October 5

1. October 5 • Obama plan • Growth • EU and the euro • Discussion guidelines

2. Obama Jobs Plan • $447 B • More than half for payroll tax cuts for workers and employees • Tax breaks for hiring new workers and raising wages • $140 for infrastructure and aid to state and local governments • $62 B to extend unemployment benefits

3. 2013 Tax Increases 1 • Cap exemptions for high income, $405B over 10 yrs • Taxing carried interest, $18B • Gas and oil, $41B • Expiration of tax credits • 100% expensing and payroll tax breaks • $240B for small businesses and workers

4. 2013 Tax Increases 2 • End Bush-era tax cuts for high income ($250,000+) raising top tax rate to 42%, capital gains and dividends, $750B • .9% higher payroll tax for Medicare for high incomes • 2.9% surcharge on investment income

5. Growth vs. Expansion • Expansion—short run • Growth—long run • Growth requires investment in capital goods and people plus advances in technology

6. Plan for Growth • Spending reform • Tax reform • Regulatory reform • Coherent and efficient energy policy • Improve primary and secondary education

7. Spending Reform • Reduce subsidies • Entitlement reform

8. Tax Reform • Eliminate/reduce exemptions, deductions, credits • Lower tax rates • This will be fairer and more efficient, will reduce unemployment and increase per capita income

9. Regulatory Reform • Cost Benefit Analysis • Efficient means of achieving goals • Avoid technical standards

10. Energy

11. Education • Choice • Performance pay

12. European Union • What is it? • History • 27 members

13. EU • Requirements for membership (Copenhagen criteria) • Must have democratic, free market government with the corresponding freedoms and institutions • Respect for the rule of law

14. EMU • Economic and Monetary Union • 15 members • Euro • Why a single currency?

15. Exchange Rates • Floating • Fixed • Benefits and costs of each

16. EMU • Criteria for joining (Maastricht criteria) • Price stability • Budget deficit less than 3% of GDP • Debt no more than 60% of GDP • Long term interest rates in line with other members • Exchange rate stability

17. European Central Bank (ECB) • One central bank for all EMU members • Implement monetary policy for euro area • Conduct foreign exchange operations

18. ECB • One monetary policy for 15 countries • What happens when some countries have high U and others do not? • What happens in US when only some areas have high U? • Main goal of ECB is price stability

19. Greece • Similarity to Argentina • Government cannot pay its debt • Needs bailout or restructuring • How can it pay its debt? • Is austerity the answer? • What happens if Greece defaults? • What happens if Greece leaves EMU?

20. Exchange Rates since WWII • 1945: Bretton Woods • 1971-73: collapse of Bretton Woods • 1973: floating exchange rates, managed float; pegged or fixed rates for some countries • 1979: ERM • 1999: EMU

21. EMU • 1998: members chosen, conversion rates fixed, ECB established • 1999: EMU begins • 2002: euro notes and coins introduced, end of national coins and currencies • The ECB • Limits on budget deficits • Is the EMU an optimal currency zone?

22. Optimal Currency Zone • Benefits of a single currency • Costs of a single currency

23. Benefits • Lower transaction costs • More competition • Greater certainty for investors • More transparent prices • Price stability

24. Costs • Loss of two policy instruments • Monetary policy • Exchange rates • Difficulty in adjusting to shocks if: • Different impact of shocks in different countries • Asymmetric shocks

25. Adjustment to shocks • Labor mobility • Flexible prices and wages • Automatic transfer of fiscal resources to affected country