Economic PolicyEconomic Policy

Theories to PracticeChapter 18

Theories to PracticeChapter 18

Theories of Economic Policyn Basics of Micro and Macro

Economics

n Supply and Demand

n Market vs Non-Market Economy (West vs. East Global Market) page 555!

n Capitalist economies

n private industry own property

n sell goods in free open Market

n Accumulates wealth/capital

Laissez Faire Economics

n Laissez-Faire Economics

n Laissez-faire: absence of government control over the economy

n Adam Smith: Wealth of Nations “the invisible hand”

n Similar to Natural Selection

Keynesian Theoryn Gov’t can adjust economy through

combined fiscal and monetary policies.

n Laissez-faire policies cannot do anything about economic depression or raging inflation

Economic depression: a period of high unemployment and business failures; a severe, long-lasting downturn in the business cycle

Inflation: an economic condition characterized by price increases linked to a decrease in the value of the currency

Keynesian Theory cont.n Consumer Price Index (CPI) - spending by consumers on needs measures inflation - tied to gov’t wages, benefits, payments, and is used by gov’t

n 15 Cycles of economic fluctuations from Ind. Rev till today

n 1st inflation then unemployment

n when demand increases + decrease of productivity capacity = price inflation

n Increases in production + decrease in demand = production cut backs and unemployment

The Fed!Federal Reserve System (“the Fed”): the system of banks that acts as the central bank of the United States and controls major monetary policy

Controls the money supply in 3 ways

Selling and buying U.S. government securities

Changing the target for the federal funds rate

Changing the reserve requirement for banks

Has historically acted to combat inflation rather than stimulate economic growth

Supply Side Economicsn Also known as Reaganomics or

trickle down economics

n Decrease in taxes will lead to increase in investment and production

n Rich should get larger cuts to promote investment which will trickle down to poor with increased jobs and income

n need to have decrease in govt spending to cut taxes, however Reagan and Bush increased spending especially in defense

The Budgetn President prepares budget

(Budget and Accounting act of 1921)

n Congress approves it

n Oct 1 thru Sept. 30

n Budget Authority - How much Gov’t agencies can spend in a year

n 45% of Public Debt is owed to institutions and individuals outside of the country

“OMB, you know me”n Presidents budget car run

thousands of pages long

n located with the Presidents office

n staffed by over 500 people

n one of the most powerful domestic agencies

n over see production of the budget with presidents vision

n they have to weigh options and choices for budget

Mandatory vs Discretionary Spendingn Mandatory is required spending and needs laws to

change spending

n Discretionary spending is annually appropriated

n The hope is that spending will either stimulate the economy through spending, or we can cut down on debt to produce a surplus

Tax Policyn Used to adjust revenue for

budget outlays

n make tax burden equitable and help govt control economy

n Flat Tax - same percentage paid by all

n Progressive Tax - Wealthy pay larger % of taxes

n Regressive Tax - Poor pay more % of tax burden of government

n Do we pay more taxes then other nations?

Effects of Taxing and Spending Policies Over Time

Between 1966 and 2004, gap in income between rich and poor grew

U.S. has most unequal distribution of income in comparative study of 18 developed countries

Democracy and Equality

Why don’t “the people” share in the nation’s wealth?

Little support for increasing income tax

More support for regressive taxation: national sales tax, lottery

Most Americans don’t understand the inequalities of the national tax system

Comparing Tax Burdens

The tax burden has not increased since the 1970s for middle income families in the United States

American tax burden is still low compared with that of other major industrialized democratic nations

Effects of Taxing and Spending Policies Over Time

Between 1966 and 2004, gap in income between rich and poor grew

U.S. has most unequal distribution of income in comparative study of 18 developed countries