The Roots of Stabilizing the Economy and The Roots of Government Intervention

Is the US Federal Debt Out of Control? Is it necessary?

Deficits and Debt Federal Deficit – annual budget shortfall Federal Debt- sum total of annual deficits Nearing debt ceiling and continuing to rise $53,108 per citizen Threatens Social Program future Social Security Medicare Government Pensions

Economic Terms Gross Domestic Product (GDP) The total market value of the goods and services produced in a country during a year Inflation General rise in price of goods over time, erosion of currency Recession General slowdown in economic activity typically triggered by dramatic drop in spending Depression Sustained deepening recession

Economic Policy Changes Laissez-Faire Doctrine Mixed Economy “Let do” or “Let it be” Hands-off government policy “Invisible Hand” is superior to Government regulation Federal Government limited to: Taxation through tariffs Public works projects Public land policy Both State and Private Sector direct the economy Government intervention when beneficial Arose during Great Depression through New Deal Result of Industrialization

Early Government Economic Intervention States, not Federal Government, took active role Roads, Railroads, Business Regulation Federal Government encouraged business through tax rates and tariffs Civil War marks shift in necessity of policy Industrialization and railroads cause need of federal intervention Monopolies, Interstate Commerce, and “Industrial” Agriculture Federal Reserve Act of 1913 Regulated national banking to combat market fluctuations

New Deal and Mixed Economy Great Depression showed the volatile nature of laissez-faire Capitalism Unregulated speculative trading of stocks High risk loans Overproduction by factories Results in high unemployment (25-35%) and loss of millions in investments Hoover supports laissez-faire policy Causes panic and the Stock Market continues to plummet FDR and New Deal 1932 marks shift in US economic policy Strong government participation and intentional government overspending to counteract reduced private spending Keynesian Economics

Stabilizing the Economy Monetary Policy (Indirect) Fiscal Policy (Direct) Government control of nation’s money supply and interest rates Federal Reserve Manipulates reserve requirement Altering discount rate Rate at which banks borrow money from regional Fed Buying and selling of securities (Open Market Operations) Government policies on taxation, spending and debt management First significant use under Kennedy Taxation Lower taxes lead to greater spending Spending Direct government spending promotes growth Typically inadequate in solving economic fluctuations by itself

Federal Reserve Banking Districts

2008 Recession Causes Deregulation of Banks Subprime home loans Decrease in Taxation Increase in spending Wars in Iraq and Afghanistan Wall Street Speculation Tightening of Credit After Crash, credit was nearly frozen Effects Near collapse of credit for business, home, and personal loans Government intervention frees up Banks credit Lowered faith in US Dollar and payment of credit Loss of AAA credit rating High Unemployment Vast expansion of National Debt for Keynesian policies

How is the Tax Rate on the highest earners different during Iraq and Afghanistan than other wars?

The US Defense Budget is the size of the next top 12 Nation’s Defense Budgets

2008 Recession and Government Intervention Monetary Intervention Fiscal Intervention Lowering of interest rates s.com/united-states/interest- rate s.com/united-states/interest- rate Increase in Federal Reserve powers to regulate securities markets $475 billion in TARP funds to banks 97% returned by end of 2012 $831 billion in stimulus package recovery/ recovery/ Retaining Bush era tax cuts

Has the US recovery been successful? What do you think caused the Recession? Was government intervention necessary to save the economy from further downward spiraling? Is Keynesian policy, Reaganomics, or Laissez-Faire policy a better route for helping the economy?