1. Copyright © 2014 Cengage Learning ECONOMIC POLICY Chapter Sixteen

2. Copyright © 2014 Cengage Learning Learning Outcomes 1. Explain how the financial crisis that began in 2008 has affected a range of national and state policies and how it is having a long-term impact on the lives of citizens. 2. Define fiscal and monetary policy and explain the tools used by the institutions of the national government to shape economic policy. 2

3. Copyright © 2014 Cengage Learning Learning Outcomes 3. Discuss the annual deficit and the total national debt, and explain the impact of these two concepts on American life and policies. 4. Define entitlement programs, and describe how these programs are related to economic policies. 5. Describe the role of the Federal Reserve Bank and its Board of Governors in influencing the economy. 3

4. Copyright © 2014 Cengage Learning Introduction  Government impacts the economy  Laws  Regulations  Policies  Bureaucratic decision making  Politics 4

5. Copyright © 2014 Cengage Learning Prosperity is the Goal  Goals of economic policy:  Low unemployment  Low inflation  GDP growth  Increasing incomes  Stable economy  Recession → economy shrinks for six or more months 5

6. Copyright © 2014 Cengage Learning Prosperity is the Goal  Unemployment  Rises about 4% during recession  High unemployment rates during 2009-10  Laissez-faire economics and dual federalism  Depression era = 25% unemployment  Social Security (unemployment insurance)  Measuring unemployment  Accurate?  Hidden unemployed and discouraged workers 6

7. Copyright © 2014 Cengage Learning More than a Century of Unemployment 7

8. Copyright © 2014 Cengage Learning Prosperity is the Goal  Inflation  Political issue  Consumer price index  Interest rates vs. consumer prices  Business cycle  Normal expansion and contraction of economy  Depression is very severe recession 8

9. Copyright © 2014 Cengage Learning Prosperity is the Goal  Economic toolkit (economic and political)  Fiscal policy  Use of taxing and spending policies  Monetary policy  Regulation of changes in supply of money 9

10. Copyright © 2014 Cengage Learning Economic Theory Guides Policy Laissez-faireKeynesianSupply-side  John Locke and Adam Smith  John Maynard Keynes  Ronald Reagan  No government regulation or intervention  Government intervention needed  Less government regulation and taxes  Individual action and free competition  Government spending and taxing will stimulate  Competition and over-supply will drive down prices  “Free market”  Obama stimulus plan  Reagan strategies 10

11. Copyright © 2014 Cengage Learning Fiscal Policy  Controlled by president and Congress  Taxing and spending  Government borrowing (budget deficit)  Discretionary fiscal policy  Kennedy  Bush  Obama  Timing 11

12. Copyright © 2014 Cengage Learning Fiscal Policy  Deficit spending and public debt  Funded by sale of U.S. Treasury bonds  About 50% now held by foreigners  Public debt in perspective  $15 trillion of debt  $49,999 per person  Are we always in debt? 12

13. Copyright © 2014 Cengage Learning Net Public Debt of the Federal Government 13

14. Copyright © 2014 Cengage Learning Net Public Debt as a Percentage of the Gross Domestic Product 14

15. Copyright © 2014 Cengage Learning The Politics of Taxes  Taxes = 30% of GDP  Federal tax rates  Marginal tax rate  Loopholes and lowered taxes  Progressive vs. regressive  Who pays? 15

16. Copyright © 2014 Cengage Learning Marginal Tax Rates for Single Persons and Married Couples (2010) 16

17. Copyright © 2014 Cengage Learning Progressive versus Regressive Taxes Progressive Taxes Rates go up with income  Federal income tax  State income tax  Estate tax  Federal corporate income tax Regressive Taxes Wealthy pay a smaller portion of income  Social Security Tax  Medicare tax  State sales tax  Local real estate taxes 17 Copyright © 2014 Cengage Learning

18. The Politics of Taxes  Entitlements: the big budget item  Social Security, Medicare, unemployment insurance, disability insurance, veteran pensions  Guaranteed to recipients  Almost two-thirds of federal budget  How will we pay for benefits in the future? 18

19. Copyright © 2014 Cengage Learning Federal Income Tax Burden by Income Group, 2012 19

20. Copyright © 2014 Cengage Learning Income and Outlays for Fiscal Year 2009 20

21. Copyright © 2014 Cengage Learning Social Security and Medicare  Social Security as kind of “social compact”  Social Security is not a pension fund  Current workers pay for retired workers  Worker vs. retiree ratio declining  Medicare and health care costs escalating 21

22. Copyright © 2014 Cengage Learning Social Security and Medicare  What will it take to salvage Social Security?  Raise taxes  Other options:  Increase age of eligibility  Change immigrant worker policies  Privatize Social Security 22

23. Copyright © 2014 Cengage Learning Monetary Policy  Organization of Federal Reserve System  Independent board of governors  Twelve Federal Reserve district banks  Federal Open Market Committee  Loose and tight monetary policies (controlled by Fed)  Loose → increases supply of credit  Tight → decreases supply of credit 23

24. Copyright © 2014 Cengage Learning Monetary Policy  Time lags for monetary policy  Monetary vs. fiscal policy  Sometimes ineffective 24 Copyright © 2014 Cengage Learning

25. Globalization and World Trade  Imports and exports  Imports about 15% of what we buy ($1.9 trillion)  Exports make up 13% of GDP ($1.3 trillion)  Negative balance of trade  Impact of import restrictions on exports  Protecting American jobs  Quotas and tariffs  Free-trade areas and common markets 25

26. Copyright © 2014 Cengage Learning Globalization and World Trade  World Trade Organization  Lowers trade barriers and settles trade disputes  140 member nations (97% of worldwide trade)  Sending work overseas  Outsourcing  Insourcing 26

27. Copyright © 2014 Cengage Learning Facing the Future  U.S. economy still strongest in world and dollar still currency of world trade  Recession and economic slowdown will have lasting effect on many generations  Political leaders must work together to keep economy strong 27