ECONOMIC POLICY

Revenues and Expenditures

Revenues: Money the government takes in – taxes, fees, other sources

Expenditures: Money the government spends – mandatory and discretionary spending

Revenues > Expenditures = Budget surplus Expenditures > Revenues = Budget deficit Revenues = Expenditures = Balanced budget The last surpluses occurred during the

Clinton and Lyndon B. Johnson Administrations. We’ve run a deficit every other year since then.

Surpluses under Clinton The Clinton budget of 1993 included tax

increases. This was politically unpopular, passed Congress by only one vote in the House (Rep. Margolies-Mezvinsky) and the tiebreaking vote of the Vice President in the Senate.

No Republicans voted for it. Many Democratic Members of Congress lost

their seats in 1994 because they voted for this bill, and this contributed to Republicans taking control of Congress.

However, the tax increases combined with the economic boom of the 1990’s to produce surpluses beginning in 1997.

Fiscal policy

Decisions on taxation and spending are made by the President and Congress

How much to raise in taxes What kinds of taxes to impose How much to spend What to spend it on This takes place through the annual

budget and appropriations process.

Appropriations

Congress is supposed to pass 12 bills each year which spend money for different government activities. Agriculture Commerce, Justice and Science Defense Energy and Water Financial Services Homeland Security Interior and Environment Labor, Health & Human Services, and Education Legislative Branch Military Construction and Veterans Affairs Dept. of State and Foreign Relations Transportation and Housing & Urban Development

Appropriations The House and Senate each have an

Appropriations Committee, with subcommittees with responsibility for each of these bills.

These bills are supposed to be enacted by Oct. 1 of each year (the beginning of the fiscal year) or the government cannot spend money.

The last year all 12 bills were passed on time was 1997.

Appropriations

Any appropriations which are not passed through the normal process by the deadline are put in a “continuing resolution,” which funds all government activity for a specific period of time, usually based on spending levels for the previous year.

If Congress and the President cannot agree on a continuing resolution, the government shuts down. This happened for 16 days in 2013.

The government is currently operating under a continuing resolution which expires on Oct. 1, 2015. There was an exception made for the Department of Homeland Security, because Republicans in Congress wanted to block funding for President Obama’s executive order on immigration. It was renewed earlier this year.

Appropriations

Relying on continuing resolutions to fund the government makes it extremely difficult to cut spending.

“Earmarks” are provisions inserted in appropriations bills by individual members to fund specific projects in the areas they represent. 2007: $500,000 in federal funding for the Teapot

Museum in Sparta, NC. Most earmarks are now prohibited.

The President has no line-item veto and cannot veto individual items in spending bills.

Appropriations

Source: Congressional Budget Office (cbo.gov)

Fiscal Year 2015 projections Revenues: $3.191 Trillion Expenditures: $3.677 Trillion Deficit: $486 Billion

Taxes and spending

Cutting spending is politically unpopular (each program has its beneficiaries, and cuts in social programs have an economic impact)

Raising taxes is politically unpopular and controversial

If you want to spend more than you have, the easiest thing to do is borrow the money (primarily from foreign banks). The money was (eventually) be repaid with interest.

National debt

The total amount of money the US government owes (primarily the result of previous deficits and the interest owed on them).

Cutting spending (or raising taxes) reduces the amount we have to borrow and thus eventually have to pay interest on.

2014 annual interest on the national debt:

$430 Billion

Accumulation of national debt

1789-1981: $1 Trillion 1981-1989: $1.9 Trillion 1989-1993: $1.5 Trillion 1993-2001: $1.4 Trillion 2001-2009: $6.1 Trillion (Bush tax cuts,

wars, effects of 9/11) 2009-2012: $5.3 Trillion (spending during

recession) 2012-2015: $2.6 Trillion Total right now:

http://www.brillig.com/debt_clock/

Keynesian economics

British economist John Maynard Keynes Introduced to the US under Franklin D.

Roosevelt The theory is that the government should

borrow money (thus running a deficit) and invest it in ways that stimulate the economy

Roosevelt’s New Deal’s jobs programs Clinton and Obama stimulus programs Newly-employed people will pay taxes on

their income, which theoretically will pay back the money the government borrowed initially.

Supply-side economics Developed during the 1970’s Practiced by Reagan and G.W. Bush in

particular Government should stimulate the economy

by cutting taxes People keep more of their own money and

thus invest more of it in the economy (hiring more employees, building new facilities, etc.)

This will theoretically stimulate the economy in a way which will produce enough new tax revenue to make up for the tax cuts, and thus balance the budget.

