1
Chapter
Seventeen:
Economic
Policy
Learning Objectives
2
 Define and use correctly a series of basic terms
used in discussions of economic policy,
including inflation, unemployment, the business
cycle, recession, depression, and budget
deficit.
 Explain the essential tools of fiscal policy,
namely increasing the budget deficit during a
recession and reducing it during a boom.
Learning Objectives
3
 Describe how the Federal Reserve System
implements monetary policy (increasing or
decreasing the rate of growth of the money
supply).
 Explain why fiscal policy may be more effective
against recessions and monetary policy against
inflation.
Learning Objectives
4
Identify some of the important events in the history
of economic policy since World War II, including:
 Kennedy’s use of Keynesianism,
 Triggering of inflation under Johnson,
 Volker’s suppression of inflation,
 Bill Clinton’s tax increase,
 George W. Bush’s return to budget deficits,
 Unique challenges presented by the sustained
2008 recession.
Learning Objectives
5
 Define key concepts used in the discussion of
world trade, including imports, exports, quotas,
and tariffs.
 Understand some of the arguments economists
advance in favor of free trade.
 Describe the role of the World Trade
Organization (WTO).
 Understand the concept of a marginal tax rate.
Learning Objectives
6
 Define progressive and regressive taxes and
identify which taxes fall into each category.
 Understand the pay-as-you-go character of
Social Security and why an aging population
presents problems for the long-term health of
Social Security.
 Evaluate some of the proposals that have been
advanced to guarantee the survival of the
Social Security system in the future.
Good Times, Bad Times
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Good times are called economic booms, while
economic slowdowns are called recessions.
 Unemployment
 Inflation
 The Business Cycle
Good Times, Bad Times
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Good Times, Bad Times
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Good Times, Bad Times
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Fiscal Policy
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The President and Congress control fiscal
policy—taxing and spending.
Keynesian Economics:
 Government Spending
 Government Borrowing
 Discretionary Fiscal Policy
Fiscal Policy
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 Deficit Spending and Public Debt
 The
government funds its deficit primarily by
selling U.S. Treasury bonds. Thirty years ago,
only 15 percent of these bonds were held
abroad. Today the figure is 50 percent.
Fiscal Policy
13
The Public Debt in Perspective:
 Net Public Debt
 Gross Domestic Product (GDP)
 Are We Always in Debt?
Fiscal Policy
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Fiscal Policy
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Monetary Policy
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 Organization of the Federal Reserve System
 The Fed implements policy by increasing
or reducing the rate of growth of the
money supply.
 Loose
monetary policy increases supply of
credit.
 Tight monetary policy decreases the supply of
credit.
Monetary Policy
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 Monetary policy has a problem with time lags, but
the Fed can make a policy change more quickly
than Congress.
 The Fed announces changes to monetary policy
by raising or lowering the federal funds rate.
World Trade
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 Imports and Exports
 The Impact of Import Restrictions on Exports
 Protecting
American Jobs
 Quotas and Tariffs
 Free Trade Areas and Common Markets
World Trade
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 The World Trade Organization
 The
WTO seeks to lower trade barriers worldwide by
administering trade agreements, acting as a forum
for trade negotiations, settling trade disputes, and
reviewing national trade policies.
 The
WTO has become the focus of those who fear
the supposed dangers of globalization. Neither the
United States nor any other country has a veto
power within the WTO.
World Trade
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 Balance of Trade and Current Account
Balance
 Balance
of trade: the U.S. balance of trade has
been significantly negative for many years.
 Current account balance: includes the balance of
trade in services, unilateral transfers, and other
items.
 Are we borrowing too much from other
countries?
World Trade
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Politics of Taxes
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Currently, Americans’ taxes are about 30% of the
GDP.
Federal Income Tax Rates:
 Loopholes and Lowered Taxes
 Progressive and Regressive Taxation
Politics of Taxes
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Who Pays?
 Liberals tend to favor progressive taxes.
 Conservatives either favor taxes that are less
progressive or even flat or regressive.
Politics of Taxes
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Politics of Taxes
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Politics of Taxes
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The Social Security Problem
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 Social Security was established as a means of
guaranteeing a minimum level of pension
benefits to all persons.
 Social Security is not a pension fund; it is a
pay-as-you-go transfer system in which those
who are working are paying benefits to those
who are retired.
 Workers Per Retiree: Today there are only
about three workers paying for each retiree.
The Social Security Problem
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The Social Security Problem
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What Will It Take to Salvage Social Security?
 Proposed Policy Options:
 Raise
Taxes
 Increase the age of eligibility for benefits
 Increase immigration
 Privatize Social Security
Web Links
30
 Tax Foundation: educates taxpayers about
sound tax policy and the size of tax burden
borne by Americans at all levels of government.
See www.taxfoundation.org.
 World Trade Organization: deals with the rules
of trade between nations at a global or nearglobal level providing a set of rules and a
negotiating forum. See www.wto.org.
What If…The Federal Government Were
Required to Balance Its Budget?
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Except for the wartime periods of the Civil War
and World War II, the U. S. government budget
normally ran a very low deficit.
Possible ways to balance the budget:
 raise taxes
 reduce spending by federal government
What If…The Federal Government Were
Required to Balance Its Budget?
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 Middle class families’ taxes would be rise
significantly.
 Corporate taxes would increase.
What If…The Federal Government Were
Required to Balance Its Budget?
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 Spending would also be cut:
 Fewer
pork barrel projects
 Drastic cut in entitlement programs
 Fewer U.S. Treasury bonds would be held by
foreign residents and governments.
You Can Make a Difference: How to Plan For
Your Future
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 College graduates today could live to be 100
years old, and must plan and save for a long
retirement.
 A comfortable retirement based on a “threelegged stool” of Social Security, pensions, and
savings may not be there for today’s college
students.
 College graduates should start saving and
investing right away.
You Can Make a Difference: How to Plan For
Your Future
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Ask potential employers:
 Is there a traditional benefit pension plan?
 Is there a 401(k) or other contribution plan?
 How soon can you join the plan?
 What are the plan’s vesting rules, and what
happens to your money if you leave the
company?
You Can Make a Difference: How to Plan For
Your Future
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 Choose to Save is a program of the nonprofit
Employee Benefit Research Institute and the
American Savings Education Council, and
provides free savings tools and information to
help plan for financial security. Go to
www.choosetosave.org.