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ECONOMIC POLICY

ECONOMIC POLICY. PUBLIC POLICY – THE BASICS. Agenda Setting: Policy Formulation Adoption Implementation Evaluation Policy Politics: Who PAYS for whose BENEFITS ? Distributed Costs & Benefits - Ex: education / defense Concentrated Costs & Benefits

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ECONOMIC POLICY

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  1. ECONOMIC POLICY

  2. PUBLIC POLICY – THE BASICS • Agenda Setting: Policy Formulation Adoption Implementation Evaluation • Policy Politics: Who PAYS for whose BENEFITS? • Distributed Costs & Benefits - Ex: education / defense • Concentrated Costs & Benefits • Ex: labor laws impact management • Concentrated Benefits / Distributed Costs • Ex. farm aid / welfare / “pork” • Distributed Benefits / Concentrated Costs • Ex. auto safety / pollution regs

  3. FOUR GOALS OF ECONOMIC POLICY 1 - Economic growth • PAST economic growth: Gross Domestic Product > total value of ALL goods & services GDP = C + I + G + X • real vs. nominal • total vs. per capita • 2009 GDP: down 2.6% to $14.4 trillion • PRESENT situation • Dow Jones Industrial Average: 30 major stocks • S&P 500 and others are more accurate • NASDAQ: smaller/newer companies; high tech indicator • FUTURE economic growth • Index of Leading Economic Indicators 11 indicators > work week / inventory / business permits / unemployment / $ supply etc. • Big Mac Index: cost of Big Mac worldwide Investment Government Net Exports Consumer

  4. 2 - “Full” employment > roughly 4 % unemployment (currently 9.7%) • Types of unemployment • Cyclical • Frictional • Structural • Hidden 3 - Minimize inflation • 1-2 % okay CPI: Consumer Price Index(2009: -1.5%) Inflation Calculator • two types: • cost-push: business expenses rise • demand-pull: demand increases • deflation associated w/recession (March 09 -.38%)

  5. 4 - Stabilize the business cycle • Official definition of RECESSION: • Decline in GDP for TWO+ consecutive quarters • Unofficial definition of RECESSION: when your neighbor is out work DEPRESSION: when YOU are out of work

  6. GOVERNMENT TINKERING STIMULATE DEMAND or PRODUCTION INCREASE GOVT $$$ • Underlying Assumption: multiplier / accelerator effect • Two main tools FIRST TOOL: FISCAL POLICY – Govt. Taxation & Spending • Expenditures – Revenue = Surplus (+) or Deficit (-) • national debt = accumulated deficits ($11.9 trillion) • misleading numbers > budget with or without Soc. Sec. • debt “danger” • crowds out private loans > interest rates rise • $$$ owed to foreign nations • Demand-side policy (Keynesian economics) > usually Democratic • stimulate consumer demand w/tax cuts and govt. spending • roots in Great Depression INCREASE EMPLOYMENT Increase consumer spending Get $2 here Add $1 here LINK: Obama Stimulus Package

  7. Supply-side policy > usually Republican • stimulate business w/tax cuts and less govt. interference • roots in Roaring Twenties (Reaganomics after 1980’s) • Spending • non-discretionary (ENTITLEMENTS) 64% • Social Security22% • Medicare 11% • Medicaid 10% • misc. mandatory 12% • interest on debt 9% • discretionary spending 36% • defense 19% • non-defense discretionary 17% • incrementalism • indexing for inflation • COLA: Cost of Living Adjustment

  8. Budget Process: • Constitutionally - must start in the House • In reality - starts with President • agencies provide estimates • budget goes to Congressional Budget Office (CBO) • committee hearings refine it • CBO reviews it • final House action (Oct.) • approval in senate • H & S version reconciled in Conference • signed by President

  9. Taxation • Conflicting Goals • Support government • raise revenue vs. cut spending • Stimulate the economy • promote productivity vs.stay out of marketplace • Change behavior • discourage it vs. encourage it • Redistribute income • provide help vs. promote independence • Fairness • ability to pay * Horizontal Equity: tax “equals” equally * Vertical Equity: “unequals” should be taxed unequally • benefits received

  10. 3 categories • proportional (PA 3.07%) • progressive (federal income) • regressive (sales tax) • federal income • individual income tax: 10 - 15 - 25 - 28 - 33 – 35 • corporate income tax: 15 – 25 – 34 – 39 – 34 – 35 – 38 – 35 • FICA: Fed. Insurance Contributions Act Social Security (6.2%) Medicare (1.45%) ”third rail of politics” • Other: excise / tariffs / user fees / estate-gifts AKA according to some Social Security Medicare

  11. SECOND TOOL: MONETARY POLICY – control money supply (MS) Increase MS stimulate economy Decrease MS  slow economy / slow inflation • Main tool of the “Fed” (Federal Reserve Board) • Interest Rates • Federal Funds Rate > banks borrowing from banks CURRENT: ¼ % • Discount Rate > banks borrowing from FED CURRENT: ½ % • Prime Rate > bank rate for “best customers” CURRENT: 3¼ % Interest Rate up Prime Rate up loans down MS down economy slows Interest Rate down Prime Rate down loans up MS up economy stimulated • Jawboning by Fed Chairman • Too much power? • Brd of Governors appt’d by Pres. for 14 years • little Congressional oversight • closed meetings Ben Bernanke

  12. THE END REVIEW AT QUIA: http://www.quia.com/jg/1738034.html

  13. Go to: Tax Rates in History BACK

  14. YIKES!! This is not good!

  15. The Hamburger Standard: March 25, 2006 BigMac Prices

  16. October 28, 1929 Dow Jones plummets 38.33 to 260.64 (13% drop) October 19, 1987 Dow Jones down 508.32 to 1738.74 (22% drop) October 13, 2008 Dow Jones drops 936 to 9,387 (11%drop) LINK: Largest gains and losses

  17. Dow Jones Link

  18. Frictional Cyclical Hidden Structural

  19. Inflation for the past year

  20. Projected 2009 deficit $1.8 trillion!! SPLAT!

  21. CBO’s Projected Deficits

  22. Projected 2009 deficit $1.8 trillion!!

  23. National Debt: inflation adjusted National Debt: raw data GO TO: National Debt Clock National Debt: as percent of GDP

  24. Who lends the U.S. money?

  25. What countries lend us money?

  26. 2006 GOVERNMENT TAXATION AND EXPENDITURES

  27. John Maynard Keynes John Maynard Keynes KEYNESIAN ECONOMICS: Prime the economic pump with government spending Add more “G” to the GDP equation: C + I +G

  28. FDR promises America a New Deal during the Great Depression

  29. Civilian Conservation Corp and Work Progress Administration provide work and hope for the unemployed

  30. Social Security: A bold new plan to help the elderly and the unemployed

  31. It has helped the elderly And it helps survivors and unemployed But its future is uncertain without reform

  32. PA income tax is 3.07% for all So what is “fair” anyway? A sales tax is regressive compared to income 6% on $1000 of goods = $60 -on a monthly income of $6000 tax rate is 1% -on a monthly income of $1500 tax rate is 4% Federal income tax climbs from 10 to 35%

  33. 2006 FEDERAL TAX BRACKETS

  34. The Federal Reserve System

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