Economics on Main Street: Concepts for American Voters May 2012

Policy Responses to Downturn scale of economic challenge housing market & financial markets meltdown in 2008, household asset losses of $13 Trillion (90% of GDP) 2009, $1.4 Trillion decline in consumer-business spending review of policy responses financial crisis: Troubled Asset Relief Program (TARP), FRB recession: 2008 Stimulus, automatic stabilizers, American Recovery & Renewal Act (ARRA), American Jobs Act (AJA)

2008 Stimulus (Outflow -$100B) tax refunds received Spring and Summer of 2008 (70% spending) TARP (Outflow -$602B, Balance -$214B) Fannie & Freddie (bulk of remaining balance), Large Banks and hundreds of Small Banks (repayments plus interest), AIG and Toxic Assets ($80B out, $40B in), Auto Firms ($80B out, $40B in) FRB (“lender of last resort”, Balance +$125B) loans at premium rates: Large Banks (domestic & international), thousands of Small Banks, Central Banks (Can, Jpn, Europe). timely intervention in Commercial Paper Market: short term cash flow for hundreds of U.S. Businesses (including CAT). peak FRB lending: $1.5 Trillion (December 2008).

automatic stabilizers (Outflow: -$1.3 Trillion) reduced revenue flows (income tax, corporate tax, capital gains, etc.) increased “main street” spending (unemployment insurance, food stamps, etc.) ARRA (Spring 2009, Outflow: -$756B) (39%) tax breaks: individuals ($183B), payroll ($105B), business ($34B) (31%) contracts-grants-loans: education ($90B), trans-infra ($62B), eng-env ($25B) (30%) income support: medicaid & medicare ($91B), ui-exp ($61B), family ($40B) AJA (Fall 2011, Outflow -$447B, failed in Congress) (55%) tax breaks: individuals ($175B), payroll ($65B), business ($5B) (31%) c-g-l: trans-infra ($90B), state-local-govt ($35B), neighborhoods ($15B) (14%) income support: ui-reemployment ($62B) government employment (April ) overall decline of 164, local education decline of 105,000

Public Goods & Sustainable Social Contracts Economics of Public Goods

why are some goods and services reasonable candidates for public sector provision? nonrival use by one does not diminish availability to others. (defense & police, flood control, radio broadcast) non-excludable impossible or very costly to prevent sharing of benefits. (defense & police, flood control, wilderness & parks) minimal role of government? (defense & police, law & courts, disaster prevention, basic infrastructure (water, sewage, bridges, roads))

Economics of Public Goods consumer demand for some goods & services expands with income so much that share grows (vacation travel, eating out, household appliances) societal demand for public provision often follows a similar pattern (fire prevention, transport network, wilderness & parks) additional market failure arguments (public invest (education, infrastructure, research), regulation (food safety, environment, financial markets), equity & stabilization (safety net, insurance, stimulus))

Public Goods & Sustainable Social Contracts Deficit & Debt Concerns

Government Share of GDP Taxes as Share of GDP GDP per Capita Denmark-Sweden- France 52%47%$33,000 Canada-Germany- Japan 39%33%$33,000 U.S.37%28%$44,000 Turkey-Mexico- South Korea 28%26%$17,000 Guatemala-Uganda- Bangladesh 17%14%$1,900 Source: OECD (2007), CIA Factbook (2011) Spending & Taxes in Context

Running a Deficit if we spend like Canada and tax like Mexico... (current debate regarding extent of public sector) (starving the beast, or simply not paying our bills) what’s wrong with running a deficit? (monetary & inflation, borrowing & interest rates) (debt, must pay out of future (or past) GDP) when does it make sense to run deficit? (beneficial effects when in deep recession) (public investments in growth at low interest rates)

Current U.S. Debt: $14.3 Trillion (about 50% from earlier periods) Sources: New York Times, Department of the Treasury, Congressional Budget Office What is a responsible limit on personal debt (home mortgage)? % of GDP current - 100% of GDP

Long Term Concerns if we spend like Canada and tax like Mexico... (accumulating costs from political stalemate) health care costs (medicare (& medicaid) growing share of budget) (part demographics, but must solve cost increases) state & local – unsustainable commitments (medicaid growing share of state budgets) (state & local pension puzzles) supporting recovery in short term

You Tackle the Deficit NY Times exercise based on budget choices. – David Leonhardt, CBO scoring, Fall – You have 33 options, impact in 2015 & – You can eliminate deficit with 8 to 12 picks. Making your selections – No restrictions on your preferences. – Visit all categories (spending, taxes) – Turn in selection sheet. Review of top choicestop choices

Concluding Thoughts challenges ahead investing in economic growth as priority balanced approach to markets & regulation inequality and joblessness as societal concerns deficits & debt as manageable concerns an absolute pleasure you have been an outstanding class of learners raise your hand, pat your back, job well done

Thank You!

Economics on Main Street: Concepts for American Voters May 2012