POLI 102: August 7, 2017 Lecture #12: Policy

Policies of the State Tax & Spend National Defense Roads and Infrastructure Food Safety Environmental Regulation Public goods Externalities Economic Regulation Health and Welfare Medicare Medicaid Social Security Affordable Care Act

US Federal Budget (Revenue)

Federal Income Taxes - USA MTR Single Married 10% $0 – $8,925 $0 – $17,850 15% $8,926 – $36,250 $17,851 – $72,500 25% $36,251 – $87,850 $72,501 – $146,400 28% $87,851 – $183,250 $146,401 – $223,050 33% $183,251 – $398,350 $223,051 – $398,350 35% $398,351 – $400,000 $398,351 – $450,000 39.6% $400,001+ $450,001+

What is your tax rate? Abe is a 35 year old, single man w/o kids makes $40,000. What does he pay in Federal income tax? $40,000-($6,100+$3,900) for standard deduction and personal exemption = $30k taxable income $8,925 × 10% = $892.50 (taxation of the first income bracket) $21,075 × 15% = $3,161.25 (taxation of the amount in the second income bracket) Total income tax paid = $892.50 + $3.161.25 = $4,053.75 (10.13% effective rate)

What is your tax rate? Bert is a 35 year old, single man w/ a kid making $40k $40,000-($6,100+3,900+$3,900)=$26,100 taxable income $8,925 × 10% = $892.50 (taxation of the first income bracket) $17,175 × 15% = $2576.25 (taxation of the amount in the second income bracket) $3,468.75-($1,000 child credit +$1,877 EITC)=$591.75 (1.5% effective tax rate)

Payroll tax Both men pay the same payroll taxes $40k * 6.2% = $2,480 (social security) $40k * 1.45% = $580 (medicare) Both men pay $3,060 in payroll taxes Abe pays $4,053.75 + $3,060 = $7,113.75 Bert pays $591.75 + $3,060 = $3,651.75

In addition… California income tax Capital gains tax (either 0%, 15%, 20%) Sales tax = 8.00% in San Diego (food and services exempted) (Prop30 expires in 2016, then 7.75%) Property tax = 1.0% of real property value (Prop13) Assorted fees Car licensing Gas taxes Cigarette and alcohol taxes

Government Revenue

Government Budget Balance

Gov’t also borrows money When spending is higher than revenue, the government borrows the difference, i.e. it takes on debt. Mostly commonly sells bonds in the market place Investors buy bonds in return for interest payments US Federal government currently owes $17.75 trillion

Who Owns America’s Debt? Roughly a third held by the government itself (weird I know, e.g. Social Security Trust Fund, Federal Reserve, etc…) Roughly a third held by American citizens and institutions (insurance companies, mutual funds, individuals) Roughly a third held by Foreign citizens and institutions (foreigners looking to diversify, foreign corporations, but also foreign governments)

Is that sustainable? Perhaps for a long time, but not necessarily forever. Interest rates are really low right now, and the economy continues to grow. But we expect expenditures to rise in the future as people get older. Interest Rates: 1 month: 0.01% 3 month: 0.02% 1 year: .11% 5 year: 1.83% 10 year: 2.59% 30 year: 3.29%

Federal Debt Owed to Public

Federal Debt Owed to Public

US Federal Budget (Spending)

US Federal Budget (Spending)

Why has Govt Spending Grown? As we get richer, we demand more government services Governments have become more clever at raising revenue. The state grows when it can. Parties try to outbid one another for votes in democracies Once a government program is established, you can’t get rid of it. Interest groups are formed and ratchet up spending World economy is more volatile today, so citizens benefit from government stabilization of their lives. 1, 5 emphasize choice. 2, 4 emphasize power. 3 is neutral. These are only proposals and are not conclusive. But, they’re reasonable.

Health and Welfare Medicare Medicaid Social Security Affordable Care Act Rules for insurance companies “pre-existing” conditions Caps on lifetime payouts Mandatory preventive care provided You must buy insurance Low-income subsidies Public marketplace

Social Security Act of 1936

Social Security Trust Fund

Healthcare in America Combination of private and public system Private insurance for most people, except The old (Medicare) The poor (Medicaid) Veterans (VA system) Children whose parents can’t afford health care, but couldn’t get medicaid (SCHIP) But this left many people uninsured Too expensive Job didn’t provide it Pre-existing condition

Uninsured Rate by State (2010)

Uninsured Rate by State (2010)

Uninsured Rate by County (2012)

Uninsured Rate over Time

Affordable Care Act Sought to improve access to healthcare by expanding both private and public sources of insurance and mandate level of covered care. Prohibited different rates for pre-existing conditions or gender (Community rating) Required everyone to get insurance (Individual Mandate) Established health care exchanges (healthcare.gov) Tax credits for low-middle income families Expanded medicaid (not every state agreed) Allowed young people to stay on parents’ insurance until 26 Reforms to medicare to attempt to save money Additional taxes fall mostly on upper income families

