The Economy: Part 2
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“How do I explain this to my brother-in-law?”
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Patrick Julius
B.S. cognitive science, graduate student in behavioral economics
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GDP (G$ US)
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Keynes 101
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Unemployment happens when supply exceeds demand and products
remain unsold.
Government spending makes up the gap in demand, putting people
and factories back to work. Countercyclical spending and automatic
stabilizers smooth economic shocks.
Once the economy is restored to full capacity, spending can be cut
back and economic growth will lead to increased tax revenue.
Deficits in a growing economy are a concern, because they lead to
long-term debt. George W. Bush's deficits were much more abnormal
than Obama's are, because they occurred during a time of relatively
strong growth.
Take-home point: Deficit spending can be the least bad option during
times of economic hardship.
US Debt in Historical Perspective
(includes government agencies)
(only non-governmental entities)
What has Obama done for the
economy?
Actions Obama Took
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Administered TARP bank bailouts started by Bush to combat the credit crisis
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Bailed out the auto industry
• Saved a 1-3 million jobs throughout the auto industry supply chain
• Prevented a $1 trillion loss in the credit default swap market
•
Passed $787 billion stimulus (Feb. 2009)
• 1/3 to states to prevent the layoff of police officers, teachers, etc. at risk of
losing their jobs because of state budget shortfalls ($300 Billion)
• 1/3 in tax cuts for working-class families (over $200 Billion)
• 1/3 to states for infrastructure projects ($300 Billion)
•
Extended unemployment benefits
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Payroll tax cut
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Middle class tax cuts affecting 95% of taxpayers
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Small business tax cuts
•
Small business loans
•
Passed banking regulation (Dodd-Frank)
The Stimulus
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The American Recovery and Reinvestment Act
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$100 billion in education
$60 billion in health care funding
$147 billion in relief to state and local
governments
$80 billion in infrastructure
$27 billion in renewable energy investment
$288 billion in tax cuts for workers,
homeowners, students, small businesses, and
families
Take-home point: The stimulus helped a lot of
people and saved a lot of jobs
Effect of the Stimulus
• Since the bottom in 2010 we have added 2.4 million jobs (more than
during the entire Bush administration)
• Up to 3.7 million jobs created or saved (1/3 of stimulus was to
save jobs)
• 114,400 teaching jobs saved
• 45,000 jobs added in auto industry since bailout
• Increased GDP by up to 3.1%
• Stimulus decreased unemployment by up to 1.8%
• Extension of unemployment benefits saved millions of jobs by
allowing people to continue buying -- supported businesses
• Since 8.8 million jobs lost (half under Bush, half under Obama), we
are still digging our way out
“If General Motors, Ford and Chrysler get the
bailout that their chief executives asked for
yesterday, you can kiss the American
automotive industry goodbye.”
--Mitt Romney(2008)
Source: Mitt Romney’s NYT OpEd “Let Detroit Go Bankrupt”, Nov18, 2008
Note: Seasonally adjusted data. Detroit figures are for
the metropolitan area. Source: Bureau of Labor Statistics
Source: Bureau of Labor Statistics
What else has Obama done for the
economy?
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Cash for Clunkers: The Car Allowance Rebate
System
Led to 400,000 new vehicle sales, averaging 50%
better gas mileage than the vehicles they replaced
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Added 40,000 full-time-equivalent jobs
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Increased gross personal income by $2 billion
(offsetting most of the $3 billion cost)
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Doubled GDP growth for the third quarter of 2009
Take-home point: Cash for Clunkers reduced air
pollution and stimulated manufacturing at the same
time
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Financial Reform: Dodd-Frank
•
First step towards regulating the “shadow banking system”
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Non-bank financial institutions that pose a risk to the financial
system can be required to submit to Fed supervision.
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Discourages “too big to fail” by increasing capital, leverage, and
other requirements as companies grow in size and complexity.
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Provides authority to regulate over the counter derivatives
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Hedge funds and private equity advisers must register with SEC
and provide data on portfolios so risks can be monitored
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Regulators can impose capital and margin requirements on
swap dealers
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Swap dealers must provide regulators with data allowing them
to monitor systemic risks
What does Dodd-Frank do?
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Volcker Rule: Limits deposit banks from investing in risky assets
Gets rid of conflicts of interest for Ratings Agencies, preventing
financial institutions from being able to shop around for the best
rating
Requires financial institutions to have “funeral plans” – detailed
accounting of how the company could be liquidated if it became
insolvent so that it won’t become a burden on the tax payer.
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Requires the TARP bailout to be repaid
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Extensive consumer protection:
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Mortgage and loan terms must be clear
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Banks can’t raise interest on credit cards without advance notice
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Debit card fees must be in line with the actual cost of service
What else does Dodd-Frank do?
Makes derivatives and swaps more transparent, shining light on
shadow markets
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Requires derivatives to be traded on public exchanges
Regulates credit rating agencies to reduce conflicts of
interest
Increases transparency on executive compensation
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Requires publicly-traded companies to put executive pay
up to shareholder vote every 3 years
Requires all corporations to report pay ratio between
executives and employees
Take-home point: Dodd-Frank placed much-needed reins on outof-control financial markets, but didn't go far enough.
Why report CEO pay?
Source: AFL-CIO PayWatch (aflcio.org)
Portion of income taken by the top 1% went
up---and peaked in 1929 and 2007
Real median income went down...
