).

This leaves only a third of all spending classified as discretionary, or subject to negotiation and debate. And even within this category, spending choices are narrowed by spending decisions made in prior years. This is because Congress determines both budget outlays (money Congress is obligating to pay in the coming year) and budget authority—financial obligations that Congress undertakes for future years. That is, Congress authorizes agencies and institutions, like the Army, to sign contracts and incur financial obligations that Congress will honor in future years.

The federal budget is thousands of pages long, and believe us, it's a page-turner. We wish Hollywood would get its act together and turn it into a movie—or better yet, a whole bunch of movies. C'mon guys—you're sitting on the next Lord of the Rings franchise.

But it takes a lot of work to churn out such a thrilling document every year. In order for the federal government to have an approved budget for the fiscal year beginning every October 1, the executive branch begins to collect information roughly a year and a half in advance. Here's what the process looks like:

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  Government agencies prepare spending estimates.
   
  
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  The Office of Management and Budget (the executive branch agency responsible for preparing and monitoring the budget) reviews and perhaps revises these estimates. The OMB then crafts the president's budget proposal for submission by the first Monday in February.
   
  
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  The president's budget is reviewed by House and Senate committees, assisted by the Congressional Budget Office—the non-partisan agency responsible for assisting Congress with economic analysis.
   
  
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  The House and Senate Budget Committees prepare a preliminary budget setting general revenue and spending estimates. This concurrent resolution is intended to provide broad guidelines for the committees reviewing the president's budget. It is to be passed by Congress by April 15, but this deadline not always met.
   
  
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  In September, the budget committees submit a second resolution containing the spending decisions reached by the Congressional committees. The various spending decisions are contained within thirteenappropriations bills, which are to be passed and submitted to the president for his signature by October 1, the beginning of the fiscal year. But often, this deadline is not met. In order for the government to continue operations without a new budget, Congress passes a continuing resolution authorizing government agencies to continue operations in the short term.
  

Watch out—it's a Deficit and Debt Dragon! (Go to 2:00.)

Okay, we're trying to make this as exciting as possible (and so is Congress, as you can tell whenever they break out the dragon posters). But, even though the deficit seems like the world's most annoying math problem, it's a problem that threatens to breathe its fiery dragon-breath all over you in the near future.

To begin with, the budget deficit is the amount of money the government takes in every year, and the amount it spends. Each year it spends more than it takes in, it runs a deficit—the extra spending is made up by borrowing money at interest. On the other hand, when the government takes in more than it spends, it's running a budget surplus.

In itself, there's nothing wrong with a deficit—the question is how big the deficit is, and when you have it. Keynesian economists, for instance (more on them below), argue that we should have a surplus in good times and a deficit in bad times (basically, the "save for a rainy day" principle). The problem comes when you run deficits that are too big, for too long. Why would we do that? Basically, because we like having nice things, but not paying for them. The federal budget includes lots of goodies (especially entitlements), but not the taxes required to pay for them. Borrowing is a way of kicking politically-unpopular decisions down the road.

The 2011 budget deficit was about $1.3 trillion. A lot of that has to do with the bad state of the economy (the government spent a lot of money on economic recovery efforts, and when people are making less money, they pay less in taxes). But we haven't always run a deficit: President Clinton left office with a budget surplus, but it was quickly turned back into a deficit under President Bush (largely thanks to tax cuts and war spending).

The main problem with deficits is that they increase the national debt—the total amount of money the government owes. Again, there's no problem with some debt, just as it's okay to carry a reasonable balance on your credit card. But at a certain point, too much debt becomes unsustainable: people stop lending to you, and the interest you pay on your debt squeezes out all of your discretionary spending (your credit card interest is so high that you can't go out for lunch). At the far end, too much debt can cause an economic crisis, as we've seen in Greece.

Economists generally agree that we're on that unsustainable course (the public debt is close to $11 trillion). The question is what we can do to reduce the debt, and how long we have to do something about it before it causes a crisis—those are essentially the questions at stake when politicians talk about debt.

