Goals of this exercise

• Discuss the political considerations that contribute to the federal deficit.
• Examine trends in surpluses and deficits in American politics in the second half of the 20th century.
• Explore the potential impact of the Federal Reserve Board on controlling the economy on a “non-political” basis.

Politicians’ Goals: Taxes and Spending

Principle #1: All political behavior has a purpose. All political actors engage in instrumental acts designed to further their individual goals.

The Goals of Fiscal Policy: Taxes and Spending
Elected politicians (the President and Members of Congress) have goals to be re-elected and to help their parties win elections as well.

The politics of taxing and spending are often used for politicians to achieve these electoral goals.

Taxes involve the imposition of the costs of government on citizens. Politicians seeking to be elected prefer to impose the costs of government on their political opponents and their supporters while lowering the costs (cutting the taxes) on their own supporters.

Government spending involves the distribution of government benefits and assistance to citizens. Politicians seeking to be elected prefer to confer as many benefits on their own supporters as possible while distributing fewer benefits to (cutting spending for) the supporters of their opponents.

Because politicians generally seek to cut taxes and increase spending, these basic motivations tend to lead the government toward deficit spending as greater incentives exist to distribute benefits than to impose costs on citizens.

Question 1: How might the goals of politicians adversely affect the federal deficit?

Question 2: What has happened to the Federal deficit since the 1970s?

Question 3: How does the mounting federal deficit constrain political actors in Washington?

Principle #4: Political Outcomes are the products of individual preferences and institutional procedures

• Seven members appointed by President (and confirmed by the Senate) for 14-year terms;
• Chairman appointed by President (from among 7 Fed members) for 4-year term;
• Members and Chairman can only be removed “for cause” (that is, they can only be removed during their term due to some wrong-doing on their part);
• The Fed does not have to follow Administration economic policies.

Question 4: How might electoral political considerations adversely affect government’s decisions about the supply of money and the availability of credit in the American economy?

Question 5: How is the Fed structurally removed from electoral control in order to keep certain economic policies from being made too “democratic” or political?

Citations

• William Greider, Secrets of the Temple: How the Federal Reserve Runs the Country (New York: Simon & Schuster, 1987).
• Historical Tables, Budget of the U.S. Government, Fiscal Year 2007 (Washington, DC: Government Printing Office, 2006).