ECONOMIC POLICY

Basic Economic Vocabulary  Boom- the “up part of the economic cycle  Business Cycle- the periodic expansion and contraction of the economy  Expansion is marked by inflation  Contraction is marked by unemployment  Economic Recession- downturn when the GDP declines for two consecutive quarters  Not as severe as a depression  Economic Depression- severe drop in the overall level of economic performance  marked by high unemployment and poor business performance  Gross Domestic Product- total value of all goods & services produced by a nation

Raising Revenue  The government raises money by collecting taxes  Includes: Income tax (16 th Amend) Progressive More than ½ of federal income Lowest burden next to Japan Corporate income tax Social insurance tax Excise tax Customs duties Estate tax Gift tax  Additionally, it also sells government securities by the Federal Reserve & collects fees for services

Government Spending  Mandatory Spending- spending required by law  Include: Social Security benefits Medicare Interest on the national debtnational debt  Discretionary Spending- spending on choice  Includes: Defense spending Education Student loans Scientific research Environmental cleanup Law enforcement Disaster & foreign aid

Mandatory vs. Discretionary SpendingSpending Explain 2 trends in spending from

Subfunction

Deficit Spending  Surplus-the situation when earnings exceed spending for the fiscal year  Deficit-the situation where spending exceeds earnings for the fiscal year  Each year’s deficit compiles to the total national debt  We have experienced deficit spending each year since Clinton was in office in the 1990’s  Recently, we incur an average of $1 trillion deficit annually

Economic Thoery  Mixed Free Market Systems  Characterized by both private and public (government) ownership of the means of production & distribution of goods & services  The price of goods & services is determined by supply & demand  Profits (after taxes) are kept by the owners  Plagued by periods of prosperity followed by periods of economic downturn Major Problem: how to maintain prosperity & growth while reducing the impact of the inevitable downturn? Leads to  to what extent should government intervene?

Laissez-Faire vs. Keneysian  Laissez-Faire  Economists believe government should never get involved in economic activity  Belief that free markets are regulated by laws of nature  Disappeared as a viable government policy option during the Great Depression  Keneysian Economics  Holds that the government can smooth out business cycles by influencing the amount of income individuals and businesses can spend on goods and services

Fiscal Policy  Refers to the government action of regulating the economy by either lowering or raising taxes or enacting government spending programs  Lowering & raising taxes results in more or less consumer spending  Keneysians believe that during economic downturns, the government should spend more money on projects to boost the economy  This additional government spending leads to annual defecits  Believe that surplus taxes should be saved to use during economic downturns  American Recovery and Reinvestment Act American Recovery and Reinvestment Act  Supply-side economists believe there is too much money chasing too few goods causing inflation  Solution: supply more goods to drive down the cost  Argue that the government should cut taxes to encourage consumer spending Raeganomics: major tax cuts & reductions to social welfare programs

Making Fiscal Policy  Office of Management and Budget (OMB)OMB  Responsible for initiating the budget process  Writes the President’s budget & submits it to Congress  Congressional Committees  House Ways and Means Committee- deals w/taxing aspects of the budget House Ways and Means Committee-  Authorization Committees- decides what programs Congress wants to fund  Appropriation Committees- decide how much money to spend on the programs that have been authorized Appropriation Committees-  Budget Reform Act of 1974  Created the Congressional Budget Office Budget committees in both houses of Congress who calculate their own spending and revenue levels  1990 Budget Enforcement Act  An effort to streamline the budget process & make it easier to arrive at a compromise budget

The Federal BudgetBudget  Statement that indicates the amount of money the federal government expects to receive & spend for a fiscal year  Fiscal Year (FY):October 1-September 30  Takes about 18 months to create  Budget Vocabulary:  Budget outlay- amount of money each agency is expected to spend in a fiscal year  Receipts- income the federal government expects to receive, mostly from income taxes

Creation of the Federal Budget  Several Steps:  Proposals Each federal agency submits a “request list” of estimated needs for the coming year to the OMB  Executive Branch The OMB holds meetings where the various agencies are able to try & convince the OMB that their needs are justified The OMB works with the President’s staff to compile all requests into single proposal The President submits the proposal to Congress in Jan. or Feb.  Congress- CBO provides Congress with economic data Committees debate & often modify the President’s proposal Offer budget resolutions to their respective houses to be passed by Sept. 15 The Appropriations Committees for both houses submit bills to authorize spending  President- Must approve appropriations bills. If no budget is approved, Congress must pass temporary emergency funding or the government will shutdownshutdown President Obama's 2015 Budget

Monetary Policy  Monetarists argue that Fiscal Policy takes too long to impact the economy  Additionally, politically difficult to cut programs during booms  Believe the best way to manage the economy is by manipulating the money supply  The process by which the government controls the supply of money in circulation, and the supply of credit  Done through actions of the Federal Reserve Board 3 main functions: control inflation, maintain employment, moderate interest rates  When the Fed lowers interest rates, it increases the amount of money in circulation to be spent on goods & services (thus discouraging saving)  When they raise interest rates, it has the opposite effect (encourages saving & not spending)  Interest rates also affect borrowing money Lower rates- less expensive to borrow money and encourages production (& vise versa)  Rates are lowered in a “downturn” economy, and raised in a “boom” economy

Implementing Monetary Policy  Monetary Policy is implemented by the Fed in 3 Ways:  Manipulating the reserve requirementreserve requirement Altering the percentage of “on hand” money a bank must keep By increasing the reserve requirement, the Fed takes money out of circulation which slows inflation & economic growth  Manipulating the discount ratediscount rate Raises or lowers the interest rates that banks pay to the Fed for borrowing money Lowering the discount rate will lower rates for consumer loans (& visa versa)  Manipulating the open market regulationsopen market regulations Buying and selling U.S. government bonds Selling bonds moves money from private banks to the Fed  consumer interest rates increase (& opposite)

Trade Policy  The U.S. is by far the richest nation in the world  Balance of trade: ration of imported goods to exported goods Trade deficits- imports exceed exports (bad) Trade surpluses- exports exceed imports  General Agreement on Tariffs & Trade (GATT)  Evolved into the World Trade Organization (WTO) 159 countries in the WTO account for 97% of the world’s tradecountriestrade  North American Free Trade Agreement (NAFTA)  Program to encourage trade among the United States, Canada, & Mexico All three nations trade with each other, tariff free Controversial…why?!?! Florida

According to the below map, what effect does international trade have on U.S. jobs?

Discussion Questions  Should the government continue to spend outside of its means?  Why do the two proposed methods of improving the economy (cutting spending or raising taxes) receive such opposition?  Why don’t the American people demand the lessening the national debt through annual budget surpluses?  How do you think the economy can be made stronger?