60
30.0%
50
25.0%
40
20.0%
15.0%
30
10.0%
20
5.0%
10
0.0%
0
2000
2001
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2005
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2007
2008
2009
2010
Median real household income (k$ 2010
US)
1913 1921 1929 1937 1944 1949 1955 1962 1970 1977 1983 1993 2000 2010
1909 1917 1925 1933 1941 1946 1953 1958 1966 1974 1979 1987 1997 2005
Percent of income received by top 1% of
wage earners
One of these things is not like the other
ones...
Source: Economic Policy Institute
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50.00
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Australia
Belgium
France
Japan
Korea
Netherlands
New Zealand
Spain
UK
Ratio in hourly pay between average CEO and minimum wage
USA
Is it a low minimum wage? Yes.
$18.00
$16.00
$14.00
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
Australia
Belgium
France
Japan
Korea
Netherlands
New Zealand
Minimum wage ($US per hr)
Spain
UK
USA
Or is it high CEO pay? Also yes.
$2,500
$2,000
$1,500
$1,000
$500
$0
Australia
Belgium
France
Japan
Korea
Netherlands
New Zealand
CEO salary (k$ US per yr)
Spain
UK
USA
What's up with tax rates?
On paper, income tax rates increase with income
(progressive taxation). In practice, most rich people
pay very little taxes. The majority of our tax burden
falls on the middle class.
How does this happen?
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Capital gains: Investment income is taxed at 15% while wage
income is taxed up to 35%
50% of capital gains go to 0.1% of Americans—we are the
99.9%
Tax havens and loopholes (e.g. Cayman Islands)
Regulatory capture: Lobbyists influence Congress to lower
rates and add loopholes
Distribution of income and taxes
Source: rationalrevolution.net
These rates are on ordinary income. I've
As you can see, that's where the 1% get
marked the capital gains rate with a red line. most of their income.
Republican Sound-Bytes Refuted
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They say: “50% of Americans pay no taxes.”
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No, in 2009, 50% of American households paid no Federal
Income Tax because their taxable income was below the
minimum for income tax
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2009 was exceptional due to the recession and many short-term
tax breaks in the Stimulus; in most years about 35% pay no
Federal Income Tax
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Payroll taxes, state taxes, and sales taxes disproportionately
affect the poor. In 2010:
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Poorest fifth of population paid 16.3% of income in taxes
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Second poorest fifth paid 20.7%
A GAO study found that in every year from 1998 to 2005,
approximately 55 percent of large corporations paid NO
corporate income tax.
Republican Sound-Bytes Refuted
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They say: “The financial crisis was caused by poor people buying homes
they couldn't afford.”
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If it had just been about mortgage defaults, we could have handled
it.
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The total value of mortgages in default in 2008 was only $300
billion; the cost of the financial crisis was near $15 trillion.
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It was the vast net of credit default swaps that spread the
contagion through the whole system.
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This argument claims that the tail wagged the dog – it was the
ravenous appetite on Wall Street for subprime mortgages, which
were being rated AAA and brought in huge profits due to the high
interest rates, that led to the collapse of lending standards.
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People assumed that housing prices would only go up, so if they
couldn’t afford their payments, they could sell. Even experts on
Wall Street used the same assumption.
Republican Sound-Bytes Refuted
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They say: “Regulations are strangling business.”
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Lack of financial regulation just cost us tens of trillions of
dollars. Overregulation is bad. That doesn’t make
under-regulation good.
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When polled, small business owners consistently report
that lack of demand and cost of health care are hurting
them more than regulation
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Obama has ordered reviews of all business regulations,
and has removed almost as many as he added
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Dodd-Frank explicitly exempts institutions with less than
$150 million in assets
Republican Sound-Bytes Refuted
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They say, “Taxing the job creators will kill jobs”
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The market collapse that resulted in over 10%
unemployment was almost entirely the result of activity
on Wall Street & the derivatives market – the wealthy.
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Companies are sitting on record levels of capital – they
won’t spend it to start hiring until there is demand.
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All modern companies depend on technological
innovations originally pioneered by tax-supported
research and development:
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The transistor (the basis of the computer chip)
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Word processors and spreadsheets
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Graphical User Interfaces (Windows and the Mac)
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The internet
Republican Sound-Bytes Refuted
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“The stimulus was a failure.”
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According to CBO estimates, the ARRA:
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Increased real GDP growth by 3%
Lowered the unemployment rate by 10%
Increased the number of people employed by
2 million
Increased the number of full-time equivalent
workers by 3 million
Republican Sound-Bytes Refuted
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They say: “Republicans cut taxes; Democrats raise taxes.”
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Cutting the payroll tax was a Democrat-led initiative
which was opposed by the majority of Republicans.
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The ARRA included $288 billion in tax cuts.
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Both Reagan and George H.W. Bush raised taxes when
the situation required.
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Under Reagan, the Democratic Congress consistently
passed budgets smaller than the administration
requested.
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Reagan's capital gains rate at the end of his
Administration was the same as his ordinary income
rate (28%; today capital gains are taxed at only 15%).
Republican Sound-Bytes Refuted
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They say: “Obama is the food-stamp President.”
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The number of hungry people in America dramatically
increased as the result of the recession. If food stamps
hadn't been increased, many people would have
starved.
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Food stamps are one of the most effective economic
stimulus policies available; they have a fiscal multiplier
of 1.73, a 73% return-on-investment
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The total cost of the Supplementary Nutrition Assistance
Program is less than 0.5% of our GDP.
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Obama increased funding to SNAP by $20 billion;
previously George W. Bush increased it by $19 billion.