Transcript Economic and Environmental Policy







Revenues: Money the government takes in –
taxes, fees, other sources
Expenditures: Money the government spends –
mandatory and discretionary spending
Revenues > Expenditures = Budget surplus
Expenditures > Revenues = Budget deficit
Revenues = Expenditures = Balanced budget
The last surpluses occurred during the Clinton
and Lyndon B. Johnson Administrations.
We’ve run a deficit every other year since then.




The Clinton budget of 1993 included tax increases.
This was politically unpopular, passed Congress
by only one vote in the House (Rep. MargoliesMezvinsky) and the tiebreaking vote of the Vice
President in the Senate.
No Republicans voted for it.
Many Democratic Members of Congress lost their
seats in 1994 because they voted for this bill, and
this contributed to Republicans taking control of
Congress.
However, the tax increases combined with the
economic boom of the 1990’s to produce surpluses
beginning in 1997.






Decisions on taxation and spending are made
by the President and Congress
How much to raise in taxes
What kinds of taxes to impose
How much to spend
What to spend it on
This takes place through the annual budget
and appropriations process.

Congress is supposed to pass 12 bills each year which
spend money for different government activities.












Agriculture
Commerce, Justice and Science
Defense
Energy and Water
Financial Services
Homeland Security
Interior and Environment
Labor, Health & Human Services, and Education
Legislative Branch
Military Construction and Veterans Affairs
Dept. of State and Foreign Relations
Transportation and Housing & Urban Development



The House and Senate each have an
Appropriations Committee, with
subcommittees with responsibility for each of
these bills.
These bills are supposed to be enacted by Oct. 1
of each year (the beginning of the fiscal year) or
the government cannot spend money.
The last year all 12 bills were passed on time
was 1997.



Any appropriations which are not passed through
the normal process by the deadline are put in a
“continuing resolution,” which funds all
government activity for a specific period of time,
usually based on spending levels for the previous
year.
If Congress and the President cannot agree on a
continuing resolution, the government shuts
down. This happened for 16 days in 2013.
The government is currently operating under a
continuing resolution which expires on Dec. 11,
2015.


Relying on continuing resolutions to fund the
government makes it extremely difficult to cut
spending.
“Earmarks” are provisions inserted in
appropriations bills by individual members to
fund specific projects in the areas they represent.
2007: $500,000 in federal funding for the Teapot Museum
in Sparta, NC.
 Most earmarks are now prohibited.


The President has no line-item veto and cannot
veto individual items in spending bills.





Source: Congressional Budget Office (cbo.gov)
Fiscal Year 2015 projections
Revenues: $3.47 Trillion
Expenditures: $3.925 Trillion
Deficit: $455 Billion

This is down from $1.55 Trillion in FY 2009



Cutting spending is politically unpopular (each
program has its beneficiaries, and cuts in social
programs have an economic impact)
Raising taxes is politically unpopular and
controversial
If you want to spend more than you have, the
easiest thing to do is borrow the money
(primarily from foreign banks). The money was
(eventually) be repaid with interest.



The total amount of money the US government
owes (primarily the result of previous deficits
and the interest owed on them).
Cutting spending (or raising taxes) reduces the
amount we have to borrow and thus eventually
have to pay interest on.
2015 annual interest on the national debt:
$402.4 Billion








1789-1981: $1 Trillion
1981-1989: $1.9 Trillion
1989-1993: $1.5 Trillion
1993-2001: $1.4 Trillion
2001-2009: $6.1 Trillion (Bush tax cuts, wars,
effects of 9/11)
2009-2012: $5.3 Trillion (spending during
recession)
2012-2016: approx. $3 Trillion
Total right now:
http://www.usdebtclock.org






British economist John Maynard Keynes
Introduced to the US under Franklin D. Roosevelt
The theory is that the government should borrow
money (thus running a deficit) and invest it in
ways that stimulate the economy
Roosevelt’s New Deal’s jobs programs
Clinton and Obama stimulus programs
Newly-employed people will pay taxes on their
income, which theoretically will pay back the
money the government borrowed initially.





Developed during the 1970’s
Practiced by Reagan and G.W. Bush in
particular
Government should stimulate the economy by
cutting taxes
People keep more of their own money and thus
invest more of it in the economy (hiring more
employees, building new facilities, etc.)
This will theoretically stimulate the economy in
a way which will produce enough new tax
revenue to make up for the tax cuts, and thus
balance the budget.

Progressive taxation: A system, used in the US,
where higher incomes are taxed at higher rates
than lower incomes.





$10,000 income pays 10% tax rate = $1000 in taxes
$500,000 income pays 35% tax rate = $175,000 in taxes
50 times as much income = 175 times as much in tax
This can be a disincentive for people to work harder and
earn more.
“Tax fairness”: Because of deductions, loopholes and
differential treatment of different types of income, some
wealthier taxpayers may actually pay a lower rate than
those who earn less (Obama made an issue out of
Romney’s taxes)



Flat (or regressive) tax: Everyone is taxed at the
same rate. The government would take in
approximately the same amount of revenue if most
deductions were eliminated and everyone paid
approximately 18% of their income in taxes.
This disproportionately affects lower-income
taxpayers, some of whom pay less than 18% now
and benefit from deductions that would be
eliminated.
An alternative that’s been suggested is abolishing
the income tax and replacing it with a 23% national
sales tax (fairtax.org).



