Part 1

1. Part 1 Domestic Policy Issues: The Economy

2. Role: State of economy plays a significant role in determing strength of United States and mood of its people Affects EVERYONE How much we earn, what we can afford to buy Important issue May influence our vote The Economy

3. 1990s Expands rapidly 2001 Recession sets in Cause: 9/11 causes anxiety about domestic security Job market tight Energy prices soar Health care pinches wallets Policymakers disagree on what steps to take to get back on track The Economy

5. Governments Role Economy encompasses production, distribution, and consumption of goods/services Struggle to determine best way to regulate economy Have a hard time anticipating ups and downs, so look to recent trends Rely on statistics to make important policy decisions 3 major tools: Fiscal policy, monetary policy, and trade policy The Economy

6. Fiscal Policy: Use of federal government’s taxing and spending powers Aim: To promote steady economic growth, full employment, and stable prices Spend taxpayer dollars on specific programs and subsidies EX: programs that provide additional jobs; subsidies for industries like agriculture The Economy

7. Monetary Policy: Fed tries to promote steady growth without inflation or unemployment How? Controlling amount of money in circulation Called monetary policy, controlled by Federal Reserve (central bank of US) Created in 1913 Purpose: Safe, flexible and stable financial system Fed issues US currency and regulates short term interest rates to banks Board of Governors, selected by President, confirmed by Senate, runs the Fed (14 year terms) The Economy

9. Trade Policy: Trade: Exchange of goods and services among nations Generally increase a country’s overall standard of living Policy includes promoting exports, restricting imports when necessary, and pursuing agreements that boost trade benefits The Economy

10. Inflation: Continuing rise in prices for goods and services Higher the rate of inflation, faster the prices go up If unaccompanied by rise in wages, standard of living goes down In other words, people can afford to buy less Who is hurt the most? People on fixed incomes What could it lead to? People to buy on credit; save less Domino Effect: Banks have less money, economy suffers b/c banks cannot lend for investments Inflation calculator The Economy

11. Inflation: (cont’d) Gov’t Control # of ways, but most common is monetary policy Reduce, or tighten, the money supply by raising interest rates When they go up, consumer spending decreases; prices level off, or go down Reducing interest rates, it increases the money supply, and consumer spending increases Deflation: Sustained decrease in prices across the economy Good initially, but widespread trend of steadily falling prices can cause consumers/businesses to hoard cash, which could lead to lower wages The Economy Zimbabwe Inflation

12. Unemployment: % of men/women who want to work but cannot find jobs Is it ever zero? No, b/c there are always people in between jobs Many consider it at full employment when rate is at 4% or less Traditionally affects minorities, women, and out of school teens harder than others Affects federal, state, and local gov’t treasuries People don’t pay taxes when they are out of work, so gov’t acquires less revenue and pays out more in unemployment comp Times of high unemployment: Gov’ will work to create jobs, ususally by lowering taxes & interest rates to encourage businesses to expand operations, thus hiring more workers The Economy

15. Recession: Period of economic decline marked by rising unemployment and reduced production, spending, and consumer demand How to stimulate? Fed can make more money available to banks for lending by lowering interest rates Through fiscal programs Funding to create jobs or reducing taxes History: We have gone through cycles of recession and recovery (capitalism) Most dramatic: Begins 1929 w/ stock market collapse; leads to Great Depression of the 1930s The Economy

16. Productivity: Refers to the amount of goods and services produced per person per hour Rising rate usually leads to higher wages and profits, and lower prices Generally considered good for economy can change nature of workforce and lead to unemployment The Economy

17. International Interdependence: Increasing levels of trade among nations has made them more interdependent than ever before US is world’s largest importer Result: jobs created overseas; keeps foreign workers employed Strength of US economy depends on how well American products sell in foreign markets US economy can be adversely affected by rising costs of certain imports, like oil G-8 Countries (Group of Eight) World’s leading industrial nations (Canada, France, Germany, Italy, Japan, Russia, UK, and US Try to develop cooperative solutions The Economy

18. The Stock Market: People invest in stock market by buying shares of ownership, called stocks, in companies If businesses make profits, their stocks generally go up in value Recent Years: More and more are buying stocks through mutual investment funds and employer retirement plans, enabling more Americans to profit from market’s highs, but also making them more vulnerable to lows The Economy Exxon Stocks

19. Offshore Outsourcing: In recent years, a # of US companies have hired companies or workers in other countries to do work that was once done within US borders Job losses affect highly skilled workers Some want federal gov’t to raise trade barriers to limit outsourcing; others think that gov’t should provide incentives for companies to keep jobs in the US The Economy:Current Issues

20. The Budget Deficit and Social Security: Currently: Soc Sec consumes 21% of federal budget; Medicare about 13% Economists worry that entitlements taken from these will grow dramatically as huge baby boom generation begins to retire from work force The Economy:Current Issues

21. For This: Tax cuts are sound fiscal policy that will keep economy moving in right direction for years to come Lower tax rates, esp. for corporations, spur investments that will lead to economic growth and new jobs As economy grows, gov’t budget surpluses will return If they expire, Americans will face a huge and economically debilitating tax increase in 2011 Against This: Tax cuts have created budget deficits and debts that will eventually handicap the economy Tax cuts have reduced revenues, given handouts to the wealthy, and left America’s children with the bill Reduce coffer, thus jeopardizing the gov’t future ability to fund essential programs like Social Security and Medicare The Debate: The EconomyCongress should make tax cuts permanent

22. For This: Nations like China and India have been “stealing” jobs away from American workers Fed gov’t must use trade barriers and incentives to keep domestic jobs at home If American workers must compete with foreign workers in manufacturing and service sectors, they will face lower wages and reduced standards of living, thus harming the economy Against This: Companies will always seek to operate in ways that reduce costs and increase profits Might result in some job losses, but the fed gov’t should not interfere with this natural move toward economic efficiency. When companies bring profits home, they inject money into US economy, boosting job creation in other areas Net affect is to strengthen economy The Debate: The EconomyFederal Gov’t should do more to protect domestic jobs

23. For This: One of the best ways to reduce budget deficit and keep it from dragging down the economy is to make needed changes in the largest entitlement programs Retirement among baby boom generation will bankrupt the already shaky Social Security system and add to deficit Any reduction plans should require wealthier Americans to reduce their benefits while allowing the poorest to continue to collect their expected amount of money Against This: Cutting Social Security benefits is a diversionary tactic designed to avoid necessary tax increases Other programs should be cut before Social Security; then changes to that and other entitlement programs could be enacted in small increments Otherwise, nation risks cutting benefits to those retirees and disables people who rely exclusively on Social Security income. These American should not be asked to solve the nation’s budget problems The Debate: The EconomySocial Security benefits should be cut to help reduce the budget deficit