Transcript document

8.
WHAT MACROECONOMIC
ACTIVITIES ARE POLICY ISSUES
FOR U.S. AGRICULTURE?
Larry D. Sanders
Fall 2005
Dept. of Ag Economics
Oklahoma State University
1
INTRODUCTION
 Purpose:
– to understand macroeconomic policy issues & options
 Learning Objectives:
1. Become aware of macroeconomic policy issues.
2. Understand key macroeconomic issues, options &
consequences.
3. Become aware of current macroeconomic
environment & outlook.
2
MACROECONOMIC POLICY:
HISTORICAL REVIEW
 1930s
– Keynes: More govt. is a solution to counter severe market
failures
– FDR: New Deal
 1940s
– WWII: Helped end Depression; proved Keynes right
– Employment Act of 1946
 1960s
– Galbraith: welfare state—technocracy controls thru big business
& big govt.
 Current
– Neo-Conservative view: less social govt. & more free market
– Growing Populist view: big business needs to be reigned in by
govt.
3
MACROECONOMIC GOALS
 HIGH
EMPLOYMENT--Prevent Depression,
Unemployment, Recession
 PRICE STABILITY--Keep inflation down
 EFFICIENCY--Micro & Macro
 EQUITABLE DISTRIBUTION OF INCOME--Equity,
Re-distribution, Fight poverty
 GROWTH--Increase quantity & quality
 FREE MARKET
 ECONOMIC SECURITY
 CUT TAXES
4
MACROECONOMIC POLICY
AGENTS
 Fiscal
Policy (changes in federal spending;
changes in taxation)
– President
– Congress
 Monetary
Policy
– Federal Reserve System
» Change money supply with changes in interest rates
5
MACROECONOMIC POLICY
MONETARY
(changes
in interest
rates)
FISCAL
(changes
in govt
spending
or taxes)
LOOSE
Increase M
(reduce i):
Inflation
TIGHT
Cut/Steady M
(increase i):
Cuts inflation
or leads to deflation
Increase G
(increase
spending or
cut taxes):
Inflation
Cut/Steady G
(decrease
spending or
increase taxes):
Cuts inflation or
leads to Stagflation
6
Macro Policy:
Alternatives & Consequences
 Loose
Fiscal & Monetary Policy (Pre-Carter;
Reaganonomics; Bush2-nomics?)
– Increasing: interest rates, domestic investment, crowding out,
employment, debt costs
– Decline in inflow of foreign capital & value of $, increased
exports, reduced imports, hi exchange rate stress, hyperinflation,
overvalued farm assets
– Stabilization policy likely results
 Loose
Monetary & Tight Fiscal Policy (Carternomics)
– Increasing interest rates, decline in foreign capital, weakened $,
improving trade deficit
– Increasing inflation, cashflow & cost price stress, stagflation (?),
decline in off-farm employment
7
Macro Policy:
Alternatives & Consequences (cont)
 Loose
Fiscal & Tight Monetary Policy (Reaganomics,
Bush2-nomics 2d Term?)
– Hi real interest rates, lo investment, hi debt cost, inflow
of foreign capital, lower living standard, budget deficit
– Strong $, trade deficit worsens, protectionism, lower
inflation, decreased farm income/ financial crisis, costprice squeeze, devalued farm assets
 Tight Fiscal & Monetary Policy
– Hi interest rates, strong $, trade deficit worsens
– Reduced economic activity, decline in inflation, recession
(?), decline in off-farm employment, depression (?),
decline in loan access, decline in technology adoption
8
Macro Policy:
Alternatives & Consequences (cont)
 Moderate
–
–
–
–
–
Fiscal & Monetary Policy (Clintonomics)
Moderate real interest rates, increased investment, lo
unemployment, lower growth in debt costs
Lo inflow of foreign capital, moderate value of $,
trade deficit improves, decline in protectionism,
moderate inflation
Increase in technology transfer, national income
Decline in farms, increase in farm size, increase in
off-farm income
Uncertainty with global economy & structural change
9
Macro Policy:
Alternatives & Consequences (cont)
 Bush2-nomics?*
– Actions/impacts:
» Tax cuts
» Rapidly increasing budget deficit
» Large job loss, slight recovery; unemployment relatively
high
» Very low interest rates (first term Fed response to low
inflation)
» Trade deficit rising
» Global economy mixed
– Appears to be a “borrow and spend” politician
» Rising interest rates (2d term Fed response to inflation)
*Also, see slides at end of this presentation
10
Macroeconomic Situation: US (1993-1997)
1993
6568
GDP($b.)
