Public Policy Exam #2Comprehensive Book Notes, LectureNotes, Key Terms, and Concepts 1Concepts for 2nd Exam Goals of Economic Policyo Economic Growth o Low Levels of Inflation o Low Levels of Unemploymento Positive Balance of Tradeo 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)2FIVE ECONOMIC GOALS PUBLIC POLICIES AIM TO ACHIEVEGOALS OF ECONOMIC POLICY1. Economic Growth2. Low Levels of Inflation3. Low Levels of Unemployment4. Positive Balance of Trade5. Manage Deficits & Debt#1 Economic Goal: Economic Growth- Economic Growth means an increase in the production of goods and services each year. - Economic Growth is measured and expressed in terms of Gross Domestic 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 increasein 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 inflationGovernment seeks to avoid high levels of inflation because higher prices usually follow strong consumer demand, particularly for products or services in scarce supply.2. Wages go up If people have more money, they can spend on money, houses, others goods causing inflation. 3. Budget surplus 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.)4o Usually expressed as a year-to-year or quarter-to-quarter comparison. - Why is GDP important? It isan objective measure of thepresent economic status. - What does GDP consist of? 1. Consumer spending.2. Investment expenditure.3. Government spending.4. Net exports. - What are the two types ofGDP? o GDP per capita: stuffproduced per person.o Real GDP: the actualstuff that’s beingproduced. - Which GDP do we care about? GDP per capita.- How often does a GDP report come out? Every 4 months. - 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. o Why does it occur? When money supply increases, the value of the dollar decreases. o How is it measured? By the Consumer Price Index (CPI).o Why is it a problem? 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)Figure 1.15- 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.THE STATISTICS MOST FREQUENTLY USED TO MEASURE INFLATIONCategory ExamplesFood and beverage-breakfast cereal, milk, coffee, chicken, wine, full-service meals, snacks.Housing -rent of primary residence, owners’ equivalent rent, fuel oil, bedroom furniture.Apparel -men’s shirts and sweaters, women’s dresses, jewelry.Transportation -new vehicles, airline fares, gasoline, motor vehicle insurance.Medical care -prescription drugs and medical supplies, physicians’ services, eyeglasses and eye care, hospital services.Recreation -televisions, cable television, pets and pet products, sports equipment, admission fees to national parks.Education and communication-college tuition, postage, telephone services, computer software, accessories.Other goods and services-tobacco and smoking products, haircuts and other personal services, funeral expenses. #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 revenueis 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. Figure 1.26 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 2011.- When unemployment rates are very low, businesses may find it difficult to 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
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