Economics on Main Street: Concepts for American Voters

1. Economics on Main Street:Concepts for American Voters May 2012

2. Policy Responses to Downturn • scale of economic challenge housing market & financial markets meltdown in 2008, household asset losses of $13 Trillion (90% of GDP) 2009, $1.4 Trillion decline in consumer-business spending • review of policy responses financial crisis: Troubled Asset Relief Program (TARP), FRB recession: 2008 Stimulus, automatic stabilizers, American Recovery & Renewal Act (ARRA), American Jobs Act (AJA)

3. 2008 Stimulus (Outflow -$100B) tax refunds received Spring and Summer of 2008 (70% spending) • TARP (Outflow -$602B, Balance -$214B) Fannie & Freddie (bulk of remaining balance), Large Banks and hundreds of Small Banks (repayments plus interest), AIG and Toxic Assets ($80B out, $40B in), Auto Firms ($80B out, $40B in) • FRB (“lender of last resort”, Balance +$125B) loans at premium rates: Large Banks (domestic & international), thousands of Small Banks, Central Banks (Can, Jpn, Europe). timely intervention in Commercial Paper Market: short term cash flow for hundreds of U.S. Businesses (including CAT). peak FRB lending: $1.5 Trillion (December 2008).

4. automatic stabilizers (Outflow: -$1.3 Trillion) reduced revenue flows (income tax, corporate tax, capital gains, etc.) increased “main street” spending (unemployment insurance, food stamps, etc.) • ARRA(Spring 2009, Outflow: -$756B) (39%) tax breaks: individuals ($183B), payroll ($105B), business ($34B) (31%) contracts-grants-loans: education ($90B), trans-infra ($62B),eng-env ($25B) (30%) income support: medicaid & medicare ($91B), ui-exp ($61B), family ($40B) • AJA(Fall 2011, Outflow -$447B, failed in Congress) (55%) tax breaks: individuals ($175B), payroll ($65B), business ($5B) (31%) c-g-l: trans-infra($90B), state-local-govt ($35B), neighborhoods ($15B) (14%) income support: ui-reemployment ($62B) • government employment(April 2007-2012) overall decline of 164,000 . . . . local education decline of 105,000

5. Public Goods &Sustainable Social Contracts Economics of Public Goods

6. Economics of Public Goods • why are some goods and services reasonable candidates for public sector provision? nonrival use by one does not diminish availability to others. (defense & police, flood control, radio broadcast) non-excludable impossible or very costly to prevent sharing of benefits. (defense & police, flood control, wilderness & parks) • minimal role of government? (defense & police, law & courts, disaster prevention, basic infrastructure (water, sewage, bridges, roads))

7. Economics of Public Goods • consumer demand for some goods & services expands with income so much that share grows (vacation travel, eating out, household appliances) • societal demand for public provision often follows a similar pattern (fire prevention, transport network, wilderness & parks) • additional market failure arguments (public invest (education, infrastructure, research), regulation (food safety, environment, financial markets), equity & stabilization (safety net, insurance, stimulus))

10. Public Goods &Sustainable Social Contracts Deficit & Debt Concerns

11. Spending & Taxes in Context Source: OECD (2007), CIA Factbook (2011)

12. Running a Deficit • if we spend like Canada and tax like Mexico . . . (current debate regarding extent of public sector) (starving the beast, or simply not paying our bills) • what’s wrong with running a deficit? (monetary & inflation, borrowing & interest rates) (debt, must pay out of future (or past) GDP) • when does it make sense to run deficit? (beneficial effects when in deep recession) (public investments in growth at low interest rates)

13. Current U.S. Debt: $14.3 Trillion (about 50% from earlier periods) What is a responsible limit on personal debt (home mortgage)? 1947 - 120% of GDP current - 100% of GDP Sources: New York Times, Department of the Treasury, Congressional Budget Office

14. Long Term Concerns • if we spend like Canada and tax like Mexico . . . (accumulating costs from political stalemate) • health care costs (medicare (& medicaid) growing share of budget) (part demographics, but must solve cost increases) • state & local – unsustainable commitments (medicaid growing share of state budgets) (state & local pension puzzles) • supporting recovery in short term

15. You Tackle the Deficit • NY Times exercise based on budget choices. • David Leonhardt, CBO scoring, Fall 2010. • You have 33 options, impact in 2015 & 2030. • You can eliminate deficit with 8 to 12 picks. • Making your selections • No restrictions on your preferences. • Visit all categories (spending, taxes) • Turn in selection sheet. • Review of top choices

16. Concluding Thoughts • challenges ahead investing in economic growth as priority balanced approach to markets & regulation inequality and joblessness as societal concerns deficits & debt as manageable concerns • an absolute pleasure you have been an outstanding class of learners raise your hand, pat your back, job well done

17. Thank You!

18. Economics on Main Street:Concepts for American Voters May 2012