PerCap
DispInc(92$) 18078
(96$)
Unemp (%)
7.4
LEI (92)
98.8
Bud bal($b.) -330
Trade bal($b.) -136
AgTrade($b.) 18
Hld inc(avg$) 41428
Farm hld inc
(% of US)
97
Farm %
12
1994
6955
1995 1996
7401 7638
18431 18861 19116
1997
8305
6.8
5.6
101.4 100.8
-225 -177
-175 -191
19
26
43133 44938
5.4
102
-151
-235
27
47123
19493
21838
4.9
103.9
-50
-242
21 (net)
49692
99
10
107
16
106
12
99
11
11
Macroeconomic Situation: US (1998-2002)
1998
8782
GDP($b.)
PerCap
DispInc(92$) 19963
(96$) 22800
Unemp (%)
4.7
LEI (96)
Bud bal($b.) 70
Trade bal($b.) -259
AgTrade($b.) 17
Hld inc(avg$)51855
Farm hld inc
(% of US)
115
Farm %
12
1999
9297
2000
9825
2001 2002
10082 10469
22671
4.2
108.8
124
-340
12
54842
23471
4.0
109.9
232
-473
11.8
57045
23602
4.7
109.5
268
-462
13.7
58208
117.3
9.9
108.6
4.2
110.2 113.7
8.6
5.3
24300
5.8
111
-157.8
-493
12.3 (net)
57852
12
Macroeconomic Situation: US (2003+)
(Current as of 2005)
2003
10971
2004
2005
1173412400
GDP($b.)
PerCap
DispInc(00$) 28065 29475
Unemp (%)
6.0
5.5
LEI (96)
113
116
Bud bal($b.) -374 -413
Trade bal($b.) -527 -686
AgTrade(net$b.) 10.5 9.7
Hhld inc(avg$) 59067 60528
Farm hld inc 116
(% of US)
Farm Inc
11.2
16.3
(% farm hhld income)
30,400
5.2
138
-331
-720
4.5
2006
2007
5.1
-314
-324
13.7
13
Macroeconomic Situation: World Economic Growth
(1993-97; Annual % change in real GDP)
Economy
1993
World (%)
1.5
Less US (%) 1.1
Developed less US
0.1
Transition
6.3
Developing
Asia
8
Latin Am. 4.3
Mideast
3.4
Africa
1
1994 1995
3.0
2.8
2.7
2.8
1996
3.5
3.4
1997
3.4
3.0
2.1
8.1
2.1
-1.3
2.8
-0.8
2.3
1.4
8.8
5.3
-0.3
3.2
8.3
1.4
4.4
2.9
7.4
3.7
4.7
5.2
5.8
5.2
4.4
2.8
14
Macroeconomic Situation: World Economic Growth
(1998-2004; Annual % change in real GDP)
Economy
1998 1999
World (%) 2.2
3.1
Less US (%)1.4
2.5
US
4.3
4.1
Developed less US
1.6
2.1
Transition -1.4 4.5
Developing
Asia
0.2
6.6
Latin Am. 2.0
0
Mideast 3.9 -0.9
Africa
3.1
3.1
2000
4.0
4.2
3.8
2001 2002
1.5 1.7
1.8 1.7
0.2 2.4
2003 2004 05
2.6 3.8 3.1
2.5 3.6 2.8
2.4 3.6
3.5
7.1
1.4
5.1
1.0
3.9
1.6
6.1
2.3
6.6
1.6
4.7
7.1 3.8 5.7
3.7 0.3 -0.9
5.7 -1.4 3.2
3.6 3.4 3.3
6.1
1.6
2.7
4.1
7.2
5.8
7.4
4.1
6.4
5.6
4.815
World Economic Growth, 1993-2006
(annual % change in real GDP)
10
8
6
World
less US
Developed less US
Transition
4
2
05
20
03
20
01
20
99
19
97
19
95
19
-2
19
93
0
16
World Economic Growth, 1993-2006
(annual % change in real GDP)
10
8
World
Asia
Latin America
Mideast
Africa
6
4
2
05
20
03
20
01
20
99
19
97
19
95
19
-2
19
93
0
17
Federal Funds Rate
July 1990-Nov 2005
9
8
7
6
5
4
3
2
1
0
Fed Funds Rate (%)
1-Nov
Mar 22
Aug10 04
1-Oct-01
1-Apr
Mar-00
Nov-98
Dec-95
May-94
Jul-92
Sep-91
Jan-91
Jul-90
4.00% (highest
since May 01)
Note: Discount Rate
is typically ½ %
lower than Fed
Funds Rate
Fed Funds Rate: rate charged by Reserve Bank for borrowing immediately available funds, primarily for
1 day;
Discount Rate: rate charged for credit to depository institutions, including 90-day commercial paper
18
Another Trend: Increasing Foreign
Ownership of US Debt
 Early
1990s: 20%
 Mid-90s: 35%
 Current (2005): 52% (share & actual $
highest ever
 Major holders
– Foreign banks
– Japan
– China
19
SUMMARY
 Economic
goals change over time
– Stresses importance of risk management & strategic
planning
 Macroeconomic policy matters to agriculture
 Success in the 1990s resulted from
– Federal Reserve decisions
– Clinton-GOP Congress decisions
