ECONOMIC POLICY

PUBLIC POLICY – THE BASICS

 Agenda Setting:Policy Formulation Adoption Implementation Evaluation– Policy Politics: Who PAYS for whose BENEFITS?

Distributed Costs & Benefits - Ex: education / defense

Concentrated Costs & Benefits – Ex: labor laws impact management

Concentrated Benefits / Distributed Costs– Ex. farm aid / welfare / “pork”

Distributed Benefits / Concentrated Costs – Ex. auto safety / pollution regs

FOUR GOALS OF ECONOMIC POLICY

1 - Economic growth– PAST economic growth: Gross Domestic Product > total value

of ALL goods & servicesGDP = C + I + G + X

real vs. nominal total vs. per capita 2009 GDP: down 2.6% to $14.4 trillion

– PRESENT situation Dow Jones Industrial Average: 30 major stocks

– S&P 500 and others are more accurate NASDAQ: smaller/newer companies; high tech indicator

– FUTURE economic growth Index of Leading Economic Indicators11 indicators > work week / inventory / business permits / unemployment / $ supply etc.

– Big Mac Index: cost of Big Mac worldwide

Consumer Investment Government Net Exports

2 - “Full” employment > roughly 4 % unemployment

(currently 9.7%)– Types of unemployment

Cyclical Frictional Structural Hidden

3 - Minimize inflation– 1-2 % okay CPI: Consumer Price Index (2009: -

1.5%)Inflation Calculator

– two types: cost-push: business expenses rise demand-pull: demand increases

– deflation associated w/recession (March 09 -.38%)

4 - Stabilize the business cycle

– Official definition of RECESSION: Decline in GDP for TWO+ consecutive quarters

– Unofficial definition of RECESSION: when your neighbor is out work

DEPRESSION: when YOU are out of work

Underlying Assumption: multiplier / accelerator effect

Two main toolsFIRST TOOL: FISCAL POLICY – Govt. Taxation & Spending

Expenditures – Revenue = Surplus (+) or Deficit (-) – national debt = accumulated deficits ($11.9 trillion)– misleading numbers > budget with or without Soc. Sec. – debt “danger”

crowds out private loans > interest rates rise $$$ owed to foreign nations

Demand-side policy (Keynesian economics) > usually Democratic

– stimulate consumer demand w/tax cuts and govt. spending– roots in Great Depression

GOVERNMENT TINKERING

INCREASE GOVT $$$

STIMULATE DEMAND or

PRODUCTIONINCREASE

EMPLOYMENTIncrease

consumer spending

Add $1 here

Get $2 here

LINK: Obama Stimulus Package

Supply-side policy > usually Republican– stimulate business w/tax cuts and less govt. interference – roots in Roaring Twenties (Reaganomics after 1980’s)

Spending– non-discretionary (ENTITLEMENTS) 64%

Social Security 22% Medicare 11% Medicaid 10% misc. mandatory 12% interest on debt 9%

– discretionary spending 36% defense 19% non-defense discretionary 17%

– incrementalism– indexing for inflation

COLA: Cost of Living Adjustment

Budget Process: Constitutionally - must start in the House In reality - starts with President agencies provide estimates

budget goes to Congressional Budget Office (CBO)

committee hearings refine it

CBO reviews it

final House action (Oct.)

approval in senate

H & S version reconciled in Conference

signed by President

Taxation– Conflicting Goals

Support government raise revenue vs. cut spending

Stimulate the economy promote productivity vs. stay out of marketplace

Change behavior discourage it vs. encourage it

Redistribute income provide help vs. promote independence

– Fairness ability to pay

* Horizontal Equity: tax “equals” equally* Vertical Equity: “unequals” should be taxed

unequally benefits received

– 3 categories proportional (PA 3.07%) progressive (federal income) regressive (sales tax)

– federal income individual income tax: 10 - 15 - 25 - 28 - 33 – 35 corporate income tax: 15 – 25 – 34 – 39 – 34 – 35 – 38 –

35 FICA: Fed. Insurance Contributions Act

Social Security (6.2%) Medicare (1.45%)”third rail of politics”

