Economic Policy

1. Economic Policy Today’s Goals- Be able to explain • GNP vs GDP • Monetary Policy and how the Fed Reserve Board carries it out • Fiscal Policy • Economic Theories for Fiscal Policy- Keynesian vs Supply Side • Progressive vs Regressive Taxes • Regulation • Expropriation and Eminent domain • Growing Economic Inequality in the US- Comparative view 12/17/12

2. ECONOMIC POLICY ___________ __________ __________all goods and services produced by the nationals of a country. This means that whatever Americans produce around the world counts, even if it is in Japan or France. We add that stuff in and subtract out goods made by foreign nationals here in the States .  .  _________ ______ _______is the more up-to-date term. Its basic meaning is the value of all final goods and services produced within a national boundary (ie within our DOMESTIC borders) . For example, the Toyotas produced by USA Toyota in KY. Often expressed per capita or PPP or by annual growth

3. Economic and political systems are deeply entwined Extremes: At one end: ______________ A type of economic system where the resources are state owned and their allocation and use is determined by the centralized decisions of a planning authority –better at industrializing than at providing __________ goods. At the other:_______ _________ the French expression for "to leave alone”: argues that the government should have as little as possible to do with the economy because private ownership, market-based decision making, and free trade will optimize public welfare and raise the standard of living; view was especially popular between the Gilded Age and the Great Depression.

5. Other measures of the economy

6. http://data.bls.gov/map/servlet/map.servlet.MapToolServlet?state=53&datatype=unemployment&year=2008&period=M12&survey=la&map=county&seasonal=uhttp://data.bls.gov/map/servlet/map.servlet.MapToolServlet?state=53&datatype=unemployment&year=2008&period=M12&survey=la&map=county&seasonal=u

7. And remember indicators of development—economic and social

8. Union Laws • National Labor Relations Act (1935)- collective bargaining is guaranteed, protection from employer retaliation • Taft-Hartley Act (47)- reaffirmed collective bargaining but placed restrictions on unions • Made closed shops illegal- required to join unions as a condition of employment • Agency shops- new employees can choose to join/not join a union, if they don’t join they must pay a fee that can be used during collective bargaining • Right-to-work states- not required to join or pay membership fees, critics say this results in free riders (people benefit from collective bargaining but don’t have to support it with union dues) • Right to work states in periwinkle blue

9. January 26, 2009 How the Government Dealt With Past Recessions Recession- a period of general economic decline Specifically: a decline in GDP for two or more consecutive quarters http://www.nytimes.com/interactive/2009/01/26/business/economy/20090126-recessions-graphic.html

10. The Economy is something voters care about 2006 Midterm elections

12. __________POLICY: tries to control the size of the total supply of money (and other highly liquid financial assets that are close substitutes for money) available in the national economy in order to: control inflation, and/or speed up/slow economic growth, and/or manage the level of unemployment and/ or influence the exchange rates at which the national currency trades for other foreign currencies

13. 3 Things the FRB does to manipulate the _________ of money • It can set discount rates for money that banks borrow from the regional Fed. Reserve banks--if rate down, more people can borrow, more money available in economy but concern is ___________ • Federal Funds Rate- the interest rate banks can charge each other for overnight loans. Lower rates = increased money supply • (3) it can increase or decrease the reserve requirements that banks must keep--if lower, more money in economy, (also brings down interest rates) but concern is _____________ • (4) it can buy (Quantitative easing) and sell govt. securities (bonds, treasury notes and other govt. IOUs which are savings devises.) When the govt. buys, it puts more money in circulation, and takes securities out of circulation, With more money around, interest rates tend to drop, so more private money is borrowed and spent. But concern is _______If the Fed sells securities, it takes money out of circulation, (it is going into savings) causing interest rates to rise by making borrowing harder.

