Public Policy Exam 2 Comprehensive Book Notes Lecture Notes Key Terms and Concepts 1 Concepts for 2nd Exam Goals of Economic Policy o Economic Growth o Low Levels of Inflation o Low Levels of Unemployment o Positive Balance of Trade o Manage Deficits and Debt Fiscal Policy Monetary Policy Tax Policy Entitlement Spending The EU Crisis Austerity Health Care Trends Market Failures in Health Care Single Payer Tort Reform Medicare Medicaid Affordable Care Act Obama Care Single Payer System Means tested System Poverty Line Supplemental Nutrition Assistance Program TANF Temporary Assistance to Needy Families Social Security Payroll Taxes Social Security Trust Fund COLA Cost of Living Adjustment 2 FIVE ECONOMIC GOALS PUBLIC POLICIES AIM TO ACHIEVE GOALS OF ECONOMIC POLICY 1 Economic Growth 2 Low Levels of Inflation 3 Low Levels of Unemployment 4 Positive Balance of Trade 5 Manage Deficits Debt 1 Economic Goal Economic Growth Economic Growth means an increase in the production of goods and Economic Growth is measured and expressed in terms of Gross Domestic services each year Product GDP o GDP growth means that on average people s incomes increase from year to year 3 What benefits flow from economic growth o 1 A strong economy is likely to add to the government s tax revenues o 2 Federal and state governments enjoy budget surpluses However when the economy is slowed and state tax revenues decline budget cuts are prompted in many programs o 3 Economic growth may make redistributive programs palatable because people are more likely to accept policies that redirect some of their money to others if they have experienced an increase in their own wealth Also allows more people to receive benefits or increases in existing benefits from government programs A low rate of economic growth can be a sign of an impending recession o Recession negative growth over two or more consecutive quarters IF THE ECONOMY GROWS TOO FAST IT COULD LEAD TO 1 Damaging levels of inflation 2 Wages go up 3 Budget surplus Government seeks to avoid high levels of inflation because higher prices usually follow strong consumer demand particularly for products or services in scarce supply If people have more money they can spend on money houses others goods causing inflation In the case of a budget surplus the government needs to make decisions regarding how to deal with it Gross Domestic Product the total amount of goods and services produced over a given time period used as an indicator for governments in planning and policy formulation Expressed in a dollar value 4 o Usually expressed as a year to year or quarter to quarter comparison Why is GDP important It is an objective measure of the present economic status What does GDP consist of Investment expenditure 1 Consumer spending 2 3 Government spending 4 Net exports What are the two types of GDP o GDP per capita stuff produced per person the actual stuff that s being produced o Real GDP Which GDP do we care about GDP per capita does a GDP report come out Every 4 months How often On average how much does GDP grow 3 Figure 1 1 2 Economic Goal Low Levels of Inflation Inflation is an increase in the costs of goods and services Although inflation is an inevitable part of the economy policymakers try to keep it under control at no more than 3 a year Figure 1 1 When money supply increases the value of the dollar o Why does it occur decreases o How is it measured o Why is it a problem By the Consumer Price Index CPI If a price increase doesn t correlate with our salary increase we fall short We want stable prices o What has the inflation rate looked like historically Figure 1 2 5 Figure 1 2 A commission headed by Michael Boskin found that the CPI overstates inflation by about 1 1 o Increases in social security benefits are based on the calculated CPI If these inflation estimates are reduced by 1 it would save the government a substantial amount of money in cost of living adjustments over a sustained period Apparel Transportation THE STATISTICS MOST FREQUENTLY USED TO MEASURE INFLATION Category Food and beverage Housing Examples breakfast cereal milk coffee chicken wine full service meals snacks rent of primary residence owners equivalent rent fuel oil bedroom furniture men s shirts and sweaters women s dresses jewelry new vehicles airline fares gasoline motor vehicle insurance prescription drugs and medical supplies physicians services eyeglasses and eye care hospital services televisions cable television pets and pet products sports equipment admission fees to national parks college tuition postage telephone services computer software accessories tobacco and smoking products haircuts and other personal services funeral expenses Education and communication Other goods and services Medical care Recreation 3 Economic Goal Low Unemployment Rates Unemployment rate full employment the percentage of the workforce that is unemployed at a given date Unemployment not only harms the people without jobs but also has two deleterious effects on the economy and the government budget o 1 The more people who are unemployed the fewer people are paying income or Social security taxes so that means less revenue is coming into the Treasury to pay for government programs o 2 The unemployed may be eligible for a number of government programs geared toward people with low incomes 6 The government needs to pay out more money when unemployment levels rise Most of these programs are entitlements If the number is higher than expected budget estimates will be thrown off Entitlements programs the government is required to pay for for all those who are eligible Unemployment in the US o Stayed 4 6 between 1997 2007 but it increased to over 9 in 2009 and continued at that level through 2011 o Increase to over 9 in 2009 and continued at that level through When unemployment rates are very low businesses may find it difficult to 2011 hire qualified employees o Low unemployment levels can also be problematic to local or state economies because businesses cannot expand without an available labor sup ply and that constrains economic development Businesses may be forced to offer generous incentives to attract and keep their most valued employees which may demand that local and state policymakers reduce their tax burdens or provide some other financial benefits Policy makers prefer a situation of unemployment being low compared to being too high The Unemployment rate has a large margin for possible error because o The
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