Transcript Economic Health, Theories, and the FED

Economic Health
and Politics
How does the state of the
economy affect politics?
Government spending
• Gov’t has spent more money than it has taken in
since at least 1960 (deficit)!
– Financed by selling gov’t bonds to Americans and
foreigners ($2.6 trill. 2008)
– Gross domestic product (GDP)—total market value
of all goods/services made in a country during a year
– National debt—total amount of all deficits
– Recession—short-term decline in economy as
investment sags, production falls, unemployment
increases
• Spending based on economic, substantive, and
political reasons
So…what’s the difference?
The national debt...
• the net accumulated borrowing by the federal government
• difference between all the money that our federal government
has ever spent and all the revenue that it has ever collected since
our nation's inception.
The annual federal budget deficit...
• the amount that our federal government borrows each year.
• the difference between what the federal government spends and
the revenue it receives during a particular year.
• So each year's deficit is added to the existing debt.
When revenue exceeds spending, it's called a surplus, which subtracts
from the debt.
So, why do we have such a large
national debt?
Let's say that my total income adds up to $2,000 each month. However, I
decide to live beyond my means by spending a total of $2,100 per month. In
doing so, each month I chalk up a deficit of $100 -- which is funded by...oh
let's say...a credit card.
• $2,000 monthly income - $2,100 monthly spending = $100 monthly
deficit
Let's further assume that my deficit spending continues in this manner
throughout the year. By year's end I have accumulated $1,200 in new debt.
• $100 monthly deficit X 12 months =$1,200 new debt for the year
So at year's end my debt is $1,200 right? Not necessarily!
•
If I had lived within my means in past years and thus began the year debt
free, then indeed my debt stands at $1,200.
•
However, if at the beginning of the year I already had some credit card
balances or other consumer debts, then my total debt would equal those
debts plus the $1,200 of new debt. And so on...And so on...And so on...
• Economic—debt is important only if the gov’t
cannot make payments with a currency that is
stable/valuable
– Dollar mostly both (people must believe this)
– Inflation—value of the dollar decreases (prices rise);
will not happen if gov’t doesn’t print a lot of money
– Must pay interest on the debt (% of overall
spending—1.7% of GDP)
• Substantive—what does our government spend
money on?
– Borrow money whenever it needs, but without much
argument about what is received/cost
• Political—since public is opposed to debt,
politicians oppose the debt but in two different
ways
– Cutting spending (conservatives)
– Raising taxes (liberals)
Politics of prosperity
• Majoritarian politics—people make connections
between own well-being and the nation’s
• Pocketbook issue—economic conditions
associated with success of incumbent in WH
and Congress
– “It’s the economy, stupid!” (1992)
– Own wealth, but mostly about others
– Those who believe n’tl econ. trends are bad much
more likely to vote against incumbent, even when
own personal finance is fine
– Don’t always “vote their pocketbooks” because they
understand gov’t cannot control everything
Politicians and the Economy
• It is not clear that the gov’t can/will do
whatever necessary to reduce all social ills
just to win an election
– Gov’t doesn’t know how to produce all
positive outcomes; costs can outweigh
benefits
– Political choices on economic policy shaped
by ideological preferences rather than
overall goal
• Dems usually want to reduce unemployment
• Reps usually want to reduce inflation
Politics of Taxing and Spending
• Politicians confront two types of conflicting
majoritarian politics: everyone wants general
prosperity, and many want more gov’t spending
on popular programs
– More spent on programs=more money needed=less
for general prosperity
• How to raise taxes without alienating voters?
– Taxing “other people”—a minority of voters
– Find a majority of voters to support tax increases on a
small group of voters
– Higher rates of tax: “people who can afford it should
pay a lot”
– Lower rates of tax: “opponents are trying to soak the
rich” by denying tax cuts to people who pay largest
share of tax
Review Questions
Please answer as proof of homework
completion:
• What is the pocketbook issue and why
does it matter?
• How do the GDP and deficit affect the
national debt?
• What is the problem when politicians
confront what the public demands of the
economy?