– World economy improving
– State & private response to macroeconomic
environment
– Trade agreements
20
SUMMARY
--Recent US Economic Status
 Clinton
years(1993-2000)
– Longest sustained economic growth in US
history
– Highest job creation in US history
– First balanced federal budget in decades
– Mixed/cyclical for agriculture
21
SUMMARY
--Recent US Economic Status
Bush 1st Term [2001-03 Recession; (2001-02)Malaise (2002-03)]
– 2.5-3 million jobs lost (more than any previous
President)
– Projected federal budget deficits highest ever
– State economies in poor shape (Service cuts? Tax
break cuts? Tax increases?)
– Farm economy (market) generally down(Cattle
market up)
– Jobless recovery economy (unemployment 6-10%)
– Outsourcing of jobs increasing
 GW
22
Summary
--Recent US EconomicStatus (continued)
 Reasons
–
–
–
–
–
–
for GW Bush 1st term economic slump?
Bush tax cuts
Cyclical downturns
9/11 & “terror hangover”
Fed overly cautious in 2000 w/r/t inflation
Federal spending continues relatively high
Corporate scandals
 Dissenters
claim conservative agenda to create crisis
to force drastic changes in federal social spending
over next 10 years
23
SUMMARY
--Economy not responding as expected


Either not responding as expected, or could be in worse shape
– Fed’s loose policy of low interest rates should have spurred
economic growth sooner, more broad-based
– Federal spending should have spurred economic growth; slow
start in 2004, finally picks up in 2005
– Federal tax cuts should have spurred economic growth sooner
The reason may be structural in nature
– Economy is improving for some sectors, not for others
– Economy is improving/continuing to reward those with
wealth base
24
SUMMARY
(continued)


Outlook unstable (but may be manageable at macro and micro level)
– Jobless recovery turned around with more jobs, lower
unemployment in 2005
– Fed interest rates on rise; not likely to stop until mid-to-late 2006
– Oil prices uncertain, but higher in short term than 2004
– Mideast strife, Wars on terrorism & Iraq
– Trade agreement uncertainty
NOTE:
– AS INSTABILITY IN AGRICULTURAL MARKETS
INCREASES, AGRICULTURAL VULNERNABILITY TO
MACROECONOMIC FORCES WILL INCREASE, LIKELY
INCREASING INSTABILITY & NEED FOR MANAGEMENT
SKILLS & RISK MANAGEMENT
25
Long Waves in Economic Activity
(40-60 year cycle)
TROUGH
1785-90
1845
1895
1933
2001?
PEAK
1815
1850s
1873
DEPRESSION
1842-49
(1858)
1873-1879;
1892-97
1914-19
(1920);
1929-39
1969
(1982)*
Between 2009-2029
Between 2022-2042
NOTES: (*) Decline more a recession than depression.
(?) May be cyclical activity rather than long waves
26
Long Wave Economic Activity
6
5
4
3
Economic Index
2
1
17
85
18
45
18
60
18
75
18
95
19
33
20
01
20
32
*
0
27
“Just the facts ma’m, just the facts.”
Jack Webb, Dragnet
“Liars can figure
but figures don’t
lie.”
Ronald Reagan
28
Additional Budget Outlook Information
http://www.senate.gov/~budget/democratic/ch
arts_econoutlook.html
http://www.senate.gov/~budget/democratic/pr
ess/2001/rev_bdgtoutlook100401.pdf
http://www.senate.gov/~budget/democratic/pr
ess/2002/cbofactsheet082702.pdf
http://www.economicindicators.gov
Also: recent federal data
29
Agricultural Programs in a Time of
Budget Concerns
The following slides (3141) are excerpted from
presentation by Craig
Jagger, Chief
Economist, US House
Ag Committee, Sep
05, for National Public
Policy Education
Conference.
