Economic Policy

Discretionary Spending Mandatory Spending In public finance, discretionary spending is government spending implemented through an appropriations bill. This spending is an optional part of fiscal policy, in contrast to entitlement programs for which funding is mandatory.

What do you know about the National Debt? US Debt Clock 1. What is the current national debt?  2. What is the current national deficit for 2015?  3. Differentiate between debt and deficit. 4. What is a budget surplus?  

Economics - the idea of choice Has become a polarized topic We all want economic prosperity, but we disagree with how to get there Generally, Republicans want to reduce inflation Democrats want to reduce unemployment

What do you know about Economic Policy? Most voters would like to have all three things: Lower Taxes Less Debt New Programs How do these things conflict? People want prosperity, but they also want no tax increases, no govt deficit, and continue/higher govt spending on things they like (education, medical care, environment, retirement benefits) Is this possible? If we have more spending on popular programs (like education), we have to pay for it some how How? Higher taxes or more borrowing

So here are some hypotheticals If you want to put more money into medical research… You raise taxes on cigarettes (only a minority smoke them and this would only alienate a minority of voters, meaning that this program would be liked by the majority + most people are happy and affected positively) If you want to pay for new education programs or bigger environmental programs… You raise taxes on affluent voters (high-income people) You can find a majority of voters who will support (or at least not oppose very strongly) tax increases on a small group of voters

Two Major Issues w/ Politicians (econ-wise) Everyone wants general prosperity (at least I would hope so…) Large majorities want more govt spending on popular programs ***BUT*** The more the govt spends on popular programs, the more money it requires, and the more it takes in, the less that is left over for private investment that produces prosperity. So… there is the conflict.

What is the Federal Reserve. What does the Federal Reserve do What is the Federal Reserve?     What does the Federal Reserve do?      Why is the Federal Reserve Board given independence in establishing monetary policy?

Monetary versus Fiscal Policy The power of the Federal Government to tax (revenue) and spend Managing the economy by the use of tax and spending laws Congress can influence fiscal policy because they pass the federal budget President can influence fiscal policy because he/she proposes the federal budget

Monetary versus Fiscal Policy Monetary Policy (this is different from fiscal policy) The actions that the Federal Reserve undertakes to influence the amount of money and credit in the US economy The Federal Reserve will regulate the economy by: Open market operations (buy and sell government bonds) Discount rate Reserve ratios

Monetary - How does the Fed regulate supply of money? M vs. F - Policy Tools Monetary - How does the Fed regulate supply of money? Manipulating the reserve requirement Raises/lowers amount of $ banks are required to keep Manipulating the discount rate Raises/lowers interest banks pay to the Fed banks for borrowing money The higher the rate, the less consumers purchase Manipulating open market operations Fed buys and sells bonds People like bonds b/c they have high interest rates Fed tries to buy bonds b/c money goes back to the banks; meaning that consumers can borrow more and interest rates are down. Which means consumers spend more and economy grows Fiscal Taxes Amount of Governmen t Spending

The Deficit -- The amount that the government overspends in a budget year This amount represents the total amount of money that the federal government had to borrow from citizens and foreign governments in order to meet its spending obligations George W. Bush assumed office in 2001 after 4 consecutive years of surpluses (when the govt spends less than it recovers through taxes) However, taxes, foreign wars/conflicts, economic stimulus packages reinstate deficits National Debt: 2012, rose to over $16 trillion and projected to reach $22 trillion by 2015 (from 2015 AP text)

Deflation vs. Inflation Deflation: when there is not enough money in the economy Inflation: when there is too much money in the economy When the price of goods is rising and the purchasing power of currency/the dollar decreases Federal Reserve does its best to limit inflation and reduce deflation in the economy

Spending Money Voters want… A Balanced Budget Lower Government spending (they believe the government spends too much and it can easily cut spending if it wanted to)

The Budget The Budget - doctrine that announces how much the government will collect in taxes & spend in revenues, and how those expenditures will be allocated among programs. The Fiscal Year: October 1st through September 30th The Budget is decided based on 2 key things: How much $ the govt is going to spend Allocating/distributing that $ among programs/agencies http://usa.abalancingact.com/

The Budget - Entitlements (important!) About ⅔ of what the government spends is mandatory These are called Entitlements (AKA “uncontrollable spending”) Examples include: Social Security, Medicare, veteran benefits, Food Stamps, Welfare, Medicaid These entitlements includes money that people are “entitled” to They have paid into these funds over time (Social Security) Or people qualify for these funds based on individual situation: poverty level, retired from military These programs should NOT (and are not) be cut

Why shouldn’t entitlement programs be cut?

What is “uncontrollable spending What is “uncontrollable spending?”      What do you think would happen if government decreases entitlement spending?        What is discretionary spending?    

The Budget - What happens if govt reduces Entitlement Spending? The majority of the American public will be angry Remember that economic policy aims to make the majority happy/pleased with the government/able to live economically Also - elections can be determined based on the economy So, would a President think to reduce SS benefits if that could cause a huge uproar in that demographic group (the elderly/almost-elderly) who would receive these benefits

The Budget - What can be altered? About ⅓ of the overall funds (remember ⅔ of it are entitlements/mandatory) Includes federal agencies like: Defense/Homeland Security Education Agriculture International Relations **Question: will reducing the spending to these programs make a huge/major fix in the deficit? Probably not… taxes need to be raised.

The Budget - Who is involved? It is not just one person It is carried out by Congress and should protect values of all/majority of Americans President is NOT the most powerful voice in deciding the budget President submits budget request to Congress Lawmakers release their budget plans/budget resolution created Subcommittees in House/Senate set funding for each program in the budget House/Senate come together to resolve these differences Budget returns to President and becomes law (if signed)

Economic Theory Description When was it Dominant? Laissez-faire economics (Economic Liberalism)    Keynesian Economics  Supply-Side Economics  Reaganomics (what is the difference between Supply Side) Obama? Trump?