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Economic Policy
Chapter 17
Economics Basics
Economics - deciding what shall be produced,
how, and for whom.
A major economic policy issue is how to
maintain stable economic growth without
falling into either excessive unemployment or
inflation (rising prices).
Predictors of the economy - Inflation,
Unemployment, US Stock Market (NYSE,
NASDAQ, S&P 500, Prime Rate, Consumer
Price Index)
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Measuring the Performance of the Economy
Economic Growth – measured by Gross domestic product
(GDP) which is a widely used measure of the performance of the
economy; GDP is a nation’s total production of goods and services
for a single year valued in terms of market prices.
Unemployment - percentage of the civilian labor force who are
looking for work or waiting to return to or begin a job.
Full employment, an arbitrary level of unemployment that
corresponds to “normal” friction in the labor market.
Measuring Unemployment. (3-5% considered good)
Inflation - sustained rise in the general price level of goods and
services erodes the value on fixed incomes.
Consumer Price Index (CPI), an inflationary indicator that
measures the change in the cost of a fixed basket of products and
services, including housing, electricity, food, and transportation. The
CPI is published monthly. also called cost-of-living index
Measuring the Performance of the Economy
Recession—Economists define a recession as two or
more quarters of negative economic growth (shrinking),
that is, declines in the gross domestic product.
Depression, a sustained, long-term downturn in
economic activity in one or more economies. It is a
more severe downturn than a recession, which is seen
as part of a normal business cycle.
Economic Stability - A situation in which there is
economic growth, rising national income, low
unemployment, and steadiness in the general level of
prices
The U.S. economy experiences booms and busts. The
busts are called recessions.
Bear vs Bull Market
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Nineteenth Century
Laissez-faire
“To leave alone” economic philosophy
Industrialization
Increased accidents and disease
Disrupted the natural business cycles
Interstate Commerce Act (1887)
Intended to rein in the railroads
Sherman Anti-Trust Act (1890)
Prohibited restraints of trade
Progressive Era
Drew support from the middle class
Sought to reform political, economic and social systems
Pure Food and Drug Act; Meat Inspection Act
(1906)
Beginning of consumer protections
Banking and business regulation
Federal Reserve Act (1913)
Sixteenth Amendment
Collection of federal income taxes
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Great Depression and the New Deal
Financial reforms
Glass-Steagall Act; created Federal Deposit Insurance
Corporation (FDIC)
Securities Act; Securities Exchange Act – required
prospective investors to be accurately informed before
investing
Agricultural Adjustment Act (AAA)
Granted subsidies to farmers
National Labor Relations Act (Wagner Act)
Guaranteed workers’ right to unionize
Industry Regulations
Expanded regulations for communications, civil aviation,
trucking industries
Deregulation
Definition:
Reduction in market controls in favor of market-based
competition
Airline Deregulation Act of 1978
Eliminated economic regulation of airlines
Ultimately resulted in less competition
Agriculture
Congress reduced, then replaced, subsidies
Financial Sector
Deregulation in the 1990s helped lead to subprime
mortgage crisis
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How Do Agriculture Subsidies Regulate the
Economy?
Fiscal Policy
Foundations of Fiscal Policy
British economist John Maynard Keynes
Argued that government could avoid recession by
stimulating demand, even if it caused deficits
Fiscal Policy – achieving economic goals through
changes in taxing, spending or borrowing activities of the
national government
Revenue Act of 1964
Reduced personal and corporate income taxes
Expanded the economy; led to 4% unemployment
Budget Deficits
Long term can lead to inflation
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Fiscal Policy continued
Responding to Recession
Economic Slowdown of 2008
$168 billion stimulus package
$700 billion financial crisis bailout package (Emergency
Economic Stabilization Act)
Troubled Assets Relief Program (TARP)
American Recovery and Reinvestment Act
Where Did the Economic Stimulus Funds Go?
