Economic Policy. Jacob Dean, Alan Avilez

Transcription

1 Economic Policy Jacob Dean, Alan Avilez

2 Basics - Economy is complex - Economic Theories - Market Economy - Supply / Demand - Capitalist economy ~ Market economy

3 Laissez-Faire Economics - Absence of government control - Natural selection - Individual pursuit of profits serves the broad interest of society - Efficient Market Hypothesis - markets naturally create fair prices

4 Economic Crises - Aggregate Demand - what consumers will spend on goods - Productive Capacity - Total value of goods that can be produced - When not balanced -Depression - high unemployment / business failures -Inflation - price increases / decrease in value of currency -Stagflation - slow growth, unemployment, inflation

5 Keynesian Theory - Aggregate demand can be adjusted through fiscal/monetary policy - Fiscal Policy - Economic policies that involve government spending and taxing - Monetary Policy - Economic policies that involve control of, and changes in, the supply of money. - Most economists accept theory to some degree

6 Monetary Policy - Monetarists - Argue hard to implement then stop spending programs - Argue government can control economy using the money supply

7 Federal Reserve System - Central Banking System in the US - Controls inflation, maintain unemployment to a minimum, ensure moderate interest rates - Buying/selling securities -Takes money in/out of circulation - Discount Rate: Interest rate banks pay when they borrow money - Reserve Requirement: Amount of cash that banks are required to keep on deposit

8 Federal Reserve Board - Controls Federal Reserve System - Seven members - appointed by president - Staggered terms of 14 years - Board meant to be independent of congress and president - Make decisions without worrying about political implications - Can act faster

9 Federal Reserve Board -Ben Bernanke - Federal Reserve Chair -Replaced Alan Greenspan - market best left unregulated crisis -arranged bank purchases -emergency loan programs -low interest rates

10 Supply-Side Economics - Used by Reagan to deal with stagflation -More demand than supply -Didn t work well - Aims to increase supply - To increase production -Tax cuts (larger for the rich) -Less government regulation of business

11 Government Spending -President proposed budget, congress approves it -Budget and Accounting Act of Gives president responsibility of preparing budget -Office of Management and Budget (OMB) - Assists with presidents budget -Congress - Constitutional authority to raise and spend funds

12 The Budget -Used to be created by congress alone until Commerce Clause -After industrialization/wwi president proposed budget -centralizes budget creation process

13 The Budget -Submitted annually for fiscal year (Oct 1 - Sept 30) -Defines budget authority - how much government agencies are authorized to spend on certain programs -Defines budget outlays - how much government agencies are expected to spend (expenditures) -Receipts - how much is expected in taxes and other revenue

14 Deficit -When government spend more money than it collects -National debt - sum of all unpaid government deficits -$18 trillion -46% owed to foreigners congress created debt ceiling -increased over 100 times to accommodate debt

15 Preparing the President s Budget -OMB meets with president to determine economic situation and budgetary priorities -Requests spending projections from agencies -OMB makes recommendations to president -President gives more precise guidelines -Political Negotiations

16 Passing the Congressional Budget -Tax Committees - responsible for raising revenue -Authorization Committees - jurisdiction over particular legislative subjects -Appropriations Committees - set aside funds for certain programs

17 Passing the Congressional Budget -Congressional Budget Office 1974 (CBO) -Meant to supervise budget review process -Created deficits -Budget Enforcement Act of 1990 (BEA) -Mandatory spending - entitlements, in law -Discretionary spending - created caps -Led to surplus in Balanced Budget Act (1997) - surplus by discretionary spending caps expired, led to deficit since

18 Tax Policy -Basic goals -meet budget expenditure -make tax burden more equitable to taxpayers -control the economy -Complicating issue -ability to pay vs. benefits received -promote social goals -Complicated tax code

19 Tax Policy -Flat tax - everybody pays at same rate -Progrogressive taxation - rich pay proportionally higher taxes than the poor -uses tax brackets -16th amendment (1914) - Proposed by President Taft. reformed the Constitution to allow for the Federal Income tax.

