ECONOMIC POLICY

1. ECONOMIC POLICY

2. Revenues and Expenditures • Revenues: Money the government takes in – taxes, fees, other sources • Expenditures: Money the government spends – mandatory and discretionary spending • Revenues > Expenditures = Budget surplus • Expenditures > Revenues = Budget deficit • Revenues = Expenditures = Balanced budget • The last surpluses occurred during the Clinton and Lyndon B. Johnson Administrations. We’ve run a deficit every other year since then.

3. Surpluses under Clinton • The Clinton budget of 1993 included tax increases. This was politically unpopular, passed Congress by only one vote in the House (Rep. Margolies-Mezvinsky) and the tiebreaking vote of the Vice President in the Senate. • No Republicans voted for it. • Many Democratic Members of Congress lost their seats in 1994 because they voted for this bill, and this contributed to Republicans taking control of Congress. • However, the tax increases combined with the economic boom of the 1990’s to produce surpluses beginning in 1997.

4. Fiscal policy • Decisions on taxation and spending are made by the President and Congress • How much to raise in taxes • What kinds of taxes to impose • How much to spend • What to spend it on • This takes place through the annual budget and appropriations process.

5. Taxes and spending • Cutting spending is politically unpopular (each program has its beneficiaries, and cuts in social programs have an economic impact) • Raising taxes is politically unpopular and controversial • If you want to spend more than you have, the easiest thing to do is borrow the money (primarily from foreign banks). The money was (eventually) be repaid with interest. • 2012 interest on the national debt: $360 Billion

6. National debt • The total amount of money the US government owes (primarily the result of previous deficits and the interest owed on them). • Cutting spending (or raising taxes) reduces the amount we have to borrow and thus eventually have to pay interest on.

7. Accumulation of national debt • 1789-1981: $1 Trillion • 1981-1989: $1.9 Trillion • 1989-1993: $1.5 Trillion • 1993-2001: $1.4 Trillion • 2001-2009: $6.1 Trillion (Bush tax cuts, wars, effects of 9/11) • 2009-2012: $5.3 Trillion (spending during recession) • Total right now: http://www.brillig.com/debt_clock/

8. Keynesian economics • British economist John Maynard Keynes • Introduced to the US under Franklin D. Roosevelt • The theory is that the government should borrow money (thus running a deficit) and invest it in ways that stimulate the economy • Roosevelt’s New Deal’s jobs programs • Clinton and Obama stimulus programs • Newly-employed people will pay taxes on their income, which theoretically will pay back the money the government borrowed initially.

9. Supply-side economics • Developed during the 1970’s • Practiced by Reagan and G.W. Bush in particular • Government should stimulate the economy by cutting taxes • People keep more of their own money and thus invest more of it in the economy (hiring more employees, building new facilities, etc.) • This will theoretically stimulate the economy in a way which will produce enough new tax revenue to make up for the tax cuts, and thus balance the budget.

10. Taxation • Progressive taxation: A system, used in the US, where higher incomes are taxed at higher rates than lower incomes. • $10,000 income pays 10% tax rate = $1000 in taxes • $500,000 income pays 35% tax rate = $175,000 in taxes • 50 times as much income = 175 times as much in tax • This can be a disincentive for people to work harder and earn more. • “Tax fairness”: Because of deductions, loopholes and differential treatment of different types of income, some wealthier taxpayers may actually pay a lower rate than those who earn less (Obama made an issue out of Romney’s taxes)

11. Taxation • Flat (or regressive) tax: Everyone is taxed at the same rate. The government would take in approximately the same amount of revenue if most deductions were eliminated and everyone paid approximately 18% of their income in taxes. • This disproportionately affects lower-income taxpayers, some of whom pay less than 18% now and benefit from deductions that would be eliminated.

12. Monetary Policy • Federal Reserve Board: A seven-member board appointed by the President and confirmed by the Senate. They serve 14-year terms, with one member’s term expiring every two years. • The current Chairman of the Federal Reserve Board is Ben Bernanke, a native of Dillon, SC. • The Federal Reserve Board controls the money supply (how much money is in circulation) and interest rates.

13. Budget sequester • The Budget Control Act of 2011 established a Joint Select Committee on Deficit Reduction to cut deficits by $1.2 Trillion by 2021, with automatic cuts to go into effect if the committee couldn’t agree. They didn’t. • Automatic cuts: $54.7 Billion total in non-defense spending • $11 Billion in Medicare payments • $5.2 Billion in student loans and other programs • $38.5 Billion in discretionary spending • $54.7 Billion in defense spending

14. Debt limit • Congress has to pass a law increasing the amount of money that the U.S. can borrow in order to pay existing debts. This has happened 78 times since 1960. • Failure to increase the debt limit would mean the U.S. would default on paying what we already owe (have already borrowed). • The October 2013 agreement to end the government shutdown included an agreement to authorize borrowing through Feb. 7, 2014, when the debt limit will have to be raised again. • Many Republicans in Congress want to condition increasing the debt limit on excluding funding for the Affordable Care Act.

15. Interest rates • Commercial banks borrow money from the Federal Reserve, which charges them interest (rates are extremely low right now). The commercial banks then lend money to their customers at a higher rate of interest, thus making their profits. • Lower interest rates encourage borrowing and investment, creating higher demand for products, which causes higher prices. So lower interest rates (generally) eventually lead to inflation (prices and other factors in cost of living increase faster than wages). • Higher interest rates discourage borrowing and investment, creating lower demand for products, which causes lower prices but also eventually leads to unemployment. Businesses are less likely to hire or retain workers if there is less demand for their products. • The Federal Reserve Board tries to adjust interest rates to keep either inflation or unemployment from occurring.

16. Economic growth vs. environmental protection • What about economic development that damages the environment? • We want to protect the environment, but this may occur at the cost of jobs • The logging industry is preventing from cutting down trees in old-growth forests • The Endangered Species Act prevents projects which could harm the habitat of rare animals (great spotted owl, certain types of fish) • Keystone XL pipeline, “fracking”: sources of cheap energy with potential environmental risk

17. Cost-Benefit Analysis • Comparing the cost of a regulation to the benefit of the problem solved. Many economists argue that many regulations are cost-ineffective (think of it in terms of spending $3 to fix a problem that only costs $1 to live with)