Public Policy #3 Fiscal Policy

The Budget You must trim the budget by looking at 10 key areas of spending!

Fiscal Policy : taxing, spending and borrowing Regulated by Congress (primarily) & President It all starts with a budget: proposed spending plan for a fiscal year

Revenue Sources Tariffs Excise taxes: aka “sin” tax, tax on alcohol, cigarettes Income taxes: from 16 th amendment Corporation taxes Social Security / Medicare payroll tax Borrowing

Types of taxes Progressive (or Graduated): taxes that go up in % as your income increases –Income tax: % of income depending on how much you make

Regressive Taxes Taxes that take out a larger % of income as income decreases –Sales tax: a 10% sales tax has a much greater impact (larger % of income) on low income than high income

Who pays the most in taxes?

Expenditures Mandatory Spending: –Entitlements: gov is required to pay if ppl meet requirements EX: Social Security, Medicare –2/3 of budget

Other Expenditures Discretionary Spending: Congress can decide how to spend - sort of –Military, education, enviro, transportation, etc –1/3 of budget Interest on debt : as debt grows, minimum payment grows

How has mand/discr spending changed since 1965?

How does this change in spending affect Congress’ ability to change policy?

Budget Process 1.OMB / Pres create a plan 2.Submit to Congress around January 3.CBO provides input 4.Appropriations Cmte (HR) reviews 5.Both houses approve w/ a concurrent resolution 6.Pres signs (or vetoes) 7.Goes into effect on Oct 1 st

How to spend our money…. Keynesian Economics : govt can stimulate economy by spending more when times are bad –Deficit spending: spending more money than one has in revenue –Used by FDR during depression –Gov builds a dam, pays workers for their labor, workers have more $ - pay taxes & spend more

Remember…. Deficit: amount over spent in one period –Over 1 trillion this fiscal year Debt: total amount owed –14 trillion & growing Should we increase spending when the economy is hurting?

Another view: Supply Side Economics - “Trickle Down Theory”: Govt cuts taxes on individuals & businesses –Ppl w/more money – spend more –If a business has more money, they pay employees more, hire more ppl, etc –Used by Reagan & Bush

What should we do to fix our economy today? Which is better – Keynesian or Supply Side Economics?

Balanced Budget Act Required a balanced budget (spend only as much as they have in revenue) by late 1990s It worked! Congress & Pres balanced budget and even had a surplus (more revenue than spending) by It all changes on 9/11

Policy #4: Monetary Policy 1.Fiscal policy is A. taxing B. spending C. borrowing D. All of the above 2. An increase in taxes on cigarettes is what kind of tax? A. progressive B. excise C. corporate D. Payroll 3. Which of the following is a payroll tax? A. Social Security B. Medicare C. Unemployment D. All of the above

Monetary Policy : regulates amount of money in circulation Regulated by the Federal Reserve Board –Bd of 7 members, appt’ed by Pres, confirmed by S, serve fixed terms (independent regulatory agency)

Imagine you each have $5…. Will you be willing to spend $5 for one soda?

Now, each of you have $20 Will you be willing to spend $5 for one soda?

You were (probably) more likely to say yes when you had $20. When you only had $5 your money was more valuable to you and were less likely to spend it. But, as you get more money, you’re more likely to spend and thus increase the prices of goods. This is inflation !

How does the Fed work? Controls supply (amount) of money –Too much money = inflation Inflation – increase in prices (like when your parents say I remember when it cost $3 to go to the movies – you need how much to go to the movie!!!?) Some is good & normal Too much – prices rise faster than wages = scary!

BUT, Too little money = hurts economy, deflation –People aren’t spending - thus employees aren’t hiring- thus people don’t have jobs – thus can’t spend & can create a vicious cycle

How does the FED do it? 1.Regulate interest rates Low interest rates = cheap money / loans – many ppl borrow High interest rates – stops ppl from borrowing money, curbs inflation 6.5% for 30 yrs = $1550/mo 4.5% for 30 yrs = $1300/mo

Reserve Requirement 2. Reserve Requirement : amount banks are required to keep on hand in bank High reserve – less money to give out in loans (curbs spending) Low reserve – more money to give out in loans (encourages spending)

Question time Interest rates are currently very low, what does this tell us about the nature of the economy? In the early 1990s interest rates for mortgages were about 15%, what does this tell you about the economy then?