20 Tax Reform -Reagan - two tax brackets, 28% for highest -George H. W. Bush - three tax brackets, 31% for highest -Clinton - four tax brackets, 39.6% for highest -George W. Bush - $1.35 trillion tax cut -led to deficit -Obama - stimulus package grew deficit -annual budget deficit of $1 trillion -campaigned to restore 39.6% for highest

21 Tax Reform -Taxes are comparatively lower than 50 years ago -US taxes lower than other european countries

22 Spending -$4 trillion budget -Biggest expenditures -National Defense (18%) -Social Security (22%) -Income Security -Medicare -Health -Government spending tends to increase

23 Spending Increases -Incremental budgeting - Agencies adding new funds onto budget each year - Agencies budgets rarely get cut back -Uncontrollable Spending - Mandatory outlays that the government is obligated to pay - Make up 65% of spending - ex. social security

24 Economic Equality -Requires redistributing wealth from the rich to the poor -Transfer payment -ex. social security, unemployment insurance -Progressive income tax -Other taxes not progressive -ex. taxes on investments

25 Income Gap -Income gap has increased since 1960 s -US has one of the largest income gaps -Highest 20% % of income -Lowest 20% - 3.4% of income -Interest groups / pluralist democracy -Americans unwilling to put heavy taxes on rich

26 Current Policy Initiatives March 4, 2014: President Obama proposed US budget for $3.9 trillion to be used in the 2015 Fiscal Year. April 1, 2014: House Budget Committee chairman Paul Ryan proposes Republican Budget Plan for the 2015 Fiscal budget. February 2, 2014: Obama proposes 2016 Budget for $4 Trillion

27 FRQ # Fiscal policy and monetary policy are two tools used by the federal government to influence the United States economy. The executive and legislative branches share the responsibility of setting fiscal policy. The Federal Reserve Board has the primary role of setting monetary policy. (a) Define fiscal policy. (b) Describe one significant way the executive branch influences fiscal policy. (c) Describe one significant way the legislative branch influences fiscal policy. (d) Define monetary policy. (e) Explain two reasons why the Federal Reserve Board is given independence in establishing monetary policy.

28 A. Define Fiscal Policy (1 point) Answer: Economic Policies that involve government spending and taxing. Acceptable Definitions Include: -Taxing and/or spending -The budget

29 B. Describe one significant way the executive branch influences fiscal policy. (1 point) Answer: The executive branch proposes a budget for each fiscal year which is the basis of federal spending. Acceptable Descriptions Include: -The president proposes/prepares the federal budget. -The president signs/vetoes legislation (related to taxing, spending, and borrowing, not generic). -The White House Office of Management and Budget (OMB) recommends the budget.

30 C. Describe one significant way the legislative branch influences fiscal policy. (1 point) Answer: All bills dealing with taxing and spending must go through congress. Acceptable Descriptions Include: -Congress passes the federal budget. -Congress acts on tax and spending legislation. -The Congressional Budget Office (CBO) advises Congress on economic policies.

31 D. Define monetary policy. (1 point) Answer: Economic policies that involve control of, and changes in, the supply of money. Acceptable Definitions Include: -Regulating the money supply. -Controlling inflation/deflation. -Adjusting interest rates to regulate the economy. -Adjusting bank reserve requirements. -The cost of money.

32 E. Explain two reasons why the Federal Reserve Board is given independence in establishing monetary policy. (2 points) Answer: One reason why the Federal Reserve Board is given independence in establishing monetary policy is remove politics from monetary policy decision making. Another reason is it allows the Federal Reserve Board to act quickly and efficiently.

33 Acceptable Explanations Include: -It removes politics from monetary policy decision making. -Congress/the president can abdicate responsibility for difficult decisions by delegating decision-making power. -The Federal Reserve Board relies on expertise when making decisions. -The Federal Reserve Board makes economic policies efficiently.