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Fiscal Policy continued
The Debt Ceiling
National Debt
Effect of Bush Administration tax cut, wars in Iraq and
Afghanistan, bailout bills
National debt reached $14.2 trillion in 2011
Debt Ceiling
Similar to a credit card limit
Congress must vote to spend above it
Budget Control Act of 2011
Authorized a series of automatic debt ceiling increases,
but:
Triggered automatic spending cuts in 2013
Fiscal Policy continued
Fiscal Policy on a Global Context
Globalization - benefits
Seen in greater movement of goods, services and
capital across borders
Increases variety of goods to consumers, lowers costs
and raises standard of living
Globalization - concerns
Greater risk that financial collapse in one country can
spread to others
Examples: Greece and Spain
Increasing interdependence
Measured by regional share of gross domestic product
(GDP)
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How Has Economic Interdependence
Altered the American Economy?
Monetary Policy
Monetary Policy – helps stabilize the economy by
regulating the nation’s supply of money and
influencing interest rates.
The Federal Reserve System
Structure
Federal Reserve Board
Federal Open Market Committee
12 Federal Reserve Banks
Other member banks
Board of Governors
Dual Mandate
Control inflation
Limit unemployment
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Monetary Policy continued
Tools of Monetary Policy
Open market operations
Buying and selling of government securities, or debt
Discount rate
Rate of interest at which it lends money to member
banks
Reserve requirements
Designate the portion of deposits that member banks
must retain on hand
How Does the Federal Reserve System
Work?
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So Is Fiscal or Monetary Policy Better
The Answer is both
Monetary Policy
If interest rates go high enough, people will stop
borrowing money and inflation will subside.
Cannot force people to borrow money in a recession
More power against inflation
Fiscal Policy
More effective against recessions because the
government does the borrowing itself
Another theory similar to Fiscal Policy is Supply Side
Economics…higher taxes hurt everyone. For example, in
a good economy, taxes should be not raised.
Foundations of Income Security
Policy
Franklin D. Roosevelt and the New Deal
Civil Works Administration (CWA) – put
people to work on public works projects
Works Progress Administration (WPA) –
disbanded after CWA was in force. Used to put
people to work on improving playgrounds,
schools, hospitals, and airfields
Social Security Program (1935) – provide
assistance to the elderly and disabled
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Income Security Programs Today
Definitions
Entitlement programs - benefits that all citizens who
meet eligibility requirements are entitled to receive.
Examples include Social Security, Medicare, and Medicaid,
most Veterans' Administration programs, federal employee
and military retirement plans, unemployment
compensation, food stamps, and agricultural price support
programs.
Non-means tested programs - provide cash assistance
to qualified beneficiaries, regardless of income. Social
Security is an example of a non-means-tested program
Means-tested programs - require people to have
incomes below a certain level to receive benefits. Food
stamps are an example of this type of program.
Income Security Programs Today
Old Age, Survivors, and Disability Insurance - People pay into
the system during their working lives, and then draw payments
once they reach the minimum retirement age.
Unemployment Insurance - funded through payroll taxes, pays
benefits to people who have lost their jobs through no fault of their
own.
Supplemental Security Income - provides support to qualified
people with disabilities.
Supplemental Nutrition Assistance Program (SNAP)
Food Stamps – must be low income and can buy most foods
Women Infants and Children (WIC) – buy milk, cereal, juice and
milk.
Earned Income Tax Credit (EITC) – benefit for working people
who have low to moderate income. It reduces the amount of tax
you owe and may also give you a refund.
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Income Security Programs Today
Family and Child Support – Welfare as we now know it.
Formerly called Aid to Dependent Families with Children (AFDC)
Personal Responsibility and Work Opportunity Reconciliation Act of 1996
revamped welfare and calls it Temporary Assistance to Needy Families (TANF)
Required single mothers with a child over five years of age to work within
two years of receiving funds
Included a provision that unmarried mothers under the age of 18 be
required to live with an adult and attend school in order to receive welfare
benefits
Set a five-year lifetime limit for aid from block grants
Included a requirement that mothers must provide information about a
child’s father in order to receive full welfare payments
Cut off food stamps and SSI for legal immigrants
Cut off cash welfare benefits and food stamps for convicted drug felons
Limited food stamps to three months in a three year period for persons
18 to 50 years old who are not raising children and not working
Estimated that 35-40 million people (11-15%) in the US have incomes below
the official poverty line
How Many Americans Benefit from
Income Security Programs?
