Economy and Politics

1. Economy and Politics • Are you better off now than you were four years ago • Economy performing poorly, presidents lose • 1960 Nixon, Carter 1980, Bush in 1992 • Economy performing well, presidents win • LBJ 1964, Nixon 1972, Reagan 1984, Clinton 1996 • Important for Congress and Realignment

2. Macroeconomic Policy • Fiscal- change tax and spending policy • Monetary- change money supply • Microeconomic policy • Education, labor, technology, transportation, subsidies to industry etc

3. Fiscal Policy • Keynes- govt can fine tune the economy • Recession- Government run deficits, stimulate demand • Prosperity- run surpluses, cool economy, prevent inflation • JFK/LBJ tax cut and 1960s boom

4. Limits of Fiscal Policy • Political Limitations • love the gas; hate the breaks • slow response time • Economic Limitations- • is economy growing or receding? • Erosion of Fiscal Flexibility • The sticky pedal • Anti- tax movement • Budget on Autopilot

7. MONETARISM • #1 tool--raising or lowering interest rates • Reduce interest rates, increase supply of money, people borrow more, economy grows. • Big advantage– speed

8. THE FEDERAL RESERVE SYSTEM • Fed Board of Governors, Federal Reserve Banks, FOMC • Will Rogers, "there are two things that can disrupt the American economy. One is a war. The other is a meeting of the Federal Reserve Board."

9. Who is this Man?

10. Interest Rates & the Fed • Fed recently increased interest rates • Who made that decision? • Any Guesses?

11. Insulation for Politics • Raise their own budget • Bowling alleys on Wall Street!!! • Appointment process & 14 year terms • Business confidence in Fed • Monetary policy too arcane

12. Jawboning • Congressional Hearing on Fed • Greenspan's "We have to bring the existing instabilities to a level of stability reasonably shortly. I think we know where we have to go. I do not think we underestimate the severity of the problems with which we are dealing," • Investors-- quarter-point rate cut is coming

13. Is independence A Good Idea? • Improves mgmt of economy, fewer recessions, • Politicians hate to take away the punch bowl as the party gets going • Odysseus and the Sirens

14. BANKER DOMINANCE • Fed is Iron Triangle with Bankers • Bankers nominate the Federal Reserve bank presidents who cast five votes on the Open Market Committee • Obsession with fighting inflation • People who benefit from low inflation, are not those who suffer from high unemployment!!!!!!!!

15. MONETARISM • #1 tool--raising or lowering interest rates • Reduce interest rates, increase supply of money, people borrow more, economy grows. • Big advantage– speed

16. Interest Rates & the Fed • Fed recently increased interest rates • Who made that decision? • Any Guesses?

17. The Maestro

18. FOMC

19. Insulation for Politics • Raise their own budget • Bowling alleys on Wall Street!!! • Appointment process & 14 year terms • Business confidence in Fed • Monetary policy too arcane

20. Minnesota Fed Bank

21. Jawboning • Congressional Hearing on Fed • Greenspan's "We have to bring the existing instabilities to a level of stability reasonably shortly. I think we know where we have to go. I do not think we underestimate the severity of the problems with which we are dealing," • Investors-- quarter-point rate cut is coming

22. Is independence A Good Idea? • Improves mgmt of economy, fewer recessions, • Politicians hate to take away the punch bowl as the party gets going • Odysseus and the Sirens

23. Bias of the Fed • Bankers nominate the Federal Reserve bank presidents who cast five votes on the Open Market Committee • Obsession with fighting inflation • NAIRU- 6% • People who benefit from low inflation, are not those who suffer from high unemployment!!!!!!!!

24. Political Business Cycle • Pres manipulate economy to engineer their reelections • Success– Bush and Reagan • Failures– Carter and Bush

25. Budget Deficits • Major issue in American politics • Solution is simple, cut benefits, raise taxes • Citizens wants less taxes; • cut spending for welfare, foreign aid, and space. • Politicians seek seek blame avoidance techniques

26. Bracket Creep • Let Inflation work for you! • Auto cuts in benefits and taxes • Congress never has to raise taxes • End of Bracket Creep • Politicians can no longer avoid taxes

27. Where do Taxes come from/go?

28. Taxes- What Economists Like • broad based taxes • Income tax • Excise tax • Sales tax

29. What elected officials (and voters) like • Tax preferences/deductions • Good or Bad • Charities, education, local taxes, mortage interest • "warfare welfare" $7.6 billion • "mansion subsidiary" $6.7 billion • "skybox scandal" $5.5 billion • Problems with preferences

30. Tax Reform • 2 main issues-- the breadth and progressivity of the tax system • 1986 tax reform • 1993 34% upper bracket • Flat Tax • 18% for everyone • Reduce loopholes

31. Flat Tax--Con • Would hurt charities, home buyers • Would not raise enough money • Main beneficiaries would be wealthy • $24,650 taxed at a 15 percent rate • $50,000 taxed at 28% rate • $1 million taxed at 36% rate

32. Flat Tax- pro • Why penalize hard work, investment • Simplicity • Internet world • Already have a flat tax-- Social insurance taxes