Consider: What is the biggest fiscal challenge facing our country? The Last Word: #6 for tomorrow, 7-8 for Thurs; MC Test Friday

Economic Policy AP Government and Politics Chapter 17

Roots of Economic Policy  Prior to the 20 th century  Laissez-faire “To leave alone”  Industrialization  Increased accidents and disease Disrupted the natural business cycles  Interstate Commerce Act (1887) Intended to rein in the railroads  Sherman Anti-Trust Act of 1890 Prohibited restraints of trade 17.1

 Keynesian economic theory – 1930s and 40s  British economist John Maynard Keynes ▪ Argued that government could avoid recession by stimulating demand, even if it caused deficits  Budget Deficits - Ok, but long term can lead to inflation  The New Deal  Financial reforms ▪ Glass-Steagall Act; created FDIC ▪ Securities Act; Securities Exchange Act  Agricultural Adjustment Act (AAA) ▪ Granted subsidies to farmers  National Labor Relations Act (Wagner Act) ▪ Guaranteed workers’ right to unionize  Industry Regulations ▪ Expanded regs for communications, civil aviation, trucking industries

Deregulation  Definition: Reduction in market controls in favor of market-based competition  Airline Deregulation Act of 1978 Eliminated economic regulation of airlines Ultimately resulted in less competition  Agriculture Congress reduced, then replaced, subsidies  Financial Sector Deregulation in the 1990s helped lead to subprime mortgage crisis 17.1

FIGURE 17.1: How Does the Federal Government Raise and Spend Money? 17.2

Responding to Recession  Economic Slowdown of 2008 $168 billion stimulus package $700 billion financial crisis bailout package (Emergency Economic Stabilization Act) Troubled Assets Relief Program (TARP) American Recovery and Reinvestment Act (ARRA) 17.2

The Debt Ceiling  National Debt Effect of Bush tax cut, wars in Iraq and Afghanistan, bailout bills Current number: about $18.5 trillion  Debt Ceiling Similar to a credit card limit Congress must vote to spend above it  Budget Control Act of 2011 Authorized a series of automatic debt ceiling increases, but: Triggered automatic spending cuts in 2013 – “sequestration” 17.2

 The United States' GDP was estimated to be $ trillion as of Q  If our current public debt is about $18.5 trillion, we are over 100%.

 Took place from October 1 st to 16 th, 2013  Cause:  Inability of Congress and the president to agree on a “continuing resolution” to keep funding the government  Main sticking point: (de)funding Obamacare, spending cuts  Approx. 800,000 federal employees were furloughed  Major/important functions of government (air traffic control) remained in operation  On October 16 th, a continuing resolution was agreed on to fund the gov. until Jan 15 th, 2014  Next bill funded the government through Sept. 30 th, 2014

 The U.S. Treasury is estimated to hit the debt ceiling in August of  It needs to be raised in order to prevent the U.S. from defaulting on its existing debts.  The new fiscal year begins October 1st.  Congress must have approved the annual 12 spending bills or have in place a stopgap funding bill to keep the government open, OR…  Unpopular, across-the-board cuts to defense and domestic programs kick in.  This is the “cliff”…

 Allow time to run out. Trigger automatic spending cuts and hope for the best.  Increase the debt ceiling. Some or all of the spending cuts and tax increases would be canceled. This would add to the deficit and America’s debt would grow.  A “middle of the road” approach could be used, in which budget issues are addressed, but there is a smaller impact on growth.