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Should Social Security be Privatized?
The Tax Burden
Individual Income Taxes - federal government’s largest source of
revenue
Corporate Income Taxes - set at 35% of net corporate income
profits; however, corporations find many ways of reducing their
taxable income, often to zero.
Social Security Taxes - second largest source of federal revenue is
the Social Security tax (6.2%)
Medicare Taxes – 1.45%
Estate and Gift Taxes - Federal estate taxes levy a tax rate that
rises to 35 percent; estates worth less than $5,250,000 are exempt.
The maximum exclusion for gifting is $14,000.
Excise Taxes and Custom Duties - Federal excise taxes on the
consumption of liquor, tobacco, gasoline, telephones, air travel, and
other so-called luxury items, together with customs taxes on
imports, provide about 4 percent of total federal revenues.
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How Does the Federal Government Raise
and Spend Money?
Tax Politics
The Argument for Progressivity - Progressive taxation is generally
defended on the principle of ability to pay; the assumption is that
high-income groups can afford to pay a larger percentage of their
incomes in taxes at no more of a sacrifice than that required of
lower-income groups to devote a smaller proportion of their income
to taxation.
Regressive Tax – Like a Sales tax. Everyone pays the same rate.
The Argument for Proportionality - Proportional (flat) taxation
requires all income groups to pay the same percentage of their
income in taxes.
Reagan’s Reductions in Progressivity - The top marginal tax rate
fell from 70 percent when President Reagan took office to 28 percent
following enactment of tax reform in 1986.
“Read My Lips” - Breaking his solemn pledge on taxes contributed
heavily to Bush’s defeat in the 1992 presidential election.
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Tax Politics
Currently, Americans pay taxes that total to somewhat
less than 30 percent of the GDP.
16th Amendment (1913): income tax
Federal Income Tax Rates
Loopholes and Lowered Taxes
Who Pays?
Liberals tend to favor progressive taxes.
Conservatives either favor taxes that are less
progressive, or even flat or regressive.
Minimum Wage - $0.25 in 1938 to now $7.25 in Texas
Value of $1 is equivalent to 1900 nickel
Revenue: Income Taxes
2013 tax rates
Tax rate
Single
filers
Married filing
Married filing
jointly or
separately
qualifying
w idow /w idow er
Head of
household
10%
Up to
$8,925
$8,926 $36,250
$36,251 $87,850
$87,851 $183,250
$183,251 $398,350
$398,351 $400,000
$400,001
or more
Up to $17,850
Up to $8,925
$17,851 $72,500
$72,501 $146,400
$146,401 $223,050
$223,051 $398,350
$398,351 $450,000
$450,001 or
more
$8,926$36,250
$36,251 $73,200
$73,201 $111,525
$111,526 $199,175
$199,176 $225,000
$225,001 or
more
Up to
$12,750
$12,751 $48,600
$48,601 $125,450
$125,451 $203,150
$203,151 $398,350
$398,351 $425,000
$425,001
or more
15%
25%
28%
33%
35%
39.60%
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Tax Equity
Should the wealthy be taxed at a higher rate—
a progressive rate—
in order to provide more services for the poor?
Government Spending, Deficits, and Debt
“Mandatory” Spending - Much of the growth of federal
government spending over the years is attributed to mandatory
spending items in the federal budget
“Discretionary” Spending - Washington policymakers consider
spending that is not previously mandated by law to be
discretionary.
Deficits - imbalances in the annual federal budget in which
spending exceeds revenues.
The Debt Burden - The accumulated annual federal deficits—that
is, expenditures exceed revenues each year—add up to the nations
national debt.
Interest Burden for Future Generations - Even if the federal
government manages to balance future budgets, interest payments
will remain obligations of the children and grandchildren of the
current generation of policymakers and taxpayers.
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