Grommersoft

The theories of economic policy provide policymakers with simplifying assumptions that help them choose between policies. The advice one economist gives is contradicted by that of another economist. Both are often contradicted by the economic reality itself.

Several economic theories are important in explaining how today's market economies work. Laissez-faire economics advocates minimal government interference with the laws of the free market, Laissez-faire policies, however, have been unsuccessful in solving the problems associated with the business cycles in market economies. Keynesian theory holds that government fiscal and monetary policies can smooth out these business cycles, thus preventing economic depressions or raging inflation. Most democratic governments in the twentieth century have used some Keynesian techniques. Monetarists question the political utility of Keynesian fiscal policies. Fiscal spending to boost a depressed economy is generally untimely, and spending programs, once started, can rarely be stopped again. The monetarists recommend that the economy be regulated through monetary policies that are controlled by the politically independent board of governors of the Federal Reserve System. Finally, supply-side economics represents the latest return to traditional laissez-faire policies based on less government regulations and taxation.

Policymakers rely on the budget as the tool by which decisions about policies are made. Since 1921, the president has been responsible for drafting and submitting the budget to Congress. The actual preparation of the budget is supervised by the Office of Management and Budget (OMB). Since the 1970s, however, Congress has regained some control over the budget process by creating new Budget Committees and the Congressional Budget Office. Congress resorted to more drastic measures in order to reduce the exploding budget deficit with the passing of the Gramm-Rudman-Hollings bill in 1985. In 1996, the Congress gave the President the Line Item Veto, which will allow the President to veto specific provisions of a bill without vetoing the whole bill.

Tax and spending policies are continually changing to meet the goals of policymakers. The sweeping tax reform of 1986 represents the most dramatic change in recent tax history. Americans however, remain relatively apathetic about changing the present tax system.

Public concern over the national deficit has prompted politicians to attempt to reduce public expenditures. Several factors militate against successful reductions in many programs. First, incremental budgeting produces a sort of bureaucratic momentum that continually pushes federal spending up. Second, most government spending programs cannot be reduced very easily because they were enacted by existing laws that no politician in his or right mind would attempt to modify. Third, Americans have become accustomed to large domestic spending projects but are reluctant to have their taxes increased.

Despite massive government spending on social programs, the gap in income between rich and poor changed very little between 1964 and 1989. This highly unequal distribution of wealth has prompted some critics to argue that spending and tax policies are dominated by pluralist politics, which favor well-funded interest groups and the wealthy. They call for the introduction of majoritarian principles in taxation and spending policies that would improve the distribution of income in society. Americans in general are not willing to expand the use of progressive taxation policies.

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