Open Classroom Policy Series Economic Growth with Equity

1. Open Classroom Policy SeriesEconomic Growth with Equity Week 14 Final Session of the Semester Barry Bluestone Cathy Minehan April 15, 2009

2. We began this Open Classroom at a tumultuous time for the Global economy Not since the 1930s have we faced such inauspicious economic times The U.S. and global economies are in decline Unemployment and economic insecurity are rising

5. March 2009: 8.5% 5

6. What Now? What do we want government to do? Get us out of this mess The “Obama” effect What should our economy look like in the long run? Highly market-oriented (last 30 years)? Highly regulated – European Model? Trade-offs in each How we deal with these tradeoffs along a wide range of issues – financial regulation, legal and political institutions, government policy, immigration, education, trade – is what this course was all about. 6 6

7. Perspective of Course This Open Classroom stepped back from the current economic situation to ask fundamental questions about how an economy operates -- what makes its prosperous and what can make it more equitable Economic Growth with Equity 7

8. Critical Issues of the Course • What makes for a“Good” Society? • Whatstatistics and indicators can we use to assess whether we are making progress toward an improved society? • Whatpublicpoliciescan we pursue for an improved society? 8

9. Two Big Tradeoffs in Achieving our Economic Goals • #1 Maximize Economic Output vs. Equal Distribution • #2 Free Market vs. Regulation

10. Tradeoff #1: Equality and Efficiency: (Arthur Okun, 1975) • Efficiency vs. Equity • Rights vs. Market Goods • Features of “Rights” • Features of “Market Goods” 10

11. “The Big Tradeoff” • “Equal Rights and Unequal Incomes generate tensions between the political principles of democracy and the economic principles of capitalism” • This constitutes an “uneasy compromise rather than a fundamental inconsistency” 11

12. “Rights-Market Goods” Spectrum Perfect Rights Perfect Market Goods Freedom of Speech Diamond Pinky Rings 12

13. “Rights-Market Goods” Spectrum Perfect Rights Perfect Market Goods Freedom of Speech Diamond Pinky Rings Where would you place the following on the Spectrum? K-12 Education Employment Higher Education Food Health Care Personal Security Housing Transportation Cultural Amenities 13

14. Summary:The Big Tradeoff #1 How much economic output are we willing to sacrifice for more equality? How much equality are we willing to sacrifice to increase economic output? Where on the Rights/Market Goods spectrum should we be?

15. The 2nd Big Tradeoff • When are there free market excesses? • When are there regulatory excesses? • Finding the right balance

16. “Free Market-Regulation” Spectrum Regulation Free Market Government Regulation of Industry, Financial Markets, Labor Markets Laissez Faire Markets 16

17. Now for a look at the U.S. Economy in Numbers

18. Gross Domestic Product Tracking the Total Output of the U.S. Economy

21. GDP (Y) = C+I+G+X-M Gross Domestic Product (Y) = Consumption (Households) + Investment (Business) + Gov’t Spending*(Fed+State+Local) + EXports - Imports * Excludes Government Transfers

22. 1960-1970 1970-1982 1982-2000 2000-2008 3.1% Growth Rate

23. 1970-1982 1982-2000 2000-2008 1960-1970

32. 2008 Poverty Threshold: $21,200 4-Person Family

35. Top 10% of Households own 78.8% of Stock Market Holdings

36. “Murder on the Inequality Express” • Suspect 1: Technology • Suspect 2: Deindustrialization • Suspect 3: Deregulation • Suspect 4: Declining Unionization • Suspect 5: Downsizing • Suspect 6: Winner-Take-All Labor Markets • Suspect 7: Free Trade • Suspect 8: Capital Mobility • Suspect 9: Immigration • Suspect 10: Trade Deficits

37. Debt Outstanding Mortgage Consumer Credit Federal Debt

38. $13.5 Trillion

39. $2.5 Trillion

40. $10.6 Trillion

42. WHAT DO YOU WANT GOVERNMENT TO DO? AND HOW MUCH DO YOU WANT TO PAY FOR IT?

43. U.S. Government Spending Over Time “Glory Days” • 1950’s – 1960’s Budget Outlays as a Percentage of GDP: <18% - 20% Deficits - Negligible

44. U.S. Government Spending Over Time “Guns and Butter” Spending • 1970’s – 1980’s 20-23% of GDP Other Problems: • Budget Deficit • Inflation Current • Account Deficit

47. U.S. Government Spending Over Time • Reagan “Revolution” • Smaller government • Cut taxes • Concept of the Laffer Curve – lower tax rate will lead to higher production, high tax revenue – Supply Side

48. U.S. Government Spending Over Time By how much/when • Economic Recovery Tax Act (ERTA) of 1981 • 25 percent across-the-board cut in personal marginal tax rates • Tax Reform Act of 1986 • Lowered maximum marginal tax rates from 50% to 28% beginning in 1988 • Lowered the top corporate tax rate to 34% from 46% and lowered the number of corporate tax brackets from five to three

49. U.S. Government Spending Over Time Reagan “Revolution” Size of Government Spending 1989 – 21.2% of GDP Deficit

50. U.S. Government Spending Over Time • George H.W. Bush/Clinton • Enacted Pay/Go • Enduring bias • Markets are king • Smaller government/balanced budget better • 1989-1992 21.9% of GDP • 1992-2000 22% - 19% of GDP • Rising Deficit in George W. Bush term/surplus in Clinton’s