We basically have two options: cutting spending (especially on entitlements and defense), and raising taxes. We might be able to solve the problem with only one of those options (recent Republican proposals revolve almost entirely around spending cuts). The problem is that either option, on its own, would probably be hugely unpopular. To solve the problem just by cutting spending, you'd need to nearly eliminate extremely popular government programs; to solve it only with more revenue, you'd need to raise huge new taxes. What's most likely, then, is some mix of spending cuts and tax increases—but what kind of mix, and whether Washington can agree on a plan while there's still time—is very much up in the air.

Economic Policy

As much as he probably enjoys being president, Barack Obama must also have times when he wishes he was in the 18th century and people didn't blame the economy on the president. But it's too late for that now—regardless of how much the president himself can actually do to improve the economy or create jobs, the federal government asked for the job.

Washington's economic responsibilities have grown more and more over the last century. The government usually practiced a philosophy of laissez faire (French for, "you're on your own, buddy"), until the social problems accompanying industrialization led federal policymakers to rethink the role of government. During theProgressive Era, the federal government worked to protect workers from unsafe conditions and consumers from unsafe products. Monopolies were broken up with anti-trust legislation and workers were allowed to form unions, strike, and picket. During the Depression, government's role increased further. Under the New Deal, the government funded public works projects, provided direct relief to the unemployed, increased regulations on banks, and provided mortgage relief to home and farm owners.

Since the Depression, it is assumed that the government has an ongoing responsibility to manage the economy. This is achieved through the implementation of fiscal policy and monetary policy.

On the other hand, supply-side economists argue that that taxes on businesses and high-income earners should be reduced in order to free capital for investment and, therefore, job creation and economic growth. Lower taxes mean higher deficits; although supply-siders have argued that lower taxes will improve the economy and therefore increase government revenue, that hasn't happened. So supply-siders are divided between those who don't mind running deficits (like Presidents Reagan and Dubya), and those who want to cut government spending along with taxes.

Besides fiscal policy, there's also monetary policy (affecting how much money is in the economy at a given time). Monetary policy is set by the Federal Reserve, the central bank of the U.S. The Fed's goals include keeping employment as high as possible and keeping inflation as low as possible (which means that prices stay stable). By adjusting interest rates and reserve requirements and buying or selling bonds (open market operations), the Fed can inject more money into the economy during periods of recession or withdraw money from the economy during periods of inflation. In the recent economic crisis, it has lowered interest rates to make borrowing easier and inject money into the economy. Though the Fed's Chair and Board are appointed by the President and confirmed by Congress, the institution is designed to be insulated from political pressure.

Entitlements

Remember that line from Unit 2 about the federal government being an insurance company with an army? It's not that far from the truth—and with entitlement programs continuing to grow (especially as the Baby Boomers age and go onto Social Security and Medicare), it's only getting truer. The majority of government spending goes to guaranteed programs like these:

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  Social Security: A government pension program for retired workers and their survivors. Payroll taxes are withheld from current workers to provide monthly payments to retirees. Shrinking ratio of workers to retirees presents a future funding challenge. In 1950 the ratio was 16:1. Today it is 3:1. Retirement of Baby Boomers will reduce ratio to 2:1. Recommended solutions include raising payroll taxes on current workers, raising the retirement age, birthin' more babies (only kidding), and privatizing Social Security—that is, allowing workers to individually invest a portion of the dollars currently paid into the system.
   
  
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  Medicare. Government medical assistance for the elderly. Funded by payroll taxes paid by current workers and a tax on Social Security benefits. The funding challenge is similar to that facing Social Security. In addition, health care costs are rising faster than other expenses.
   
  
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  Medicaid. Medical assistance to low income families and the disabled. Funded by the state and federal governments. Rising health care costs also present funding challenges to this entitlement.
   
  
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  Unemployment Insurance. Funded by payroll taxes paid by employers and collected and administered by the states in accordance with federal guidelines.
  