15. _____Policy the use of government expenditure and revenue collection to influence the economy

16. Fiscal Policy • Keynesian Economic Theory • Advocates gov’t taking an active role to stimulate the economy during a recession • Temporary mixed economy • Spending helps increase demand • Multiplier effect- people who’s jobs are saved continue consuming goods, that in turn keeps people in jobs to meet the stable demand • After the economy recovers, gov’t spending can be reduced • Examples: FDR’s New Deal policies: WPA (roads/highways, public buildings), CCC (national and state parks, flood/erosion control), TVA dams), • Reagan’s defense spending increases (although he criticized Keynesianism)

17. Keynesianism in Action –recent bailouts • Economic Stimulus Act of 2008 • Tax rebates- most individuals received $600, $300 per dependent child • Tax breaks to businesses for investing in new equipment • $152 billion 2. Cash for Clunkers (2009)- Car Allowance Rebate System • $3 billion program • $3,500 or $4,500 credit for buying new (old car had to be 25 years old) and fuel efficient cars • TARP- Troubled Asset Relief 2008 • Originally passed under Bush • Obama released the second half in 2009 • $700 billion to prevent • gave banks the right to submit a bid price to sell their toxic mortgage-backed securities to the Treasury Dept. and buy stock • “Too big to fail” • Also help stabilize companies like General Motors • Many companies (including GM) have repaid their loans

19. American Recovery and Reinvestment Act of 2009 • $787 billion total- Passed under Obama • Tax relief: 116 billion: New payroll tax credit of $400 per worker , $15 billion Expansion of child tax credit- A $1,000 credit to more families, 6.6 billion: Homebuyer credit: $8,000 refundable credit for all homes bought between 1/1/2009 and 12/1/2009 • $51 billion tax expenditures for companies: renewable energy • $155 billion Healthcare- $86 billion Medicaid, $25.8 health information technology (digitizing records) • $100 billion Education: $53.6 billion to school districts to help prevent layoffs • $40 billion to unemployment benefits • $105.3 Infrastructure Projects

20. American Recovery and Reinvestment Act of 2009

21. Supply-side economics • Became popular during the 80’s (Reagan) until 2008 • Advocates return to free markets, less gov’t programs/spending, and monetarism (keep money supply low to resist inflation) • Taxes and regulations hurt economic growth • Lower taxes = more motivation to work, companies have more money to hire more workers, people can invest/save more money • Spending increases national deficit and debt- could cause interest rates to increase • Examples- Bush $1.3 trillion 10 year tax cut following the 2001 dot-com recession • Truman’s lack of action during the Great Depression • Margaret Thatcher (G.B.) slashed gov’t programs

22. “This is an essential short-term measure to ensure the viability of the American banking system,” President Bush said Tuesday morning. http://www.nytimes.com/2008/10/15/business/economy/15bailout.html?hp

23. Income Taxes If you work in the United States, you will probably incur some sort of federal income tax liability each year. Most people will also owe state income taxes, A few cities and townships add another layer to the mix of taxes you’ll pay; this list details what the various state and local governments charge. The amount you owe — for federal, state and local taxes — is determined by how much you earn each year. The United States uses a progressive tax system, which means the more money you earn, the higher your tax rate. The chart above lays out the different tax brackets and rates, which depends on your filing status (single, married couples filing jointly, married filing separately, etc.).

26. a flat tax can be regressive . . . . Suppose there is a 10% flat payroll tax. Paying it will be a much bigger sacrifice for someone who makes $10,000 than someone who makes $100,000. The marginal benefit of an extra dollar of income has a diminishing property and is non-linear. 

27. The FICA tax is levied on employers, employees, and certain self-employed individuals. Revenue goes to Social Security and Medicare. In 2000, the employee’s contribution to the retirement part of the FICA tax was 6.2 percent of the first $76,200 earned in wages and salaries. (Medicare is withheld on all wages and tips.) People with income from interest and dividend payments do not have to pay any Social Security tax on this income. 1. Over the wage and salary income range of $0 to $76,200, was the Social Security tax regressive, progressive, or proportional? Why? Proportional; the same percentage (6.2%) was taken of all earned income over the given range. 2. For employees who earned more than $76,200, was the Social Security tax regressive, progressive, or proportional? Why? Regressive; they paid no social security tax on earned income over $76,200, so their average tax rate would be lower than the rate for people who earned $76,200 or less. However, they did pay income tax on these earnings, so their total liability for all taxes may have been proportional or even progressive. 3. For people with income from interest and dividend payments, is the Social Security tax regressive, progressive, or proportional? Why? Regressive; they pay no Social Security tax on the interest and dividend part of their income, so their average tax rate would be lower than the rate for people who do not receive any interest or dividend income. They do owe income tax on most of this income, so their total tax liability may be proportional or even progressive.

