American Government and Politics Today

1. American Government and Politics Today Chapter 16 Economic Policy

2. Introduction • A major economic policy issue is how to maintain stable economic growth without falling into either excessive unemployment or inflation (rising prices). • Inflation, a sustained rise in the general price level of goods and services.

3. Good Times, Bad Times • The U.S. economy experiences booms and busts. The busts are called recessions. • Recession, two or more successive quarters in which the economy shrinks instead of grows. • Unemployment • Full employment, an arbitrary level of (around 5%) unemployment that corresponds to “normal” friction in the labor market. • Measuring Unemployment. US Department of Labor • Government Jobs Depression era Unemployment Insurance • Inflation-A decline in the purchasing power of money over time • The Business Cycle: reoccurring booms and busts

4. More than a Century of Unemployment

5. Changing Rates of Inflation: 1860-Present

6. National Business Activity, 1880-Present

7. Fiscal Policy • Fiscal policy is concerned with achieving economic policy goals through changes in spending or levels of taxation. • Keynesian Economics • Government Spending during slow times • Government Borrowing over Government Taxes • Government should spend more than it receives, runs a deficit. Government makes up for both reduced spending and borrowing by consumers • Discretionary Fiscal Policy-left to the policy maker to fine-tune the economy • Discretionary Fiscal Policy Failures-LBJ failure to tax during a boom, borrowed instead and caused inflation. Nixon used price controls causing inflation • The Thorny Problem of Timing-Agenda building…take time • Automatic Stabilizers-Tax system, unemployment insurance

8. Deficit Spending and the Public Debt • The government funds its deficit primarily by selling U.S. treasury bonds. Twenty years ago, only 15 percent of these bonds were held abroad. Today the figure is 40 percent. • The Public Debt in Perspective • Net public debt, the accumulation of all past federal government deficits; the total amount owed by the federal government to individuals, businesses, and foreigners. • Gross domestic product (GDP), the dollar value of all final goods and services produced in a one-year period. • Are We Always in Debt? Keynsian economics advocates running budget surpluses during boom time. Clinton raised taxes and together with the dot.com boom. He presided over a budget surplus from 1998-2002. Then came 911.

9. Net Public Debt of the Federal Government

10. Net Public Debt as a Percentage of GDP

11. Monetary Policy • Monetary policy, the utilization of changes in the amount of money in circulation to alter credit markets, employment, and the rate of inflation. • Organization of the Federal Reserve System • 7 full-time members appointed by the president. Operate 12 banks with 25 branches to hold reserves. Federal open market Committee makes monetary policy decisions largely independently • Loose and Tight Monetary Policies. The Fed implements policy by increasing or reducing the rate of growth of the money supply. The cost of borrowing money. • Increasing the rate of growth is loose monetary policy. Cheap money. Fast economy. • Reducing the rate is tight monetary policy. Expensive money. Slow economy.

12. Monetary Policy (cont.) • Monetary policy has a problem with time lags, but the Fed can make a policy change more quickly than Congress. • The Fed announces changes to monetary policy by raising or lowering the federal funds rate, a government-controlled interest rate for funds that banks borrow from each other. • The Fed Tackles Inflation • Volkernomics • Monetary Policy versus Fiscal Policy. If interest rates go high enough, people will stop borrowing and inflation will subside. Monetary policy cannot force people to borrow money in a recession. While monetary policy is more powerful against inflation, fiscal policy is more effective against recessions, because the government does the borrowing itself.

13. World Trade • Imports and Exports • Imports, goods and services produced outside a country but sold within its borders. • Exports, goods and services produced domestically for sale abroad. • The Impact of Import Restrictions on Exports • Protecting American Jobs • Quotas and Tariffs • Free Trade Areas and Common Markets

14. World Trade Keeps Growing

15. The World Trade Organization • The WTO seeks to lower trade barriers worldwide. • What the WTO Does: The WTO also has a dispute-resolution mechanism that nations may use. • The WTO and Globalization. • The WTO has become the focus of those who fear the supposed dangers of globalization. It is true that neither the United States nor any other country has a veto power within the WTO.

16. The Balance of Trade and the Current Account Balance • The balance of trade, or the difference between the value of a nation’s exports of goods and its imports of goods. The U.S. balance of trade has been significantly negative for many years. • The current account balance includes the balance of trade in services, unilateral transfers, and other items. It is also negative and has been growing more so. • Are we borrowing too much from other countries?

17. The Current Account Deficit

18. Taxes as a Percentage of GDP in Major Industrialized Nations

19. The Politics of Taxes • Currently, Americans pay taxes that total to somewhat less than 30 percent of the GDP. • Federal Income Tax Rates • Loopholes and Lowered Taxes • Progressive and Regressive Taxation • Who Pays? • Liberals tend to favor progressive taxes. • Conservatives either favor taxes that are less progressive, or even flat or regressive.