Dr Andrew Glencross ~ andrew.glencross@eui.eu

American Economic Policy

Government and Politics of the USAHillary Term, Lecture 26

Hillary Term Essay

• Submit essay online via www.turnitin.com and hard copy to Jane Suiter: Deadline: 5pm, Monday 10th of March (Hillary term wk 10)

• Choose 1 of 3 titles; strict 2,000 word limit (excluding bibliography)

– “In practice, Congress functions not as a unified institution, but as a collection of semi-autonomous committees that seldom act in unison“. Discuss this view, and explain your response.

– What are the consequences of pluralism and federalism for the policy-making process in the US? Evaluate these consequences with reference to at least two policy areas.

– Discuss the role played by money in US Presidential elections. Elaborate your response in the context of attempts at campaign finance reform since the 1970s and the 2008 Presidential election.

• Details on course website - http://uspoliticstcd.pbwiki.com/Course-assessment

Required reading…

– McKay chap. 17

– Singh chap. 13Additional resources…

• Chalmers Johnson, Why the US Has Really Gone Broke, Le Monde Diplomatique, Feb 2008 http://mondediplo.com/2008/02/05military

• A. Brandolini and T Smeeding, Patterns of Economic Inequality in Western Democracies, Political Science and Politics, Jan 2006

• www.economicmobility.org

Readings for today

Definitions

• Keynesianism: ‘the belief that the state has to intervene the prevent and respond to market failure’

• Laissez-Faire: ‘the belief that markets work best when the state does not interfere’

• Overview of American Economic Policy

• Current Issues in Economic Policy

• Interest Groups and Economic Policy

• Evaluating Recent Economic Policy

• Economic Policy and the 2008 Election

Agenda

Overview of American Economic Policy

• Energy

• Big Business

• Labour Force

Current Issues in Economic Policy• Stimulating the economy: emergency 150bill package

in Bush budget to counteract effects of sub-prime mortgage crisis

• Income Tax: to keep or not to keep the Bush tax cuts? Making the cuts permanent will affect…

• The Budget Deficit: set to be 400 bill in 2009, which affects…

• The Exchange Rate of the Dollar: as more debt issued, increasingly purchased by other countries, the dollar falls in value affecting international trade…

• Foreign Economic Policy: promoting free trade but worries over deficit in balance of trade with China, dependence on foreign energy supplies, worries over foreign ownership of US debt and role of sovereign wealth funds

Current Issues in Economic Policy

• Last three decades have seen growing economic inequality

• Between 1979-2004, the real after-tax income of the poorest one-fifth of Americans rose by 9%, that of the richest one-fifth by 69%, and that of the top 1% by 176%.

• Between 1978-2005, CEO pay increased from 35 times to nearly 262 times the average worker’s pay

The Problem of Economic Mobility

Current Issues in Economic Policy

• Two out of three Americans have higher incomes than their parents, while one third are falling behind.

• But that does not necessarily mean they are moving up the economic ladder compared to their parents or to other families. Only one third are “upwardly mobile.” Another third is “downwardly mobile.”

• Moreover, about one quarter are “riding the tide” making more than their parents, but remaining in the same economic position as their parents.

The Problem of Economic Mobility

Interest Groups and Economic Policy

• 2001 Repeal of Inheritance Tax – a classic tale of interest group activity

• Federal Estate Tax prior to 2001 affected 2.3% of population, raising $25 billion

• Abolished in 2001: WHY?

Interest Groups and Economic Policy

• Early 90s group of Rep congressmen seek to build a “Kill the Death Tax Coalition”

• Two key strategies: framing the issue in human terms with personal stories, finding research to back up repeal

• So tax framed as “death tax”, affecting family businesses and entrepreneurs who struggled against adversity

• Funded Heritage Foundation report on why repealing tax makes economic sense

Interest Groups and Economic Policy

• Generating Publicity: opinion polls showed that 40% of Americans thought they would eventually be affected by death tax; 70% thought it was unfair

• Democrats outmaneuvered as refused to contest estate tax on principle of fairness

• Yet at same time the tax did not raise huge amounts and the super-rich typically able to minimise their liabilities

• But is it the thin end of the wedge?

Evaluating Recent Economic Policy

• Continuing low unemployment – currently 4.9%, above OECD average employment rate at 71%, Bush presidency saw zero job creation in first term but nearly 6 million since 2004

• US economy resilient – survived dotcom meltdown, 9/11 and 600 billion war in Iraq, economic growth outpaces EU

• Federal reserve acted decisively – cutting interest rates significantly after financial crises, latest being sub-prime

• Very successful in comparative terms at integrating immigrants through employment

The Good News

Evaluating Recent Economic Policy

• US economy heavily dependent on credit - end of housing bubble leads to credit crunch and less consumption, last quarter 2007 saw lowest growth for 4 years

• Economic mobility stalling – foundation of American dream, greater uncertainty for middle classes and low-skilled

• Growing public debt – reluctance to raise taxes• Weak dollar and pricey petrol• A backlash against free trade?

The Bad News

Economic Policy and the 2008 Election

What do you think is the most important problem facing this country today?

(CBS News Poll. Jan. 30-Feb. 2)

See www.pollingreport.com

It’s the economy stupid

Economy 38%

Iraq 21%

Health 6%

Immigration 4%

Terrorism 3%

• Taxes – McCain promises no new taxes, Obama and Clinton against enshrining Bush tax cuts

• Housing – McCain sees federal intervention as last resort, Clinton proposes freeze on adjustable subprime mortgages, Obama a 10 bill fund for preventing foreclosure

• Energy – McCain in favour of nuclear power and credits for carbon emissions, Clinton seeks to encourage renewables and biofuels, Obama wants international agreement on climate change and fed investment in clean energy

Economic Policy and the 2008 Election

Next Week

• Foreign Economic Policy (read MHW chap 16, Singh chap 15)

• Health and Social Policy (read McKay chap 16, Singh chap 17)

• Keep an Eye on the Primaries

• 19 February: Hawaii Caucus (D), Washington and Wisconsin