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The Economy: Part 2

“How do I explain this to my brother-in-law?” Patrick Julius B.S. cognitive science, graduate student in behavioral economics. The Economy: Part 2. Keynes 101. Unemployment happens when supply exceeds demand and products remain unsold.

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The Economy: Part 2

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  1. “How do I explain this to my brother-in-law?” Patrick Julius B.S. cognitive science, graduate student in behavioral economics The Economy: Part 2

  2. Keynes 101 • Unemployment happens when supply exceeds demand and products remain unsold. • Government spending makes up the gap in demand, putting people and factories back to work. Countercyclical spending and automatic stabilizers smooth economic shocks. • Once the economy is restored to full capacity, spending can be cut back and economic growth will lead to increased tax revenue. • Deficits in a growing economy are a concern, because they lead to long-term debt. George W. Bush's deficits were much more abnormal than Obama's are, because they occurred during a time of relatively strong growth. Take-home point: Deficit spending can be the least bad option during times of economic hardship.

  3. US Debt in Historical Perspective (includes government agencies) (only non-governmental entities)

  4. What has Obama done for the economy?

  5. Actions Obama Took • Administered TARP bank bailouts started by Bush to combat the credit crisis • Bailed out the auto industry • Saved a 1-3 million jobs throughout the auto industry supply chain • Prevented a $1 trillion loss in the credit default swap market • Passed $787 billion stimulus (Feb. 2009) • 1/3 to states to prevent the layoff of police officers, teachers, etc. at risk of losing their jobs because of state budget shortfalls ($300 Billion) • 1/3 in tax cuts for working-class families (over $200 Billion) • 1/3 to states for infrastructure projects ($300 Billion) • Extended unemployment benefits • Payroll tax cut • Middle class tax cuts affecting 95% of taxpayers • Small business tax cuts • Small business loans • Passed banking regulation (Dodd-Frank)

  6. The Stimulus • The American Recovery and Reinvestment Act • $100 billion in education • $60 billion in health care funding • $147 billion in relief to state and local governments • $80 billion in infrastructure • $27 billion in renewable energy investment • $288 billion in tax cuts for workers, homeowners, students, small businesses, and families Take-home point: The stimulus helped a lot of people and saved a lot of jobs

  7. Effect of the Stimulus • Since the bottom in 2010 we have added 2.4 million jobs (more than during the entire Bush administration) • Up to 3.7 million jobs created or saved (1/3 of stimulus was to save jobs) • 114,400 teaching jobs saved • 45,000 jobs added in auto industry since bailout • Increased GDP by up to 3.1% • Stimulus decreased unemployment by up to 1.8% • Extension of unemployment benefits saved millions of jobs by allowing people to continue buying -- supported businesses • Since 8.8 million jobs lost (half under Bush, half under Obama), we are still digging our way out

  8. “If General Motors, Ford and Chrysler get the bailout that their chief executives asked for yesterday, you can kiss the American automotive industry goodbye.” --Mitt Romney(2008) Source: Mitt Romney’s NYT OpEd “Let Detroit Go Bankrupt”, Nov18, 2008

  9. Note: Seasonally adjusted data. Detroit figures are for the metropolitan area. Source: Bureau of Labor Statistics

  10. Source: Bureau of Labor Statistics

  11. What else has Obama done for the economy? • Cash for Clunkers: The Car Allowance Rebate System • Led to 400,000 new vehicle sales, averaging 50% better gas mileage than the vehicles they replaced • Added 40,000 full-time-equivalent jobs • Increased gross personal income by $2 billion (offsetting most of the $3 billion cost) • Doubled GDP growth for the third quarter of 2009 Take-home point: Cash for Clunkers reduced air pollution and stimulated manufacturing at the same time

  12. Financial Reform: Dodd-Frank • First step towards regulating the “shadow banking system” • Non-bank financial institutions that pose a risk to the financial system can be required to submit to Fed supervision. • Discourages “too big to fail” by increasing capital, leverage, and other requirements as companies grow in size and complexity. • Provides authority to regulate over the counter derivatives • Hedge funds and private equity advisers must register with SEC and provide data on portfolios so risks can be monitored • Regulators can impose capital and margin requirements on swap dealers • Swap dealers must provide regulators with data allowing them to monitor systemic risks

  13. What does Dodd-Frank do? • Volcker Rule: Limits deposit banks from investing in risky assets • Gets rid of conflicts of interest for Ratings Agencies, preventing financial institutions from being able to shop around for the best rating • Requires financial institutions to have “funeral plans” – detailed accounting of how the company could be liquidated if it became insolvent so that it won’t become a burden on the tax payer. • Requires the TARP bailout to be repaid • Extensive consumer protection: • Mortgage and loan terms must be clear • Banks can’t raise interest on credit cards without advance notice • Debit card fees must be in line with the actual cost of service

  14. What else does Dodd-Frank do? • Makes derivatives and swaps more transparent, shining light on shadow markets • Requires derivatives to be traded on public exchanges • Regulates credit rating agencies to reduce conflicts of interest • Increases transparency on executive compensation • Requires publicly-traded companies to put executive pay up to shareholder vote every 3 years • Requires all corporations to report pay ratio between executives and employees Take-home point: Dodd-Frank placed much-needed reins on out-of-control financial markets, but didn't go far enough.