Economic Regulation Contract enforcement Inspections Business standards Licensing Limits to risk-taking Back up banks Regulate money supply Control tax and spending rates

Growth

Unemployment

Inflation

Productivity & Wages

Housing Prices

Stock Market

How does the gov’t fight recessions? Well, first how why do recessions happen? Okay, really first – what is a recession? A recession is an extended period of negative growth in the economy, i.e. the economy shrinks. People lose their jobs, people lose their houses, people can’t pay debts, businesses fail, people don’t get raises, opportunities lost, etc… People unhappy. Unemployment goes up, inflation goes down, interest rates go down Federal Reserve’s job is to maintain a stable economy – stable inflation and full-employment.

How does the gov’t fight recessions? Recessions can happen for a number of reasons Bad harvest Oil price spikes Irrational exuberance followed by irrational despair in the economy War Bad laws, etc…. Governments that cannot maintain successful economies tend to be voted out Government has four main responses to fight bad economy. Do nothing and let the economy take its course Change laws that might be harming economy Adjust taxing and spending levels Print money Government response will depend on nature of particular economic problem. Different recessions, different responses.

Do Nothing - Advice to Hoover “The government must keep its hands off and let the slump liquidate itself. Liquidate labor, liquidate stocks, liquidate the farms, liquidate real estate. When the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. A panic is not altogether a bad thing. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.” -Treasury Secretary Andrew W. Mellon

Change Laws Deregulation – get rid of laws that are hampering normal economic interactions. Lower or get rid of minimum wage, perhaps Remove environmental restrictions Reregulation – add laws designed to guide economic behavior i.e. change bank lending standards, for example Nationalization of key industries

Taxing & Spending Levels Stimulus to put more money in people’s pockets Lowering tax burden, raising spending i.e. deliberately running a deficit Directly putting people to work Work programs during the Great Depression Infrastructure, research, project funding during Great Recession

Print Money Put money into the economy through the Federal Reserve People are trying to hoard money, there is high demand for cash. Satisfy that demand. Make cash easier to come by and raise wages. Lower interest rates Increase investment and employment Increase inflation But inflation worries

European Origins of the Great Depression Austria/Germany borrow money from USA to pay war debts to France and England France, England pay debts owed to USA for WWI System dependent on flow of cash from USA Investors begin to pull out in 1928

New Technologies and the Great Depression Single-export countries devastated by declines due to new technology Reclaimed rubber destroys rubber-based economies of Dutch East Indies, Malaysia, Ceylon

Agricultural Surplus and the Great Depression Overproduction in 1920s Strongest harvests in 1925, 1929 Wheat lowest price in 400 years Farm income drops less demand for manufactured goods inventory surpluses The Dust Bowl, mid-late 30s

Black Thursday (October 24, 1929) Stock purchases on margin (3%) Hints of slowdown in Europe investors begin to sell Snowball effect Life savings lost Black Thursday 11 Suicides

US Economic Collapse Inventory surplus leads to layoffs Layoffs lead to decreased demand, businesses fail 1932 industrial production ½ of 1929 levels 44% of US banks out of business Deposits lost

Debt-Deflation Debt liquidation and distress selling. Contraction of the money supply as bank loans are paid off. A fall in the level of asset prices. A still greater fall in the net worth of businesses, precipitating bankruptcies. A fall in profits. A reduction in output, in trade and in employment. Pessimism and loss of confidence. Hoarding of money. A fall in nominal interest rates and a rise in deflation-adjusted interest rates.

Poor Mother and Children, California

World Economic Collapse Hardest hit: countries dependent on export of manufactured goods for essentials Japan Single-export countries South America

Unemployment during the Great Depression

Unemployment in the Eurozone Today

Initial Government Attempts to Increase Demand Brazil surplus of coffee beans set on fire, used to build highways USA: “planned scarcity” Vegetables, fruits and animals destroyed Steinbeck’s The Grapes of Wrath

New US Strategies Laissez-faire, “planned scarcity” approaches fail John Maynard Keynes, economist Stimulate economy by lowering interest rates Government spending to compensate for private deleveraging encouraging investment, employment Leave the gold standard – release from “golden fetters” The New Deal of Franklin Delano Roosevelt WWII Spending

Golden Fetters

Golden Fetters

Inflation So, what is it? What causes it? An increase in the price of goods What causes it? Goods become harder to provide at a given price Demand increases Supply becomes increasingly hard to come by Oil and gas prices, for example Go up during summer months In this case, inflation implies drop in the standard of living

Inflation But also drop in the value of a dollar Too many imports, not enough exports More dollars are printed by the government More dollars for a given amount of goods means the value of the dollar declines Helps some, hurts others Wages increase Price of goods go up, because the workers are being paid more.