30
31
32
33
34
Budget Reconciliation
Sharing the Pain of Cutting Federal Spending on
Mandatory Programs to Reduce the Deficit.
•
Budget Reconciliation: Instructions in the Congressional
Budget Resolution to authorizing committees to draft changes
to existing laws to achieve specified reductions in “mandatory
spending.”
•
Mandatory Programs for Agriculture
• Under the jurisdiction of the House Ag Committee
• Typically multi-year programs such as under the farm bill
• Food stamps, commodity program, and conservation
program funding are major mandatory spending categories.
• All multi-year mandatory funding is provided up front
when the farm bill or other House Ag Committee bill is
passed.
35
Budget Reconciliation
& Discretionary Spending (Appropriations)
•
Discretionary Spending (Appropriations) for Agriculture
• Under the jurisdiction of the House Appropriations Committee
and the Agricultural Appropriations Subcommittee
• Programs and funding are reviewed every year.
• Agency salaries and expenses and research funding are major
discretionary spending categories.
• Funding typically is provided one year at a time in an annual
appropriations bill.
•
The Budget Resolution specifies a maximum level for
appropriations that may be lower than in prior years but cutting
discretionary spending is done outside of reconciliation in regular
appropriations bills.
36
Budget Reconciliation (Continued)
•
Cuts are made from baseline spending—CBO’s projections (with any Budget
Committee Adjustments) of mandatory spending over the next 10 years under the
assumption that current laws continue.
•
Only reduced spending caused by legislated changes are credited—No credit is
given for lower than expected costs from changes in market conditions or USDA
implementation decisions different than expected.
•
Cuts can come from any program under the jurisdiction of the Ag Committees:
commodity, conservation, crop insurance, trade, rural development, research,
foods stamps, or forestry.
•
The 10-year mandatory baseline for programs under the jurisdiction of the House
Ag Committee is about $540 billion.
37
Are We Having Fun Yet?
•
Proposed cuts may lead to interest group wars. Every program has a
constituency.
•
Policy changes that save money may be viewed as more attractive
than they otherwise would be.
•
Can lead to “bad” policy if policies are designed to capture quirks in
CBO baselines or estimating assumptions.
•
Programs with perceived problems could be viewed as likely
candidates for cutting.
•
Cost trade-offs and savings opportunities can be heavily dependent on
CBO Baselines and Scoring.
38
Under CBO’s Current Sept., 2004 Baseline, Food Stamps Are Over
Half of the Costs of Programs Under the Jurisdiction of the House
Agriculture Committee
House Agriculture Committee Jurisdiction
CBO 10-Year Projections: FY 05-14 Budget Authority
CBO Sep 04 Baseline
Food Stamps
$294.2
CCC Commodity Prog
$128.9
Farmer Conservation
$48.5
Crop Insurance
$37.1
Other Nutrition
$8.0
Rsch & Inspect.
$7.5
CCC Other (Exc Conserv.)
$7.2
CCC Export Prog & Guar
$5.8
Forest Serv
$2.3
Transportation
$0.6
Comm & Rural Dev $0.5
0
50
100
150
200
250
300
350
$ Billion
39
CHIMPS
Mandatory Program Cuts Taken
by the Appropriators
•
•
•
•
Appropriations cuts in mandatory programs are called
CHIMPS: Changes In Mandatory Programs.
It is against the House Rules to “legislate on
appropriations bills.” But appropriators indirectly do so
by, for example, limiting salaries and expenses to carry
out a conservation program of greater than $xxx million.
CHIMPS represent a one-way street—Appropriators can
cut Ag Committee mandatory farm bill programs but Ag
Committee can’t cut their discretionary programs.
For FY 04 Ag CHIMPS were 31% of total CHIMPS. Ag
Appropriations are 2% of total appropriations.
Since FY 2002, $3.1 billion has been taken from House
Ag Committee programs.
40
Consequences of CHIMPS
•
Producers don’t get full benefits intended when the
farm bill was passed and that the Ag Committees paid
for.
•
Upsets the delicate balances and compromises that
were struck during negotiations on the 2002 farm bill.
•
May set up a potential fight between Ag Committees
seeking reconciliation cuts and Appropriators who
have come to depend on limiting our programs to
make their ever tightening budget targets.
41
Budget Reconciliation Update (5 Nov 05)
House Ag C.
Senate Ag C.
2006
2006-2010
(----------$bil.------------)
-.617
-3.7
-.196
-3.014
Note: Senate has passed Reconciliation bill
42