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AP GOPO
Chapter 16
Economic Policy
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Financial Reform
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Introduction– A major economic policy issue is how to
maintain stable economic growth without falling into either excessive unemployment or inflation (rising prices).
– Inflation, a sustained rise in the general price level of goods and services.
– Recession, economy shrinks for at least six months
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Creating A Budget
• President submits a budget to Congress by February 1
• Congress divides budget into appropriation bills (ie Defense, Ag)
• Fiscal Year 2012 is from Oct ’11-Oct ‘12
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2012 Budget
• Feb 2011 – Obama sends Budget to Congress
• April 2011 – House passes their budget & sends to Senate
• May 2011 – Senate Votes it Down• August 2011 – Budget Control Act
passed
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Debt Limit Agreement: Budget Control Act
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2012 Budget
• Dec 2011 – Budget Passed by making continuing resolutions
• 2012 Total Outlays– Obama’s Plan $3.7 Trillion– House of Rep Plan $3.6 Trillion– Deficit of $1.1 Trillion
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Obama: 60 minutes
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Federal Spending
• Discretionary Spending - Spending that changes each Congressional year. Money goes to FBI or Army or Highway projects
• Entitlements (Mandatory) - Spending on Social Security and Medicare. Programs created by permanent law.
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Good Times, Bad Times– The U.S. economy experiences booms
and busts. The busts are called recessions. • Recession, two or more successive
quarters(6 months) in which the economy shrinks instead of grows.
– Unemployment• Full employment, an arbitrary level of
unemployment that corresponds to “normal” friction in the labor market.
• Measuring Unemployment.
– Inflation– The Business Cycle: reoccurring booms
and busts
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Good Times Bad Times
• Depression - 25% unemployment
• Depression ended the notion for laissez-faire economics
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Fiscal Policy
–Fiscal policy Congress changes spending levels or levels of taxation. (Congress)
–Keynesian Economics• Government Spending• Government Borrowing• Discretionary Fiscal Policy• Discretionary Fiscal Policy
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Fiscal Policy Theory - Keynes
• Economy enters a recession THEN the government should run a budget deficit
• JFK applied Keynesian Theory• LBJ & Nixon were fiscal policy failures• Clinton was the only president in recent
times to run a budget surplus
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Supply-Side Econ
• Need for LESS govt involvement
• Lower taxes
• Arthur Laffer, Milton Friedman, Paul Craig Roberts
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Reaganomics
• Monetarism (Friedman) - increase $ supply about = to econ growth and then let the free market operate
• Supply side tax cuts
• Domestic budget cuts
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Reagan
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Reaganomics Effects
• 1. Inflation was reduced BUT interest rates increased
• 2. Personal income taxes cut BUT Soc Sec Taxes increased
• 3. Unemployment Decreased BUT Nat. Debt Dramatically increased
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Deficit Spending and the Public Debt
– The government funds its deficit primarily by selling U.S. treasury bonds. Twenty years ago, only 15 percent of these bonds were held abroad. Today the figure is 40 percent.
– The Public Debt in Perspective• Net public debt, the accumulation of all
past federal government deficits; the total amount owed by the federal government to individuals, businesses, and foreigners.
• Gross domestic product (GDP), the dollar value of all final goods and services produced in a one-year period.
– Are We Always in Debt?
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Monetary Policy
II. Monetary policy - changes in the amount of money in circulation to alter credit markets, employment, and the rate of inflation.
A. Organization of the Federal Reserve System
– Loose and Tight Monetary Policies. The Fed implements policy by increasing or reducing the rate of growth of the money supply. • Increasing the rate of growth is loose
monetary policy. • Reducing the rate is tight monetary policy.
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Monetary Policy
• Recession - the Fed should expand the rate of growth in the money supply
• Do this by decreasing interest rates
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Monetary Policy
• Inflationary times - Fed should decrease the rate growth of the money supply
• This can be done by increasing interest rates
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Monetary Policy (cont.)
–Monetary policy has a problem with time lags, but the Fed can make a policy change more quickly than Congress.–The Fed announces changes to monetary policy by raising or lowering the federal funds rate, a government-controlled interest rate for funds that banks borrow from each other. –The Fed Tackles Inflation
• Volckernomics - tightened the money supply–Monetary Policy versus Fiscal Policy. If interest rates go high enough, people will stop borrowing and inflation will subside. Monetary policy cannot force people to borrow money in a recession. While monetary policy is more powerful against inflation, fiscal policy is more effective against recessions, because the government does the borrowing itself.
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The Fed
• Main purpose is to regulate the money supply
• Created in 1913 to serve as the nations central banking organization
• The Federal Reserve Board can be unsuccessful (depression) or successful (Volcker)
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The Fed• The Federal Reserve system was
created by Congress and can be altered by Congress
• The are responsible to Congress and provide monetary policy briefings to Congress
• Tradition - Keep Fed independent
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The Fed
• Paul Volcker (Carter appointment)
• Alan Greenspan (Reagan appointment)
• Ben Bernanke (Bush II appointment)
• 7 Members to the Board who serve for 14 year appointment (staggered)
• Chairman is for 6 years
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World Trade
• Since 1950 World Trade has increased by more than 20 times
• Tariffs are taxes on imports
• Hawley-Smoot Tariff Act (1930) hurt American business
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World Trade Keeps Growing
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The World Trade Organization– The WTO seeks to lower trade barriers
worldwide. •What the WTO Does: The WTO also has a
dispute-resolution mechanism that nations may use.
– The WTO and Globalization. •The WTO has become the focus of those
who fear the supposed dangers of globalization. It is true that neither the United States nor any other country has a veto power within the WTO.
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WTO
• Promote Globalization
• 140 nations
• Helps to settle trade disputes between countries
• No country has a veto power
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WTO
• http://www.youtube.com/watch?v=_mAWslHmiok
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The Balance of Trade and the Current Account Balance
– The balance of trade, or the difference between the value of a nation’s exports of goods and its imports of goods. The U.S. balance of trade has been significantly negative for many years.
– The current account balance includes the balance of trade in services, unilateral transfers, and other items. It is also negative and has been growing more so.
– Are we borrowing too much from other countries?
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The Politics of Taxes– Currently, Americans pay taxes that
total to somewhat less than 30 percent of the GDP.
– Federal Income Tax Rates• Loopholes and Lowered Taxes
– Loopholes reduce taxable income
• Progressive and Regressive Taxation
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The Politics of Taxes
– Who Pays? • Liberals tend to favor progressive taxes.
(higher income/higher taxes)• Income tax and estate tax are progressive • Conservatives either favor taxes that are
less progressive, or even flat or regressive.
• Sales tax is regressive
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Social Security
• Funded by a payroll tax (currently 4.2%)• Projected to be depleted of funds by 2040-
2042• Estimated that SS will have less revenue than
pay out by 2017• SS will draw from its Trust Fund - collection of
special issue bonds - The Surplus the govt borrowed from
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The Social Security Problem
– Social Security was established in 1935 with the intent of providing a type of insurance for a large segment of the public.
– Social Security is not a pension fund. – Workers Per Retiree
• 1:40 • 1:3
– What Will It Take to Salvage Social Security?• Raising payroll taxes• Reducing benefits payouts
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SS
• Social Compact between each generation
• Politically difficult to propose to abolish SS altogether
• Bush proposed privatization of SS taxes into the stock market - crickets chirped
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Economic Policy
• Social Security