28. But not all taxes within the federal system are equally progressive. The estate tax is the most progressive federal tax. The individual and corporate income taxes are also progressive. In contrast, payroll taxes for Social Security and Medicare are regressive, claiming a larger share of income from lower-income than from higher-income households. Taken as a whole, the federal tax system is progressive: on average, households with higher incomes pay a larger share of their income in federal tax than do those with lower incomes. In other words, the overall average effective tax rate-total tax paid as a percentage of income-rises as income rises

29. Among OECD countries only Mexico, Turkey, Korea, and Japan had lower taxes than the United States as a percentage of GDP. In many European countries taxes exceeded 40 percent of GDP, but those countries generally provide much more extensive government services to their citizens than the United States does. The United States relies less on consumption taxes—17 percent of total 2006 tax receipts—than any other OECD country. Revenue from such taxes averaged 32 percent of total taxes among the 30 OECD countries. Mexico, in contrast, collected 56 percent of its 2006 tax revenue from consumption taxes.

31. The Earned Income Tax Credit (EITC) is a federal income tax credit for low-income workers who are eligible for and claim the credit. The credit reduces the amount of tax an individual owes, and may be returned in the form of a refund. http://en.wikipedia.org/wiki/Earned_Income_Tax_Credit

33. Trend since the 1980s is market _______________

34. Balance of Trade. The value of a nation's exports minus the value of its imports. The balance of trade is positive if exports exceed imports; negative if imports exceed exports. Trade deficit http://www.brightpointinc.com/flexdemos/ustrade/ustradedeficit.html

35. OTHER ways the gov’t impacts the economy: Subsidy: Monetary assistance granted by a government to a person or group in support of an enterprise regarded as being in the public interest.

36. OTHER ways the gov’t impacts the economy: Regulation . . . Or deregulation

37. More examples of regulation March 18, 2008 Justices Take Up On-Air Vulgarity Again WASHINGTON — March 18 2008The issue of vulgar speech on the nation’s regulated airwaves, a flash point for decades, reached the Supreme Court again on Monday. The justices agreed to give the Federal Communications Commission a chance to defend its decision to start punishing broadcasters for the isolated and fleeting on-air use of expletives, an abrupt change in the commission policy that a federal appeals court last year found procedurally improper. By LINDA GREENHOUSE It has been almost exactly 30 years since the Supreme Court ruled in the “seven dirty words” case that the First Amendment did not bar the government from regulating the broadcasting of speech that, while “indecent,” was not actually obscene. The broadcast at issue then was a 12-minute monologue by the comedian George Carlin, titled “Filthy Words,” that deliberately challenged federal regulators by highlighting “the words you couldn’t say” on the public airwaves.

38. In a 2-to-1 ruling last June, the appeals court did not address the First Amendment challenge directly. Rather, it held that the commission had violated ordinary principles of administrative law by making “a dramatic change in agency policy without adequate explanation.” The appeals court vacated the commission’s order, instructing the F.C.C. to “articulate a reasoned basis for this change in policy.” At the same time, the appeals court majority made it clear that any explanation would face a high hurdle. “We are skeptical” that any explanation “would pass constitutional muster,” the court said in an opinion by Judge Rosemary Pooler. Noting that all the words at issue were “fully protected by the First Amendment,” Judge Pooler continued, “We are sympathetic to the networks’ contention that the F.C.C.’s indecency test is undefined, indiscernible, inconsistent and, consequently, unconstitutionally vague.” In its Supreme Court appeal, Federal Communications Commission v. Fox Television Stations, No. 07-582, the commission said the ruling placed it in an “untenable position” by leaving the commission “accountable for the coarsening of the airwaves while simultaneously denying it effective tools to address the problem.” As cable television viewers are well aware, the commission’s authority to regulate indecency is limited to the broadcast medium; whether the indecency horse is out of the barn may become an issue as the case moves forward. That will be early in the court’s next term. Kevin J. Martin, the F.C.C. chairman, said in a statement he was pleased the Supreme Court had accepted the appeal. “I continue to believe we have an obligation to enforce laws restricting indecent language on television and radio when children are in the audience,” Mr. Martin said. The Parents Television Council, a group whose members filed the original complaints, also said it was pleased. Of the 234 complaints the commission received after the 2003 Golden Globes broadcast, all but 17 were generated by the Parents Television Council.

