Economic Policy

Economic PolicyQ. 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 FreedomEconomic 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

And just how big is our economy?

Our government, our economyFree enterprise- Leave business aloneHow alone is the debate, Liberals and conservatives both highly activeLiberals- regulate activity

Conservatives- give tax payers dollars to businesses Companies want it both ways:Want to be left alone BUT want subsidies and land grants

$92 billion in 2006

Intervention 1. Economic- regulate business activity, typically to control prices, promote expansion, innovation or competition. Often protects small business in a competitive marketBoth liberals and conservatives have been deregulators in recent yearsInterventionSocial- Not economic but tied to it. Ex. Workplace safety, tax breaks to companies that offer employee benefitsReal political battles fought here Ex Environment- Pollution is an externality- cost the responsible party can escape but society must bareClean Air Act (1963)EPA (1070)Clean Water Act (1972)

Car safety regulationsSocial regulation of auto industry has economic impact

Car regulations

Intervention growthBy 1990s over 100 regulatory agencies

The Big OnesAirlines- regulation & deregulationFAA(1966) Controls airlinesPart of Dept of Transportation. Designed to be sheltered from politics. Leaders appt and confirmed, Congress appropriates money so hard to ignore politics, but they tryAirline regulation & deregulationWas regulated, schedules, fares etcDeregulated in 1970s and 80s under Carter and ReaganHoped for result:Increased competition/cheaper flights/ safer flights/better service

Airline regulation & deregulationReal result:Mixed- No frills airlines come and go ( Airtran, Valujet, Southwest)Older airlines ( Pan Am, Eastern die)Less profitable markets ignored BUTCommuter airlines take over small marketsLower prices, better service dont materializeMergers reconglomerate industry ( Southwest, Airtran merger). Oligopolies reemerging

Economic philosophyMonetarism- Money supply is the key. Too much money= inflationBelieve money supply should = rise in GDPEconomic PhilosophyKeynesian- (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 lessInflation-spend less/tax moreDOMINANT U.S. philopsphyEconomic PolicySupply side- ReaganToo much big government- soaks up too much of GDPTaxes hurt incentive to spend/invest, thus supply sideEconomic PolicyMore supply sideLaffer curve:

Laffer curve, a laugh?More tax = less tax revenueLess tax = more tax revenueBut:Workers dont work enough extra hours to make up for tax cutsReagan lived it- He was on the Laffer Curve. After WWII you could only make 4 movies a year and then youd be in the top tax bracket so we all quit after 4 pictures- ReaganEconomic PolicyEconomic planning- wage/price controlsReaganomicsCombination of monetarism/supply side- led to massive budget deficit as taxes were lowered but government spending (mostly because of the military) went upWho does this stuff?Within Executive Branch1. Council of Econ Advisers- sympathetic to pres view on econForecast 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 protectingfinancial system, and manage the U.S. Governments finances and resources effectively. 4. Federal Reserve- appt by Pres, 14 yr term, independent agency, regulates $ supply

Who Does This Stuff?Congress- most important1. Approve all taxes and expenditures2. Consent to wage/price controls3. Oversight of Fed res4. Power restrained by varying agendas, factions

Our PolicyTypically majoritarian- econ health is good for allSometimes interest group- ex. Protectionism- importers pay, unions benefitHard to lower spending interest groups an issue- too much of budget represents past commitments- Mandatory vs Discretionary spending

Mandatory vs DiscretionaryMandatory- Government is obligated to spend this money. Largest is Social Security. Also known as entitlement spending.shifts towards an older population. The chart below shows the breakdown of different types of mandatory spending proposed for FY2012.

Mandatory vs DisrectionaryDiscretionary- Money that is allocates by choice, such as farm subsidies. The military is the largest in this category.can choose to increase or decrease spending on any of those programs in a given year.

We can kill.everyone!!!

Revenue vs Mandatory and discretionary spending

Discretionary fading

Discretionary as a % ofGDP

Look out, its coming

Money sources and how it is spentfinance Federal Fund activities.

Taxes pay the freight Over But not over Tax rate $0 $17,000 10% $17,000 $69,000 15% $69,000 $139,350 25% $139,350 $212,300 30% $212,300 $379,150 33% $379,150 $450,000 35% $450,000 infinity or Oprahs salary 39.6%

And of course, we want our stuff but..