Federal Reserve Board: A seven-member board
appointed by the President and confirmed by the
Senate. They serve 14-year terms, with one
member’s term expiring every two years.
The current Chair of the Federal Reserve Board is
Janet Yellen. A member of the Board serves a fouryear term as Chair.
The Federal Reserve Board controls the money
supply (how much money is in circulation) and
interest rates.
More money in circulation -> more opportunity to invest
and spend, but leads to higher prices.
 Less money in circulation -> less opportunity to invest
and spend, but leads to lower prices.




Congress has to pass a law increasing the amount
of money that the U.S. can borrow in order to pay
existing debts. This has happened 78 times since
1960.
Failure to increase the debt limit would mean the
U.S. would default on paying what we already
owe (have already borrowed).
The October 2013 agreement to end the
government shutdown included an agreement to
authorize borrowing through Feb. 7, 2014, when
the debt limit ($17.2 Trillion) was suspended
through March 15, 2015. The debt limit was raised
again as of March 16. On Oct. 30, 2015, it was
raised through March 2017.


Commercial banks borrow money from the
Federal Reserve, which charges them interest
(rates are extremely low right now). The
commercial banks then lend money to their
customers at a higher rate of interest, thus
making their profits.
Lower interest rates encourage borrowing and
investment, creating higher demand for
products, which causes higher prices. So lower
interest rates (generally) eventually lead to
inflation (prices and other factors in cost of
living increase faster than wages).


Higher interest rates discourage borrowing and
investment, creating lower demand for
products, which causes lower prices but also
eventually leads to unemployment. Businesses
are less likely to hire or retain workers if there
is less demand for their products.
The Federal Reserve Board tries to adjust
interest rates to keep either inflation or
unemployment from occurring.


Discretionary spending can be controlled by
Congress and the President through the
appropriations process.
Mandatory spending is set by formulas
determined by federal law. The government is
required to spend whatever the formula
dictates.


> $2 Trillion total
$861 Billion on health care
Medicare, Medicaid, other programs



$808 Billion on Social Security
$340 Billion on Income Security programs
Earned Income Tax Credit
 Supplemental Security Income




$153 Billion on federal retirement benefits
$80 Billion on veterans’ benefits
$95 Billion on other programs

Source: Congressional Budget Office at cbo.gov.




What about economic development that
damages the environment?
We want to protect the environment, but this
may occur at the cost of jobs
Protecting federal land (parks, wilderness)
from recreational or economic activity has costs
The logging industry is prevented from cutting
down trees in old-growth forests

The Endangered Species Act (1973) prevents
projects which could harm the habitat of rare
animals (great spotted owl, certain types of
fish)


Is it worth it to forgo a project like a flood control
dam to preserve a fish?
Keystone XL pipeline, fracking: sources of
cheap energy with potential environmental risk


Good: Jobs, lower gas prices
Bad: Potential oil spills, water contamination

Comparing the cost of a regulation to the
benefit of the problem solved. Many
economists argue that many regulations are
cost-ineffective (think of it in terms of spending
$3 to fix a problem that only costs $1 to live
with)









What are the alternatives?
Is this the most efficient way to solve the problem?
What else could you do with the money you’re spending
(opportunity costs)?
Could you save more lives by investing the money in
another way?
Whose benefits and costs count?
Can you fairly compensate the losers for their losses?
Identify the impacts of what you’re doing
Perform an economic analysis to quantifiably predict
impacts
Attach dollar values to impacts (assigning a value to a
human life)
 You can’t know the dollar value of everything





In economics, the value of a life is how much
you’re willing to pay to reduce the risk of death
in a way that results in one less death in a
population.
In law, the value of a life is how much a jury
would be willing to pay your survivors if you
were killed through someone else’s negligence.
Future costs and benefits count less than
present costs and benefits.
Do net benefits outweigh net costs?
Which alternatives maximize net benefits?

http://content.time.com/time/specials/2007/
article/0,28804,1658545_1658498_1657866,00.ht
ml







Designed to weigh no more than 2000 lbs. and cost no more
than $2000 (in 1968).
It was discovered that when the car was rear-ended at more
than 20 MPH, the gas tank tended to rupture and cause an
explosion.
The gas tank problem could have been fixed by adding an
$11 piece of equipment to the car and moving the gas tank
farther from the rear end.
This would have added $137.5 million to the total cost of
production (sales projections were 12.5 million vehicles)
The projected cost of paying out lawsuits for people killed
or injured by gas tank explosions was $49.5 million.
They didn’t make the change.
One source estimates that this resulted in 500 preventable
deaths. Ford was only found liable in one case with a $3.5
million verdict.