39. For years after that ruling, despite its victory, the F.C.C. exercised its power with a light hand, disclaiming the authority to punish fleeting words that did not reflect “deliberate and repetitive use in a patently offensive manner,” as the commission said in a public notice in 1987. In an “industry guidance” document it issued in 2001, the commission said that in deciding whether to punish a broadcaster with fines or license revocations, it would consider “whether the material dwells on or repeats at length descriptions of sexual or excretory organs or activities.” That document said that “the full context in which the material appeared is critically important.” The approach changed soon after that, when the NBC broadcast of the 2003 Golden Globe Awards drew complaints for the expletive that the singer Bono used as an adjective to express his delight at receiving an award for best original song. The commission overruled its own Enforcement Bureau, which had denied the complaints on the basis of the existing policy, and found that the fleeting expletive fell within the definition of indecency, because it “invariably invokes a coarse sexual image” that made its broadcast “shocking and gratuitous.” The commission did not impose a penalty against NBC, because the network “did not have the requisite notice” of the new approach, the commission said in its “Golden Globe Awards Order” in 2003. Complaints about two other broadcasts, of the Billboard Music Awards on the Fox network, eventually led to the case the justices accepted Monday. The entertainers Cher, in receiving an award, and Nicole Richie, in presenting one, both used common expletives that generated complaints. Once again, the commission did not impose a sanction, but it made the new policy official and put broadcasters on notice there would be future penalties. A coalition of broadcasters challenged the new policy in the United States Court of Appeals for the Second Circuit, in New York, raising constitutional and statutory objections.

40. Supreme Court Rules that Government Can Fine for 'Fleeting Expletives'By Robert Barnes, Washington Post Staff WriterWednesday, April 29, 2009 The Supreme Court said yesterday that the Federal Communications Commission may penalize even the occasional use of certain expletives on the airwaves but left for another day the question of whether such a policy is constitutional. The court's narrow ruling said the FCC -- prompted by Cher's use of the F-word during a 2002 live broadcast and similar remarks by what Justice Antonin Scalia called "foul-mouthed glitteratae from Hollywood" -- was justified in changing its policy in 2004 to fine broadcasters up to $325,000 every time certain words are allowed on the air. For Now . . . The networks also challenged the rule under the First Amendment, but, like the U.S. Court of Appeals for the Second Circuit in New York, the Supreme Court did not rule on the question of constitutionality. "Whether [the policy] is unconstitutional will be determined soon enough, perhaps in this very case," Scalia wrote in sending the case back to the appeals court. In the meantime, any suppressed "references to excretory and sexual material surely lie at the periphery of First Amendment concern."

41. More ways the govt can impact the economy EXPROPRIATION: seizing private property for public use: done for highways, urban redevelopment, parks, Process: Govt exercises the right of Eminent domain (subject to limits put on it by the 5th amendment “takings clause” and applied to the states thru the 14th amendments DP clause)

42. ____CPI_____________). A monthly measure of changes in the prices of goods and services. It is the most widely accepted measure of inflation. _Farm Bill_________________The major agricultural legislation in the U.S., which expires every four or five years. Outlines provisions on commodity programs, trade, conservation, credit, agricultural research, food stamps, and marketing. ___Federal Reserve System________The central bank of the U.S. consisting of 13 district banks and a centralized decision-making body, the Board of Governors. : 1) provides currency upon demand to member banks, 2) provides check-clearing services, and 3) regulates the money supply by buying and selling government securities, changing the reserve requirement, and changing the discount rate. Although a creation of government, with the Board of Governors being appointed by the President, the System has generally maintained independence in its own policy decisions and on wider economic events and policies. _Fiscal Policy________A macroeconomic policy tool used by the government to regulate the total level of economic activity within a nation. Examples include setting the level of government expenditures and the level of taxation. ___GNP______________A measure of the market value of goods and services produced by the labor and property of a nation. Includes receipts from that nation's business operations in foreign countries, as well as the share of reinvested earnings in foreign affiliates of domestic corporations.

