American Government and Politics Today Chapter 16 Economic Policy

Introduction A major economic policy issue is how to maintain stable economic growth without falling into either excessive unemployment or inflation (rising prices). Inflation, a sustained rise in the general price level of goods and services.

Good Times, Bad Times The U.S. economy experiences booms and busts. The busts are called recessions.  Recession, two or more successive quarters in which the economy shrinks instead of grows. Unemployment  Full employment, an arbitrary level of unemployment that corresponds to “normal” friction in the labor market.  Measuring unemployment. Inflation The Business Cycle: reoccurring booms and busts

More than a Century of Unemployment

Changing Rates of Inflation: 1860-Present

National Business Activity, 1880-Present

Fiscal Policy Fiscal policy is concerned with achieving economic policy goals through changes in spending or levels of taxation. Keynesian Economics  Government Spending  Government Borrowing  Discretionary Fiscal Policy The Thorny Problem of Timing Automatic Stabilizers

Deficit Spending and the Public Debt The government funds its deficit primarily by selling U.S. Treasury bonds. Twenty years ago, only 15 percent of these bonds were held abroad. Today the figure is 40 percent.

The Public Debt in Perspective  Net public debt, the accumulation of all past federal government deficits; the total amount owed by the federal government to individuals, businesses, and foreigners.  Gross domestic product (GDP), the dollar value of all final goods and services produced in a one-year period. Are We Always in Debt? Deficit Spending and the Public Debt

The Growth of the Net Public Debt of the Federal Government

Net Public Debt as a Percentage of GDP

Monetary Policy Monetary policy, the utilization of changes in the amount of money in circulation to alter credit markets, employment, and the rate of inflation. Organization of the Federal Reserve System Loose and Tight Monetary Policies. The Fed implements policy by increasing or reducing the rate of growth of the money supply.  Increasing the rate of growth is loose monetary policy.  Reducing the rate is tight monetary policy.

Monetary Policy (cont.) Monetary policy has a problem with time lags, but the Fed can make a policy change more quickly than Congress. The Fed announces changes to monetary policy by raising or lowering the federal funds rate, a government-controlled interest rate for funds that banks borrow from each other.

Monetary Policy (cont.) The Fed Tackles Inflation  Volkernomics Monetary Policy versus Fiscal Policy. If interest rates go high enough, people will stop borrowing and inflation will subside. Monetary policy cannot force people to borrow money in a recession. While monetary policy is more powerful against inflation, fiscal policy is more effective against recessions, because the government does the borrowing itself.

World Trade Imports and Exports  Imports, goods and services produced outside a country but sold within its borders.  Exports, goods and services produced domestically for sale abroad. The Impact of Import Restrictions on Exports  Protecting American Jobs  Quotas and Tariffs  Free Trade Areas and Common Markets

World Trade Keeps Growing

The World Trade Organization The WTO seeks to lower trade barriers worldwide.  What the WTO Does: The WTO also has a dispute-resolution mechanism that nations may use. The WTO and Globalization.  The WTO has become the focus of those who fear the supposed dangers of globalization. Neither the United States nor any other country has a veto power within the WTO.

The Balance of Trade and the Current Account Balance The balance of trade, or the difference between the value of a nation’s exports of goods and its imports of goods. The U.S. balance of trade has been significantly negative for many years. The current account balance includes the balance of trade in services, unilateral transfers, and other items. It is also negative and has been growing more so. Are we borrowing too much from other countries?

Taxes as a Percentage of GDP

The Politics of Taxes Currently, Americans pay taxes that total somewhat less than 30 percent of the GDP. Federal Income Tax Rates  Loopholes and Lowered Taxes  Progressive and Regressive Taxation Who Pays?  Liberals tend to favor progressive taxes.  Conservatives either favor taxes that are less progressive, or even flat or regressive.

Marginal Tax Rates

The Social Security Problem Social Security was established in 1935 with the intent of providing a type of insurance for a large segment of the public. Social Security is not a pension fund. Workers Per Retiree  Initially for every recipient of Social Security there were forty workers paying into the general fund—a one-to-forty ratio. Today, the ratio is more like one-to-three, and it will get worse in future years.

What Will it Take to Salvage Social Security?  Raising taxes  Reducing benefits payouts  What do you think will happen to Social Security in 30 years? 60 years? 100 years?

A comparison of the number of active workers per the number of retirees.

Questions for Critical Thinking  Why are the public and the economics profession on such different wavelengths when it comes to world trade?  How much of a problem is it that the United Sates has become so dependent on money borrowed from foreign countries? What might happen if foreigners stopped lending?

Questions for Critical Thinking  Is progressive taxation “fair”? Support your argument that this form of taxation is either fair or unfair.  Which of the proposals to “fix” Social Security have the most merit? Which do you think would cause the most problems?