President Lyndon B. Johnson (who created Medicare and Medicaid) also declared war on poverty in the 1960s. Poverty is still winning (but probably only because the White House is afraid to use nuclear anti-poverty weapons). However, the government does provide direct relief through programs like Temporary Assistance for Needy Families (what people are usually talking about when they mention "welfare"), Supplemental Public Assistance, and food stamps. Funded by the federal government and administered by the states, these offer examples of cooperative or marble cake federalism (remember that from Unit 1?). The federal government addresses poverty less directly through job-training programs and early childhood educational programs like Head Start.

The judicial branch has played the biggest role in broadening protections for Americans' civil rights (they still feel bad about that whole "separate but equal" thing). We'll talk about Supreme Court decisions on civil rights in the next unit, but for now, we should save some space for some of the landmark civil rights laws passed by Congress.

After the passage of the Thirteenth, Fourteenth, and Fifteenth Amendments in the 1860s, Congress didn't do much at all about racial discrimination for the next 100 years. (Note to Congress: abolishing slavery was nice and all, but did you actually expect to coast on that accomplishment for a century?) But things changed in the 1960s, the decade of hippies, the Beatles, and (incidentally) the end of segregation. During this decade, Congress prohibited employment discrimination and discrimination in public accommodations under the Civil Rights Act of 1964, protected voter rights in the Voting Rights Act of 1965, and prohibited housing discrimination in the Civil Rights Act of 1968. During the 1970s, the federal government also began to require that the state and federal governments, as well as all private contractors and entities receiving any government money, have an affirmative action program designed to increase minority participation.

Gender-wise, it also took Congress until the 1960s to get off of its butt. Even though women were granted the vote by the Nineteenth Amendment in 1920, it took until the Equal Pay Act of 1963 to require equal pay for equal work, regardless of gender, and the Civil Rights Act of 1964 to prohibit employment discrimination on the basis of gender. (That's the same Civil Rights Act as above—the part on gender discrimination was actually added by an opponent of the law in order to make it fail, but it passed anyway. Joke's on you, sexists!) And in 1972 Congress passed Title IX, requiring that schools provide equal opportunities to women and men, including athletic opportunities. Today, thanks to Congress, women can dunk!

On the plus side, as noted above, you can thank the federal government for women who can dunk. On the minus side, you can thank the federal government for an increasing number of obnoxious standardized tests with Scantron forms. Pencils down!

Education is still primarily a state and local issue, but the federal role in education has grown rapidly since 2002's No Child Left Behind Act, an important domestic priority of President Bush. The act links federal funding for districts to student performance of standardized tests.

Supporters argue that improving America's schools is dependent on increasing accountability by establishing measurable instructional targets. Critics argue that standardized tests poorly measure student progress, teachers are forced to "teach to the test," and the legislation was not fully funded. President Obama's most important education initiative has been the Race to the Top program, a competitive grant program that rewards states for raising education standards.

You've probably heard a bit about this one. The one with the death panels?

Actually, President Obama's health care reform bill, the Affordable Care Act, didn't create any death panels, but it did respond to an issue that has been on the national agenda for a long time. Presidents since Harry Truman have advocated for universal health care. More recently, George W. Bush, though he wasn't an advocate of universal health care, did expand health care access by adding a prescription drug benefit to Medicare.

The Affordable Care Act does not create a single-payer system, as in Canada (like Medicare for everyone, in which the government acts as a health insurance company for everyone) or a national health care system, as in the U.K. (where the government also runs the hospitals). But it does extend health care to nearly all Americans through a number of steps: preventing insurance companies from denying patients on the grounds that they aren't healthy enough, expanding coverage through subsidies, setting up "insurance exchanges" intended to work like competitive markets to reduce insurance costs, mandating that companies above a certain size provide insurance to their employees, and mandating that all individuals carry health insurance (to prevent healthy people from waiting until they are sick to buy coverage).

Did you think we were going to give you just one Auto-Tune the News link?