Taxation Progressive taxation: A system, used in the US,

where higher incomes are taxed at higher rates than lower incomes. $10,000 income pays 10% tax rate = $1000 in taxes $500,000 income pays 35% tax rate = $175,000 in

taxes 50 times as much income = 175 times as much in tax This can be a disincentive for people to work harder

and earn more. “Tax fairness”: Because of deductions, loopholes and

differential treatment of different types of income, some wealthier taxpayers may actually pay a lower rate than those who earn less (Obama made an issue out of Romney’s taxes)

Taxation

Flat (or regressive) tax: Everyone is taxed at the same rate. The government would take in approximately the same amount of revenue if most deductions were eliminated and everyone paid approximately 18% of their income in taxes.

This disproportionately affects lower-income taxpayers, some of whom pay less than 18% now and benefit from deductions that would be eliminated.

An alternative that’s been suggested is abolishing the income tax and replacing it with a 23% national sales tax (fairtax.org).

Monetary Policy

Federal Reserve Board: A seven-member board appointed by the President and confirmed by the Senate. They serve 14-year terms, with one member’s term expiring every two years.

The current Chair of the Federal Reserve Board is Janet Yellen. A member of the Board serves a four-year term as Chair.

The Federal Reserve Board controls the money supply (how much money is in circulation) and interest rates. More money in circulation -> more opportunity to invest

and spend, but leads to higher prices. Less money in circulation -> less opportunity to invest and

spend, but leads to lower prices.

Debt limit

Congress has to pass a law increasing the amount of money that the U.S. can borrow in order to pay existing debts. This has happened 78 times since 1960.

Failure to increase the debt limit would mean the U.S. would default on paying what we already owe (have already borrowed).

The October 2013 agreement to end the government shutdown included an agreement to authorize borrowing through Feb. 7, 2014, when the debt limit ($17.2 Trillion) was suspended through March 15, 2015. The debt limit was raised again as of March 16.

Interest rates Commercial banks borrow money from the

Federal Reserve, which charges them interest (rates are extremely low right now). The commercial banks then lend money to their customers at a higher rate of interest, thus making their profits.

Lower interest rates encourage borrowing and investment, creating higher demand for products, which causes higher prices. So lower interest rates (generally) eventually lead to inflation (prices and other factors in cost of living increase faster than wages).

Interest rates

Higher interest rates discourage borrowing and investment, creating lower demand for products, which causes lower prices but also eventually leads to unemployment. Businesses are less likely to hire or retain workers if there is less demand for their products.

The Federal Reserve Board tries to adjust interest rates to keep either inflation or unemployment from occurring.

Discretionary spending vs. mandatory spending

Discretionary spending can be controlled by Congress and the President through the appropriations process.

Mandatory spending is set by formulas determined by federal law. The government is required to spend whatever the formula dictates.

Mandatory spending 2013

> $2 Trillion total $861 Billion on health care

Medicare, Medicaid, other programs $808 Billion on Social Security $340 Billion on Income Security programs

Earned Income Tax Credit Supplemental Security Income

$153 Billion on federal retirement benefits $80 Billion on veterans’ benefits $95 Billion on other programs

Source: Congressional Budget Office at cbo.gov.

Economic growth vs. environmental protection

What about economic development that damages the environment?

We want to protect the environment, but this may occur at the cost of jobs

Protecting federal land (parks, wilderness) from recreational or economic activity has costs

The logging industry is prevented from cutting down trees in old-growth forests

Economic growth vs. environmental protection

The Endangered Species Act (1973) prevents projects which could harm the habitat of rare animals (great spotted owl, certain types of fish) Is it worth it to forgo a project like a flood

control dam to preserve a fish? Keystone XL pipeline, fracking: sources of

cheap energy with potential environmental risk Good: Jobs, lower gas prices Bad: Potential oil spills, water contamination

Cost-Benefit Analysis

Comparing the cost of a regulation to the benefit of the problem solved. Many economists argue that many regulations are cost-ineffective (think of it in terms of spending $3 to fix a problem that only costs $1 to live with)

Cost-Benefit Analysis:Questions to Ask

What are the alternatives? Is this the most efficient way to solve the problem? What else could you do with the money you’re

spending (opportunity costs)? Could you save more lives by investing the money in

another way? Whose benefits and costs count? Can you fairly compensate the losers for their losses? Identify the impacts of what you’re doing Perform an economic analysis to quantifiably predict

impacts Attach dollar values to impacts (assigning a value to a

human life) You can’t know the dollar value of everything

Cost-Benefit Analysis

In economics, the value of a life is how much you’re willing to pay to reduce the risk of death in a way that results in one less death in a population.

In law, the value of a life is how much a jury would be willing to pay your survivors if you were killed through someone else’s negligence.

Future costs and benefits count less than present costs and benefits.

Do net benefits outweigh net costs? Which alternatives maximize net benefits?