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Economic Policy

Economic Policy. Q. What's the difference between an economist and a befuddled old man with Alzheimer's? A. The economist is the one with the calculator. Economic Freedom. Economic freedom matters Economic repression breeds terrorism ? From the 2002 study:

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Economic Policy

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  1. Economic Policy Q. What's the difference between an economist and a befuddled old man with Alzheimer's? A. The economist is the one with the calculator.

  2. Economic Freedom Economic freedom matters Economic repression breeds terrorism? From the 2002 study: “The world's largest concentration of economic repression -- Iran, Iraq, Syria and Libya -- is also a primitive hotbed of terrorism. Egypt and Yemen are "mostly unfree," while Afghanistan, Sudan, the Democratic Republic of Congo, Angola and Somalia are all so void of a rule of law that they are impossible to analyze.” 2002 list

  3. And just how big is our economy?

  4. Our government, our economy • Free enterprise- Leave business alone • How alone is the debate, Liberals and conservatives both highly active Liberals- regulate activity Conservatives- give tax payers dollars to businesses

  5. Companies want it both ways: • Want to be left alone BUT want subsidies and land grants • $92 billion in 2006

  6. Intervention 1. Economic- regulate business activity, typically to control prices, promote expansion, innovation or competition. Often protects small business in a competitive market Both liberals and conservatives have been deregulators in recent years

  7. Intervention • Social- Not economic but tied to it. • Ex. Workplace safety, tax breaks to companies that offer employee benefits • Real political battles fought here • Ex Environment- Pollution is an externality- cost the responsible party can escape but society must bare • Clean Air Act (1963) • EPA (1070) • Clean Water Act (1972)

  8. Car safety regulations • Social regulation of auto industry has economic impact • Car regulations

  9. Intervention growth By 1990’s over 100 regulatory agencies The Big Ones

  10. Airlines- regulation & deregulation • FAA(1966) – Controls airlines • Part of Dept of Transportation. • Designed to be sheltered from politics. Leaders appt and confirmed, Congress appropriates money so hard to ignore politics, but they try

  11. Airline regulation & deregulation • Was regulated, schedules, fares etc • Deregulated in 1970’s and 80’s under Carter and Reagan • Hoped for result: • Increased competition/cheaper flights/ safer flights/better service

  12. Airline regulation & deregulation • Real result: • Mixed- • No frills airlines come and go ( Airtran, Valujet, Southwest) • Older airlines ( Pan Am, Eastern die) • Less profitable markets ignored BUT • Commuter airlines take over small markets • Lower prices, better service don’t materialize • Mergers reconglomerate industry ( Southwest, Airtran merger). Oligopolies reemerging

  13. Economic philosophy Monetarism- Money supply is the key. Too much money= inflation Believe money supply should = rise in GDP

  14. Economic Philosophy • Keynesian- (Fiscal or demand side) Government spending and taxing- helps us weather ups and downs of market ( great Depression policy, Great recession policy of both Bush and Obama) • Recession- spend more/tax less • Inflation-spend less/tax more • DOMINANT U.S. philopsphy

  15. Economic Policy • Supply side- Reagan • Too much big government- soaks up too much of GDP • Taxes hurt incentive to spend/invest, thus supply side

  16. Economic Policy More supply side Laffer curve:

  17. Laffer curve, a laugh? • More tax = less tax revenue • Less tax = more tax revenue But: Workers don’t work enough extra hours to make up for tax cuts Reagan lived it- He was on the Laffer Curve. “After WWII you could only make 4 movies a year and then you’d be in the top tax bracket so we all quit after 4 pictures”- Reagan

  18. Economic Policy • Economic planning- wage/price controls • Reaganomics • Combination of monetarism/supply side- led to massive budget deficit as taxes were lowered but government spending (mostly because of the military) went up

  19. Who does this stuff? • Within Executive Branch • 1. Council of Econ Advisers-sympathetic to pres view on econ • Forecast trends, analyze issues, prepare reports, set econ agenda 2. Office of Management and Budget- prepare forecasts and budget, ensure agencies are in line with agenda 3. Sec of Treasury-from website- Maintain a strong economy..create job opportunities… [promote]conditions that enable economic growth and stability at home and abroad.. strengthen national security by …protecting…financial system, and manage the U.S. Government’s finances and resources effectively. 4. Federal Reserve- appt by Pres, 14 yr term, independent agency, regulates $ supply

  20. Who Does This Stuff? • Congress- most important • 1. Approve all taxes and expenditures • 2. Consent to wage/price controls • 3. Oversight of Fed res • 4. Power restrained by varying agendas, factions

  21. Our Policy Typically majoritarian- econ health is good for all Sometimes interest group- ex. Protectionism- importers pay, unions benefit Hard to lower spending– interest groups an issue- too much of budget represents past commitments- Mandatory vs Discretionary spending

  22. Mandatory vs Discretionary Mandatory- Government is obligated to spend this money. Largest is Social Security. Also known as entitlement spending.

  23. shifts towards an older population. The chart below shows the breakdown of different types of mandatory spending proposed for FY2012.

  24. Mandatory vsDisrectionary Discretionary- Money that is allocates by choice, such as farm subsidies. The military is the largest in this category.

  25. can choose to increase or decrease spending on any of those programs in a given year.

  26. We can kill….everyone!!!

  27. Revenue vs Mandatory and discretionary spending

  28. Discretionary fading

  29. Discretionary as a % ofGDP

  30. Look out, it’s coming

  31. finance Federal Fund activities. Money sources and how it is spent

  32. Taxes pay the freight

  33. And of course, we want our stuff but…..

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