43. __Inflation_______A sustained rise in the general price level, generally measured by the Consumer Price Index (CPI). _Monetary Policy__________. A macroeconomic policy tool used to influence interest rates, inflation, and credit availability through changes in the supply of money available in the economy. In the U.S., the Federal Reserve implements monetary policy changes. ___Recession___________A cyclical downward movement in the economy involving at least two consecutive quarters of a decline in the real (inflation-adjusted) GDP ___Reserve Requirement______________The amount of reserves (i.e., money) that the central bank requires a commercial bank to hold (i.e., money that cannot be used for loans). ____tariff_______A tax that a government assesses on goods as they enter (or leave) a country. May be imposed to protect domestic industries from imported goods and/or to generate government revenue.

44. _Deficit_______ when current expenditures exceed current revenues. Most frequently used to describe the situation in which government revenues (i.e., taxes) fail to cover government expenditures __Surplus____When current revenues exceed current expenditures. Most frequently, used to describe the situation in which government revenues (i.e., taxes) exceed government expenditures Balance of trade The value of a nation's exports minus the value of its imports. It is positive if exports exceed imports; negative if imports exceed exports. ___Discount Rate_____ The interestrate the central bank charges on loans to commercial banks ___exchange rate_____ The price of one currency in terms of another currency

45. Import quotaThe maximum quantity or value of a commodity allowed to enter a country during a specified time period. protectionism____________ism Tariff or nontariff trade barriers imposed by a government to protect a domestic industry Trade barriers_______ _________Regulations governments use to restrict imports from, and exports to, other countries. Examples include tariffs, embargoes, import quotas, and unnecessary sanitary restrictions expropriation________taking out of an owner's hands (especially taking property by public authority) subsidy_________ financial support Neo-liberalism________ ism political movement that espouses privatization and other free market policies as a means of promoting economic development and securing political liberty

46. Monetary policy—Point is to manipulate the _supply_________ of money and credit in the economy. Key player is the_Fed_________. It can decrease the cost to borrow money by __lowering___________ interest rates, ___lowering_______________ the reserve requirements and __buying____________ securities, but it risks ___inflation____________. • __Fiscal_________ Policy A macroeconomic policy tool used by the government to regulate the total level of economic activity within a nation. Examples include setting the level of government expenditures and the level of taxation. • Practicing Keynesian economic theory where the key is to create the right level of __demand___________ in the economy. If it is too ___low____________ you stimulate with programs. If it is too great, you risk inflation so you cut (ha!). President __FDR__________ is best example. • __antitrust__________ laws allow the __Justice________ Department to bring suit against companies that have monopolized a certain product or service. • Consumer policy: The _F___________ _____T________ ___C_______________ regulates trade and advertising; the ___F____________ and ______D____ ______A_________ monitors the health safety of food and approves new drugs for sale.

49. Today's poverty rate is a bit less than it was when there were 200 million Americans in 1967 - 12.6 percent last year, according to a Census Bureau report last month. But because the overall population has increased, the number of those in poverty has also grown - from 28 million to 37 million over the same period. Whether an individual is likely to be officially designated as poor depends in large part on race. For non- Hispanic whites the poverty rate is 8.3 percent; for African-Americans, 24.9 percent; and for those of Hispanic origin, 21.8 percent

50. Gini coefficients for the United States at various times, according to the US Census Bureau: • 1970: 0.394 • 1980: 0.403 • 1990: 0.428 • 2000: 0.462 • 2005: .469 • 2006: .470 (highest index reported) • 2007: .463 • 2008: .466 • 1929: . 450 • The Gini coefficient is often used as an _______ ________metric. Here, 0 corresponds to perfect income equality (i.e. everyone has the same income) and 1 corresponds to perfect income inequality (i.e. one person has all the income, while everyone else has zero income). While most developed European nations tend to have Gini coefficients between 0.24 and 0.36, the United States Gini coefficient is above 0.4, indicating that the United States has greater inequality