Economic Policy An Overview of Chapter 18

Pop Quiz 18 What amendment legalized income taxes? When does the federal fiscal year start? What executive agency helps prepare the budget? What independent group conducts monetary policy? Name 1 economic theory that our government has followed. What is the largest area of expenditure for our federal government?

Measuring The Economy Gross Domestic Product (GDP) Inflation Unemployment Consumer Price Index (CPI) Interest Rates

Economic Indicators GDP is the total dollar value of all FINAL GOODS produced in a country in a year. Not affected by inflation (Real GDP) Inflation can affect GDP (ex. Gas prices) CPI (consumer price index) & the PPI (producer price index) are the main gauges of inflation.

Economic Indicators Unemployment is the total # out of work actively seeking a job Full employment is around 4% Highest unemployment was 33% during the height of the Great Depression Unemployment is gauged by the number of people applying for benefits. Unemployment has an impact on many other economic indicators.

The Business Cycle Prices Rise (Inflation) Profits Fall (GDP falls) Demand Falls (Spending falls) Business Slows (Unemployment up) Business Recovers (Unemployment falls) Profits Rise (GDP rises) Prices Fall (Spending rises) Demand Rises (Businesses hire)

Five Economic Theories Monetarism: Belief that inflation occurs when too much money is chasing too few goods Keynesianism: Belief that the government must manage spending more money when in a recession and cut spending when there is inflation Economic Planning: Belief that government plans, such as wage and price controls or the direction of investment, can improve the economy Supply-side: Belief that lower taxes and fewer regulations will stimulate the economy Reaganomics: Belief that a combination off monetarism, lower federal spending, and supply-side economics will stimulate the economy

Controlling the Economy Fiscal Policy Controlling taxing and spending by the government to influence the economy. Affects incomes, services, benefits & spending. Fiscal policy is controlled by the President and Congress.

The Art of Making the Budget A Budget announces how much will be collected and how much will be spent Fiscal year (FY) is from 10/1-9/30 First federal budget came in 1921 First presidential budget came in 1930 Entitlements take up much of the budget so it is hard to make changes in spending Both branches remain independent with their own group of economic experts: Congress has CBO; POTUS has OMB.

The Budget Process President submits budget House & Senate budget committees analyze budget Budget resolution in May proposes budget ceilings Members informed whether or not spending proposals conform to budget resolutions Committees approve appropriations bills, Congress passes them, and sends them to the president for signature

Congressional Budget & Impoundment Control Act of 1974 Titles I-IX layout the budget process as seen on the previous slide. Title II created the CBO. Title X basically ended the Presidential practice of impoundment. This limit was upheld by the SCOTUS in Train v. City of New York.

Affecting the Economy How does a rise in taxes effect the economy? Explain. How does an increase in government spending (such as on programs like building bridges, schools, or roads) effect the economy? Explain. Using the above examples, how does the government use fiscal policy to affect the economy?

Income taxes Until 1913 most revenue came from tariffs 16th amendment allowed income taxes War and peace caused fluxes in tax levels WWII saw big increases in tax rates Huge loopholes offset high tax rates Before 1986, tax bills were more about deductions than rates The Tax Reform Act of 1986 made lower rates with smaller deductions

“Only 2 Certainties in life…Death & Taxes.” Complete chart on types of taxes. Discuss each. Complete quotes and debate discussion questions.

Revenue by Federal Tax Types 49% 33% 9%

The Current National Debt www.brillig.com/debt_clock Who is ultimately responsible for our National Debt? Presidents make the budget. Congress approves the budget. People demand services, low taxes.

Federal Budget Breakdown FY2011

How the Debt Increases

Reducing Spending Gramm-Rudman Balanced Budget Act Cap on the deficit every year Spending plan within the cap Budget would be cut by sequesters if Congress and the president didn’t agree The institutions went around the act Now Congress proposes tax increases and a cap on discretionary spending, so we at least try to pay as we go

“And now the rest of the story.” Who really controls the economy? How do you stop a recession? How do you restore confidence?

Controlling the Economy Monetary Policy Controlling the money supply to influence the US economy. Affects interest rates, loans, credit, spending, & saving. Monetary policy is conducted by the Federal Reserve Board.

7 members are appointed by the president, confirmed by the Senate; serve a nonrenewable fourteen-year term; removable for cause Independent of both the president and Congress Each of the 12 districts has a President that reports to the Federal Reserve Board. Current Chairwoman is Janet Yellen.

Monetary Policy Tool 1 Reserve Requirements The amount of funds that a depository institution must hold in reserves in the form of vault cash or deposits with Federal Reserve Banks.

Monetary Policy Tool 2 The Discount Rate The interest rate charged to commercial banks and other depository institutions on loans they receive from the Fed.

Open Market Operations Monetary Policy Tool 3 Open Market Operations Purchases and oversees sales of U.S. Treasury and federal agency securities. These operations are the Fed's principal tool for implementing monetary policy.