  15. Why report CEO pay?Source: AFL-CIO PayWatch (aflcio.org) Portion of income taken by the top 1% went up---and peaked in 1929 and 2007 Real median income went down...

  16. One of these things is not like the other ones...Source: Economic Policy Institute

  17. Is it a low minimum wage? Yes.

  18. Or is it high CEO pay? Also yes.

  19. What's up with tax rates? On paper, income tax rates increase with income (progressive taxation). In practice, most rich people pay very little taxes. The majority of our tax burden falls on the middle class. How does this happen? • Capital gains: Investment income is taxed at 15% while wage income is taxed up to 35% • 50% of capital gains go to 0.1% of Americans—we are the 99.9% • Tax havens and loopholes (e.g. Cayman Islands) • Regulatory capture: Lobbyists influence Congress to lower rates and add loopholes

  20. Distribution of income and taxesSource: rationalrevolution.net These rates are on ordinary income. I've marked the capital gains rate with a red line. As you can see, that's where the 1% get most of their income.

  21. Republican Sound-Bytes Refuted • They say: “50% of Americans pay no taxes.” • No, in 2009, 50% of American households paid no Federal Income Tax because their taxable income was below the minimum for income tax • 2009 was exceptional due to the recession and many short-term tax breaks in the Stimulus; in most years about 35% pay no Federal Income Tax • Payroll taxes, state taxes, and sales taxes disproportionately affect the poor. In 2010: • Poorest fifth of population paid 16.3% of income in taxes • Second poorest fifth paid 20.7% • A GAO study found that in every year from 1998 to 2005, approximately 55 percent of large corporations paid NO corporate income tax.

  22. Republican Sound-Bytes Refuted • They say: “The financial crisis was caused by poor people buying homes they couldn't afford.” • If it had just been about mortgage defaults, we could have handled it. • The total value of mortgages in default in 2008 was only $300 billion; the cost of the financial crisis was near $15 trillion. • It was the vast net of credit default swaps that spread the contagion through the whole system. • This argument claims that the tail wagged the dog – it was the ravenous appetite on Wall Street for subprime mortgages, which were being rated AAA and brought in huge profits due to the high interest rates, that led to the collapse of lending standards. • People assumed that housing prices would only go up, so if they couldn’t afford their payments, they could sell. Even experts on Wall Street used the same assumption.

  23. Republican Sound-Bytes Refuted • They say: “Regulations are strangling business.” • Lack of financial regulation just cost us tens of trillions of dollars. Overregulation is bad. That doesn’t make under-regulation good. • When polled, small business owners consistently report that lack of demand and cost of health care are hurting them more than regulation • Obama has ordered reviews of all business regulations, and has removed almost as many as he added • Dodd-Frank explicitly exempts institutions with less than $150 million in assets

  24. Republican Sound-Bytes Refuted • They say, “Taxing the job creators will kill jobs” • The market collapse that resulted in over 10% unemployment was almost entirely the result of activity on Wall Street & the derivatives market – the wealthy. • Companies are sitting on record levels of capital – they won’t spend it to start hiring until there is demand. • All modern companies depend on technological innovations originally pioneered by tax-supported research and development: • The transistor (the basis of the computer chip) • Word processors and spreadsheets • Graphical User Interfaces (Windows and the Mac) • The internet

  25. Republican Sound-Bytes Refuted • “The stimulus was a failure.” • According to CBO estimates, the ARRA: • Increased real GDP growth by 3% • Lowered the unemployment rate by 10% • Increased the number of people employed by 2 million • Increased the number of full-time equivalent workers by 3 million

  26. Republican Sound-Bytes Refuted • They say: “Republicans cut taxes; Democrats raise taxes.” • Cutting the payroll tax was a Democrat-led initiative which was opposed by the majority of Republicans. • The ARRA included $288 billion in tax cuts. • Both Reagan and George H.W. Bush raised taxes when the situation required. • Under Reagan, the Democratic Congress consistently passed budgets smaller than the administration requested. • Reagan's capital gains rate at the end of his Administration was the same as his ordinary income rate (28%; today capital gains are taxed at only 15%).

  27. Republican Sound-Bytes Refuted • They say: “Obama is the food-stamp President.” • The number of hungry people in America dramatically increased as the result of the recession. If food stamps hadn't been increased, many people would have starved. • Food stamps are one of the most effective economic stimulus policies available; they have a fiscal multiplier of 1.73, a 73% return-on-investment • The total cost of the Supplementary Nutrition Assistance Program is less than 0.5% of our GDP. • Obama increased funding to SNAP by $20 billion; previously George W. Bush increased it by $19 billion.

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