Other: excise / tariffs / user fees / estate-gifts

AKA according to some

Social Security

Medicare

SECOND TOOL: MONETARY POLICY – control money supply (MS) Increase MS stimulate economy

Decrease MS slow economy / slow inflation

Main tool of the “Fed” (Federal Reserve Board) Interest Rates

Federal Funds Rate > banks borrowing from banks CURRENT: ¼ %

Discount Rate > banks borrowing from FED CURRENT: ½ %

Prime Rate > bank rate for “best customers” CURRENT: 3¼ %

Interest Rate up Prime Rate up loans down MS down economy slows

Interest Rate down Prime Rate down loans up MS up economy stimulated

Jawboning by Fed Chairman Too much power?

Brd of Governors appt’d by Pres. for 14 years little Congressional oversight closed meetings Ben Bernanke

REVIEW AT QUIA: http://www.quia.com/jg/1738034.html

U.S. Tax Brackets - 2008

Single Taxpayer Rate (old rate before Bush)

$0 - $8,025 10%

$8,026 - $32,550 15% (15%)

$32,551 - $78,850 25% (28%)

$78,851 - $164,550 28% (31%)

$164,551 - $357,700 33% (36%)

$357,701 - and above 35% (39.3%)

Go to: Tax Rates in History BACK

YIKES!! This is not good!

Country BigMac Price Purchasing Power PriceLocal Currency US dollars

United States $3.10 3.10 -Argentina Peso 7.00 2.2564 2.26

Brazil Real 6.40 3.08 2.06Britain £1.94 3.8047 0.625China Yuan10.50 1.3556 3.39

Euro area €2.94 3.9143 0.9524Hungary Forint 560 3.0147 181

Indonesia Rupiah 14,600 1.5943 4,710Japan ¥250 2.1273 80.6Mexico Peso 29.0 2.6127 9.35Poland Zloty 6.50 2.2328 2.10Russia Rouble 48.00 1.8442 15.5

South Africa Rand13.95 1.8928 4.50

South Korea Won2,500 2.6347 806

Sweden Skr33.0 4.7244 10.6

The Hamburger Standard: March 25, 2006 BigMac Prices

October 28, 1929

Dow Jones plummets 38.33 to 260.64 (13%

drop)

October 19, 1987

Dow Jones down 508.32 to

1738.74 (22% drop)

October 13, 2008

Dow Jones drops 936 to 9,387 (11% drop)

LINK: Largest gains and losses

Dow Jones Link

Cyclical

Structural

Frictional

Hidden

Inflation for the past year

Projected 2009 deficit

$1.8 trillion!!

SPLAT!

CBO’s Projected Deficits

Projected 2009 deficit$1.8 trillion!!

National Debt: raw data

National Debt: inflation adjusted

National Debt: as

percent of GDP

GO TO:National

Debt Clock

Who lends the U.S. money?

What countries lend us money?

2006 GOVERNMENT TAXATION AND EXPENDITURES

KEYNESIAN ECONOMICS: Prime the economic pump with government spending

Add more “G” to the GDP equation: C + I + G

John Maynard Keynes

John Maynard Keynes

FDR promises America a New Deal during the

Great Depression

Civilian Conservation Corp and Work Progress Administration provide work and hope for the unemployed

Social Security: A bold new plan to help the elderly and the

unemployed

It has helped the elderly

And it helps survivors and unemployed

But its future is uncertain without reform

PA income tax is 3.07% for all

Federal income tax climbs from 10 to 35%A sales tax is regressive compared to income 6% on $1000 of goods = $60 -on a monthly income of $6000 tax rate is 1% -on a monthly income of $1500 tax rate is 4%

So what is “fair” anyway?

If taxable income is  over--

But not over-- The tax is:

$0 $7,550 10% of the amount over $0

$7,550 $30,650 $755 plus 15% of the amount over 7,550

$30,650 $74,200 $4,220.00 plus 25% of the amount over 30,650

$74,200 $154,800 $15,107.50 plus 28% of the amount over 74,200

$154,800 $336,550 $37,675.50 plus 33% of the amount over 154,800

$336,550 no limit $97,653.00 plus 35% of the amount over 336,550

 

2006 FEDERAL TAX BRACKETS

The Federal Reserve System