1. Economic Health and Politics How does the state of the economy affect politics?

2. Government spending Gov’t has spent more money than it has taken in since at least 1960 (deficit)! –Financed by selling gov’t bonds to Americans and foreigners ($2.6 trill. 2008) –Gross domestic product (GDP)—total market value of all goods/services made in a country during a year –National debt—total amount of all deficits –Recession—short-term decline in economy as investment sags, production falls, unemployment increases Spending based on economic, substantive, and political reasons

3. So…what’s the difference? The national debt... the net accumulated borrowing by the federal government difference between all the money that our federal government has ever spent and all the revenue that it has ever collected since our nation's inception. The annual federal budget deficit... the amount that our federal government borrows each year. the difference between what the federal government spends and the revenue it receives during a particular year. So each year's deficit is added to the existing debt. When revenue exceeds spending, it's called a surplus, which subtracts from the debt.

4. So, why do we have such a large national debt? Let's say that my total income adds up to $2,000 each month. However, I decide to live beyond my means by spending a total of $2,100 per month. In doing so, each month I chalk up a deficit of $100 -- which is funded by...oh let's say...a credit card. $2,000 monthly income - $2,100 monthly spending = $100 monthly deficit Let's further assume that my deficit spending continues in this manner throughout the year. By year's end I have accumulated $1,200 in new debt. $100 monthly deficit X 12 months =$1,200 new debt for the year So at year's end my debt is $1,200 right? Not necessarily! If I had lived within my means in past years and thus began the year debt free, then indeed my debt stands at $1,200. However, if at the beginning of the year I already had some credit card balances or other consumer debts, then my total debt would equal those debts plus the $1,200 of new debt. And so on...And so on...And so on...

5. Economic—debt is important only if the gov’t cannot make payments with a currency that is stable/valuable –Dollar mostly both (people must believe this) –Inflation—value of the dollar decreases (prices rise); will not happen if gov’t doesn’t print a lot of money –Must pay interest on the debt (% of overall spending—1.7% of GDP) Substantive—what does our government spend money on? –Borrow money whenever it needs, but without much argument about what is received/cost Political—since public is opposed to debt, politicians oppose the debt but in two different ways –Cutting spending (conservatives) –Raising taxes (liberals)

6. Politics of prosperity Majoritarian politics—people make connections between own well-being and the nation’s Pocketbook issue—economic conditions associated with success of incumbent in WH and Congress –“It’s the economy, stupid!” (1992) –Own wealth, but mostly about others –Those who believe n’tl econ. trends are bad much more likely to vote against incumbent, even when own personal finance is fine –Don’t always “vote their pocketbooks” because they understand gov’t cannot control everything

7. Politicians and the Economy It is not clear that the gov’t can/will do whatever necessary to reduce all social ills just to win an election –Gov’t doesn’t know how to produce all positive outcomes; costs can outweigh benefits –Political choices on economic policy shaped by ideological preferences rather than overall goal Dems usually want to reduce unemployment Reps usually want to reduce inflation

8. Politics of Taxing and Spending Politicians confront two types of conflicting majoritarian politics: everyone wants general prosperity, and many want more gov’t spending on popular programs –More spent on programs=more money needed=less for general prosperity How to raise taxes without alienating voters? –Taxing “other people”—a minority of voters –Find a majority of voters to support tax increases on a small group of voters –Higher rates of tax: “people who can afford it should pay a lot” –Lower rates of tax: “opponents are trying to soak the rich” by denying tax cuts to people who pay largest share of tax

9. Review Questions Please answer as proof of homework completion: What is the pocketbook issue and why does it matter? How do the GDP and deficit affect the national debt? What is the problem when politicians confront what the public demands of the economy?