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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 – Ex: labor laws impact management
Concentrated Benefits / Distributed Costs– Ex. farm aid / welfare / “pork”
Distributed Benefits / Concentrated Costs – Ex. auto safety / pollution regs
FOUR GOALS OF ECONOMIC POLICY
1 - Economic growth– PAST economic growth: Gross Domestic Product > total value
of ALL goods & servicesGDP = 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 Indicators11 indicators > work week / inventory / business permits / unemployment / $ supply etc.
– Big Mac Index: cost of Big Mac worldwide
Consumer Investment Government Net Exports
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%)
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
Underlying Assumption: multiplier / accelerator effect
Two main toolsFIRST 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 $$$ owed to foreign nations
Demand-side policy (Keynesian economics) > usually Democratic
– stimulate consumer demand w/tax cuts and govt. spending– roots in Great Depression
GOVERNMENT TINKERING
INCREASE GOVT $$$
STIMULATE DEMAND or
PRODUCTION
INCREASE EMPLOYMENT
Increase consumer spending
Add $1 here
Get $2 here
LINK: Obama Stimulus Package
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 Security 22% 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
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
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
– 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
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
U.S. Tax Brackets - 2008
Single Taxpayer Rate (old rate before Bush)
$0 - $8,025 10%
$8,026 - $32,550 15% (15%)
$32,551 - $78,850 25% (28%)
$78,851 - $164,550 28% (31%)
$164,551 - $357,700 33% (36%)
$357,701 - and above 35% (39.3%)
Go to: Tax Rates in History BACK
YIKES!! This is not good!
Country BigMac Price Purchasing Power PriceLocal Currency US dollars
United States $3.10 3.10 -
Argentina Peso 7.00 2.2564 2.26
Brazil Real 6.40 3.08 2.06
Britain £1.94 3.8047 0.625
China Yuan10.50 1.3556 3.39
Euro area €2.94 3.9143 0.9524
Hungary Forint 560 3.0147 181
Indonesia Rupiah 14,600 1.5943 4,710
Japan ¥250 2.1273 80.6
Mexico Peso 29.0 2.6127 9.35
Poland Zloty 6.50 2.2328 2.10
Russia Rouble 48.00 1.8442 15.5
South Africa Rand13.95 1.8928 4.50
South Korea Won2,500 2.6347 806
Sweden Skr33.0 4.7244 10.6
The Hamburger Standard: March 25, 2006 BigMac Prices
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
Cyclical
Structural
Frictional
Hidden
Inflation for the past year
Projected 2009 deficit
$1.8 trillion!!
SPLAT!
CBO’s Projected Deficits
Projected 2009 deficit$1.8 trillion!!
National Debt: raw data
National Debt: inflation adjusted
National Debt: as
percent of GDP
GO TO:National
Debt Clock
Who lends the U.S. money?
What countries lend us money?
2006 GOVERNMENT TAXATION AND EXPENDITURES
KEYNESIAN ECONOMICS: Prime the economic pump with government spending
Add more “G” to the GDP equation: C + I + G
John Maynard Keynes
John Maynard Keynes
FDR promises America a New Deal during the
Great Depression
Civilian Conservation Corp and Work Progress Administration provide work and hope for the unemployed
Social Security: A bold new plan to help the elderly and the
unemployed
It has helped the elderly
And it helps survivors and unemployed
But its future is uncertain without reform
PA income tax is 3.07% for all
Federal income tax climbs from 10 to 35%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%
So what is “fair” anyway?
If taxable income is over--
But not over--
The tax is:
$0 $7,550 10% of the amount over $0
$7,550 $30,650$755 plus 15% of the amount over 7,550
$30,650 $74,200$4,220.00 plus 25% of the amount over 30,650
$74,200 $154,800$15,107.50 plus 28% of the amount over 74,200
$154,800 $336,550$37,675.50 plus 33% of the amount over 154,800
$336,550 no limit$97,653.00 plus 35% of the amount over 336,550
2006 FEDERAL TAX BRACKETS
The Federal Reserve System
