Monday January 30 y Intro to Public Policy Subject Concepts Inflation Economic Growth Unemployment Balance of Trade Deficit Debt Why Economic Policy Usually the primary concern among citizens If the economy is bad Less tax money comes in Less ability to address other types of policy Goal 1 Control Inflation The rate at which the prices of goods and services is rising Measured by Consumer price Index CPI a basket of all the goods and services purchased by an average household dur ing the year Causes Consequences of Inflation 1 Monday January 30 y Causes Amount of money in the economy Federal reserve More dollars chasing the same amount of goods Consequences Things are more expensive Wages tend to be sticky Fixed income Good for borrowers bad for lenders Goal 2 Promote Economic Growth Usually measured by Gross Domestic Product GDP All the goods and services produced in a given year Private consumption investment government expenditure net exports GDP C I G NX GDP per capita per person Negative Economic Growth Recession 2 A fall in GDP for to consecutive quarters 6 months Recession caused by 2008 financial crisis lasted about 18 months Monday January 30 y Out of work and are actively seeking work last two months Depression A decline in real GDP exceeding 10 or A recession lasting 2 or more years Goal 3 Maintain High Employment Unemployed Labor force employed unemployed Unemployment Rate Unemployed workers labor force x 100 Shortcomings of Unemployment Rate Discouraged workers Part time workers Underemployed workers Labor force participation rates for different groups Goal 4 Maintain Positive Balance of Trade Balance of trade Exports imports 0 Export more than import Controversial 3 Monday January 30 y The government spends more than it takes in from taxes during a given year Issue T bonds to cover the difference American competitiveness unfair trade Protectionists Protect industries Free trade Comparative advantage higher economic growth Goal 5 Managing Deficits and Debts Budget Deficit The accumulated amount of budget deficits over time Debt Policy Tools Two tools to achieve these goals Monetary Policy Buying and selling T bonds Fiscal Policy The sum of all taxing and spending policies THURSDAY OCT 2nd 4 The tools of the federal reserve controlling how much money is in the economy Monday January 30 y Concepts Fiscal Policy Keynesianism Supply side economics Budget Process Entitlement Discretionary spending Income Tax Capital Gains Tax Fiscal Policy year Deficits Surplus Government spending Taxes Government spending Taxes Unbalanced Budgets Reasons The sum of all taxing and spending policies Setting the budget determines what taxing and spending will be like the coming Lawmakers like to provide goods but don t like to raise taxes to pay for them Can use the budget as a tool to control the macroeconomy 5 Monday January 30 y Approach 1 Keynesianism Government programs can stimulate the economy GDP C I G NX Increase G and increase GDP Counter cyclical Sluggish Economy economic stimulus Run a deficit increase spending or decrease taxes Growing economy create budget surpluses Pay down the debt reduce inflation Examples of Keynesianism George W Bush Post 911 tax cuts to stimulate the economy 2008 housing crises starts massive spending Barack Obama American Recovery and Reinvestment Act 2009 800 billion dollars Most Keynesians think we needed 2 trillion About 2 3 macroeconomists agree 6 Republicans Democrats don t fit into a Keynesian non keynesian boxes Approach 2 Supply Side Economic Government spending does little to affect economy in short run Monday January 30 y Timing crowd out Instead fiscal policy should focus on long run growth Low taxes incentives to invest Low taxes particularly for the rich who create jobs Austerity Reagonomics Trickle down economics Debt Limit The maximum amount the U S government is allowed to borrow Debt limit in theory bind our hands so we spend less Consequence Defaults on loans Problem framing Democrats Congress should pay for the things they bought Republicans Reign in government spending Fall 2013 government shutdown Cost 23 24 billion nothing achieved In March debt ceiling increased Republican Party and Debt Ceiling Tension in Republican Party 7 Tea party debt violates values and compromises long term growth Monday January 30 y Traditional short term growth more important Last Year s debt limit battle In house all democrats voted to extend 28 republicans did More in senate House majority leader Eric Cantor loses primary in VA Budget Process Assumptions and Planning Agency Budget Development OMB Budget Review Congressional Review Budget Execution and Control Entitlement Spending Social Security Medicare Medicaid Unemployment compensation Food stamps 8 Mandatory spending programs anyone who applies and matches a legislated list of criteria has a legal right to automatically receive benefits Monday January 30 y about 2 3 of federal budget Discretionary Spending Spending in the government budget that is optional Bills have been authorized but every year the Congress has to decide how much money they will spend on the programs Elephant in the room Cut spending on Nobody wants to talk about entitlement programs George W Bush Social Security Reform Tax Structures Tax Structure is defined in relation to a person s total income Total Income wage income capital gains Capital gains investment income 9the amount you earn from investing in real estate stock market etc Regressive taxes If those with higher total income pay a smaller percentage of their incomes in taxes Sale tax Medicare social security capital gains Progressive taxes You earn more you pay more 9 Monday January 30 y Earned income Lessen income inequality Effective Tax Rate The average rate at which income is actually taxed Effective tax rate taxes paid total income Tax law is complex Statutory tax rates Different rates for different types of income Deductions exemptions etc The effective tax rate tells you how much was paid as a percent of total income US Income Tax Income taxes Taxes paid on the taxable income from labor in a given year Progressive taxes in theory But what do people actually end up paying TUESDAY OCT 7th Concepts The Federal Reserve System Money Supply 10 Monday January 30 y Tools of Monetary Policy Reserve requirement Discount Rate Open market operations Capital Gains Tax A tax on all investment income A single low rate Lower than earned income Regressive tax Effective Tax Rates
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