American Politics Today - Essentials (3rd Ed)

ECONOMIC POLICY| 441

tors levels of bank lending, the money supply, and interest rates. Bank lending is

important for economic growth because businesses borrow money to expand, and

as they grow, they add jobs. If credit is tight and businesses cannot borrow money,

economic growth will suff er, as became painfully evident in late 2008 and 2009.

The second target of monetary policy, the money supply, is also central to eco-

nomic growth and directly related to levels of lending activity. The Fed can infl u-

ence the amount of money in the system by making it easier or harder for banks

to lend money. According to the monetarist theory, the amount of money in cir-

culation is the most important determinant of economic activity and infl ation. If

too much money is chasing too few goods, there could be infl ationary pressure on

Revenues, 1962 Spending, 1962

Payroll

Taxes

17 .1%

Defense

Discretionary

49 .2%

Net Interest

6 .4%

All Other

Mandatory

12 .8%

Non-defense

Discretionary

18 .3%

Excise Taxes

and All Other

8 .2%

Revenues, 2013

Payroll

Taxes

33%

Spending, 2013

Social

Security

13 .2%

Individual Income Taxes

46 .8%

Individual

Income Taxes

45 .7%

Corporate

Income Taxes

12%

Corporate

Income Taxes

20 .6%

Excise

Taxes and

All Other

16 .6%

Social Security

21 .5%

Medicare

13 .8%

Medicaid^8.

6%

Non-defenseDiscretionary

13

.5%

Defense

Discretionary

17 .8%

Net Interest7%

All Other

Mandatory

17 .8%

Source: The President’s Budget for Fiscal Year 2013, Offi ce of Management and Budget, http://www.whitehouse.gov/omb/budget (accessed 10/7/12).

FEDERAL REVENUES AND SPENDING, 1962 AND 2013

A much larger share of tax revenue comes from payroll taxes than was true in the 1960s. What implications does this have
for the redistributive nature of federal taxes? What have been the biggest changes since the 1960s in the way the federal tax
dollar is spent? Are these trends likely to reverse or continue in the next 30 years?

FIGURE » 14.5

monetarist theory The idea that

the amount of money in circulation

(the money supply) is the primary

infl uence on economic activity and

infl ation.