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

2. 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

3. US Federal Budget (Revenue)

4. 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+

5. 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% = $ (taxation of the first income bracket)
$21,075 × 15% = $3, (taxation of the amount in the second income bracket)
Total income tax paid = $ $ = $4, (10.13% effective rate)

6. 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% = $ (taxation of the first income bracket)
$17,175 × 15% = $ (taxation of the amount in the second income bracket)
$3, ($1,000 child credit +$1,877 EITC)=$ (1.5% effective tax rate)

7. 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, $3,060 = $7,113.75
Bert pays $ $3,060 = $3,651.75

8. 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

9. Government Revenue

10. Government Budget Balance

11. 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

12. 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)

13. 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%

14. Federal Debt Owed to Public

15. Federal Debt Owed to Public

16. US Federal Budget (Spending)

17. US Federal Budget (Spending)

18. 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.

19. 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

20. Social Security Act of 1936

21. Social Security Trust Fund

22. 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

23. Uninsured Rate by State (2010)

24. Uninsured Rate by State (2010)

25. Uninsured Rate by County (2012)

26. Uninsured Rate over Time

27. 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

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

29. Growth

30. Unemployment

31. Inflation

32. Productivity & Wages

33. Housing Prices

34. Stock Market

35. 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.

36. 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.

37. 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

38. 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

39. 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

40. 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

41. 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

42. 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

43. 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

44. 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

45. 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

46. 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.

47. Poor Mother and Children, California

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

49. Unemployment during the Great Depression

50. Unemployment in the Eurozone Today

51. 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

52. 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

53. Golden Fetters

54. Golden Fetters

55. 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

56. 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.