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Policy-making process in the United States

June 23, 2011

How does any issue get resolved? First, of course, the issue must be identified as a problem. Often, policymakers have only to open their local newspapers—or letters from their constituents—to discover that a problem is brewing. On rare occasions, a crisis, such as that brought about by the terrorist attacks of September 11, 2001, creates the need to formulate policy. Like most Americans, however, policymakers receive much of their information from the national media. Finally, various lobbying groups provide information to members of Congress.
As an example of policymaking, consider the Emergency Economic Stabilization Act of 2008, commonly known as the bank bailout bill. Enacted in response to the global fi nancial crisis of 2008, the act granted the U.S. treasury secretary, Henry Paulson, the power to spend up to $700 billion to support fi nancial institutions. Although the bill
was initially meant to fund the federal government’s purchase of distressed mortgagebacked securities (“toxic assets”) from banks, the language of the bill actually gave Paulson the ability to spend the funds on almost anything that could be considered support for the fi nancial system.
No matter how simple or how complex the problem, those who make policy follow a number of steps. We can divide the process of policymaking into at least fi ve steps: (1) agenda building, (2) policy formulation, (3) policy adoption, (4) policy implementation, and (5) policy evaluation.
Agenda Building
First of all, the issue must get on the agenda. In other words, Congress must become aware that a problem requires congressional action. Agenda building may occur as the result of a crisis, technological change, or mass media campaigns, as well as through the efforts of strong political personalities and effective lobbying groups.
Paulson proposed the bank bailout bill to Congress, with President Bush’s backing, in response to a set of potentially catastrophic circumstances. On September 15, Lehman Brothers, a giant investment bank, failed. Lehman held more than $600 billion in assets and debts, making its bankruptcy the largest in U.S. history.
Earlier in 2008, the federal government had intervened when a series of major financial institutions failed. These included Bear Stearns, an investment bank, and AIG, a giant insurance fi rm. By September, however, members of the Bush administration were increasingly reluctant to bail out such institutions. They feared that they were creating a dangerous degree of moral hazard, in which individuals and institutions take excessive risks, confi dent that they will be rescued if something goes wrong. The government therefore allowed Lehman to fail, wiping out not only the bank’s owners (the stockholders) but also almost everyone who had lent or entrusted funds to the bank. We discuss other examples of moral hazard in this chapter’s The Politics of Boom and Bust feature.
The government misjudged the situation. By September, banks were no longer taking excessive risks. The danger instead was that they would avoid taking any risks at all. After Lehman’s collapse, banks became fearful that other banks might go under and fail to pay their debts. Banks therefore stopped making loans to each other. The money market, which provides short-term corporate finance, froze up as well. Lending threatened to stop altogether. The resulting prospect was ominous: access to credit is essential for a vast share of the nation’s firms, and a lending freeze could shut down much of the economy. Panicked fi nanciers pleaded for the government to “do something.”
Policy Formulation
During the next step in the policymaking process, various policy proposals are discussed among government offi cials and the public. Such discussions may take place in the printed media, on television, and in the halls of Congress. Congress holds hearings, the president voices the administration’s views, and the topic may even become
a campaign issue.
In the example of the bank bailout, Paulson and other offi cials concluded that the underlying cause of the crisis was bank losses due to the collapse in the value of the “toxic assets.” The Treasury Department proposed to restore confi dence by buying up these assets. To obtain congressional funding, Treasury drafted a three-page bill that granted Paulson the right to spend $700 billion on mortgage-related assets. The $700 billion fi gure was pulled out of a hat—the only consideration was that the sum be large enough to impress the fi nancial markets. On September 20, five days after Lehman collapsed, Treasury sent the bill to the House. Members of Congress were shocked by the onset of the crisis, but they were fl abbergasted by Paulson’s bill. Never in the history of the republic had Congress ever
granted such uncontrolled spending power to an executive department, nor had it ever allocated hundreds of billions of dollars based on what was effectively a three-page memo. Still, the House set to work, adding desirable oversight mechanisms and a large dose of pork. The resulting 110-page bill was put to a vote on September 29. Members of both parties proceeded to vote it down. The next day, the Dow Jones Industrial Average, an index of stock market prices, sustained its biggest point drop in history.
Policy Adoption
The third step in the policymaking process involves choosing a specific policy from among the proposals that have been discussed. After the House refused to pass the bank bailout bill, the Senate sought to rescue it. Senate leaders decided to amend an existing bill already passed by the House—this step circumvented the clause in the Constitution requiring that revenue bills originate in the House. By the time the Senate was done with the bill, it was 451 pages long and bursting with earmarks designed to win necessary votes. The Senate passed the measure on October 1, the House accepted it on October 3, and President Bush signed it into law within hours.
Policy Implementation
The fourth step in the policymaking process involves the implementation of the policy alternative chosen by Congress. Government action must be implemented by bureaucrats, the courts, the police, and individual citizens.
The bank bailout, now known as the Troubled Assets Relief Program (TARP), actually expanded one grant of authority beyond what Treasury had included in the initial draft—it did not require that TARP funds be spent on mortgage-related assets.
In the fi rst weeks of October, Paulson and other offi cials began to realize that buying up toxic assets would not resolve the fi nancial crisis. If Treasury paid market prices for the assets, banks would gain nothing of value. If Treasury overpaid, banks would gain financial stability, but taxpayers would be granting a huge subsidy to the banking
industry that would never be returned.
On October 14, therefore, President Bush and Secretary Paulson announced that instead of buying toxic assets, TARP would buy preferred stock in banks, thereby adding to their capital. From the taxpayers’ point of view, this step had two virtues: the preferred stock would pay interest, and the banks could eventually buy back the preferred stock, returning TARP funds to the government.
Policy Evaluation
After a policy has been implemented, it is evaluated. Groups inside and outside the government conduct studies to determine what actually happens after a policy has been in place for a given period of time. Based on this feedback and the perceived success or failure of the policy, a new round of policymaking initiatives may be undertaken
to improve on the effort.
In the example of TARP, Congress developed a series of bodies to review Treasury’s actions. These included a Financial Stability Oversight Board in the executive branch and a Congressional Oversight Panel. Congress also created a special inspector general for the program. Given its size and importance, TARP was also a focus of intense
interest by the media. Surprisingly, relatively few people objected to the complete transformation in the use of TARP funds. Many Americans were greatly interested, however, in whether the government’s investments would promote lending and in how much bankers would be paid.
Source: Steffen W. Schmidt, et al. American Government and Politics Today: 2010–2011 Brief Edition (Boston: Wadsworth, Cengage Learning, 2011) at 302-305


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