Transcript Understanding our Economy and Our Current Government Policies

Understanding Our Economy and
Our Current Government Policies
Oral Capps, Jr.
Executive Professor and Regents Professor
Texas A&M University
March 4, 2013
Email: [email protected]
Things should be made as simple
as possible, but not any simpler.
---- Albert Einstein
Overview
• Gross Domestic Product
• Measurement
• Key Points
• Components
• Understanding Determinants of Private Sector
Components of GDP (Consumers, Business)
• Interest Rates
• Taxes
• Monetary Policy
• Fiscal Policy
Overview
•
•
•
•
Deficit/Surplus/Balanced Budget
Public Debt
Fiscal Policy Tools
Recent Situation
•
•
•
•
2007-2009 Financial Crisis
Dodd-Frank Act
Quantitative Easing
Passage of Obama Care
• Where Should We Go from Here?
Gross Domestic Product
Definition
A measure of the total amount of goods and services
produced by the economy during a particular period of time.
Simon Kuznets – National Income Accounts – Department of
Commerce – first made estimates in 1932.
Gross Domestic Product
Measurement
Money – a common denominator ; add up
the value of money in terms of the total
output of goods and services during a
certain time period, normally a year.
Gross DomesticGDP
Product (GDP)
16,000
14,000
Billion Dollars ($)
12,000
10,000
8,000
6,000
4,000
2,000
0
50
55
60
65
70
75
80
85
90
Year
GDP at the beginning of 2013 was $15.8 Trillion
95
00
05
10
Gross Domestic Product
Key Points
1. GDP only includes the value of final goods and services
produced.
2. Some final goods and services included in GDP are not
bought in the market place, so they are valued at what they
cost.
3. Some non-marketed goods and services are excluded from
GDP.
4. Purely financial transactions are excluded from GDP.
5. Sale of second-hand goods are excluded from GDP.
6. Illegal activities are excluded from GDP.
YTOY_CHANGE_GDP
Year to Year Change
in GDP
10
8
6
4
Percent (%)
2
0
-2
-4
-6
55
60
65
70
75
80
85
Year
90
95
00
05
10
GDP Components
a)
b)
c)
d)
Personal Consumption Expenditure (C)
Gross Private Domestic Investment (I)
Government Expenditure (G)
Net Exports (NE) = Exports – Imports
GDP = C + I + G + NE
Work of John Maynard Keynes – Represents the
Aggregate Demand for any Economy
Components of GDP, 1947 to 2012
PCE
GPDI
10,000
2,000
Billion Dollars ($)
2,400
Billion Dollars ($)
12,000
8,000
6,000
4,000
2,000
0
1,600
1,200
800
400
0
50 55 60 65 70 75 80 85 90 95 00 05 10
50 55 60 65 70 75 80 85 90 95 00 05 10
Year
Year
GOVT_EXP
NET_EXPORTS
200
Billion Dollars ($)
Billion Dollars ($)
4,000
3,000
2,000
1,000
0
-200
-400
-600
-800
0
-1,000
50 55 60 65 70 75 80 85 90 95 00 05 10
Year
50 55 60 65 70 75 80 85 90 95 00 05 10
Year
Share of GDP by Component, 1947 to 2012
80
70
60
50
Percent (%)
40
30
20
10
0
-10
50
55
60
65
70
75
80
85
GOVT_EXP_SHARE
NET_EXPORTS_SHARE
90
95
00
05
10
GPDI_SHARE
PCE_SHARE
Year
Average over the period: PCE – 65%; GDPI – 16%; GOVTEXP – 20%; NETEXPORTS – 1% (negative)
Understanding Determinants of
Personal Consumption Expenditures
and Gross Private Domestic
Investment
Drivers of Personal Consumption
Expenditures
• Changes in the level of disposable personal
income (the Keynesian consumption function);
disposable personal income (DPI) is income after
taxes
• Increase/decrease in wealth of nation’s
household sector
• Interest rates
Drivers of Gross Private
Domestic Investment
Profit expectations
Interest rates
Technological change
Taxes
Keys to making changes to GDP –
interest rates and taxes
Key Question: How do we affect interest
rates and taxes?
Monetary Policy Actions by the
Federal Reserve System
(The “Fed”)
Changes in the money supply
bring about changes in interest
rates
Consequences of FED
Actions
• Contractionary monetary policies that drive up interest rates
will depress personal consumption expenditures and
investment expenditures by businesses and households
• Expansionary monetary policies that lower interest rates will
stimulate personal consumption and investment expenditures
Fiscal Policy
Taxation by federal, state
and local governments
Government spending by
federal state and local
governments
Budget deficit and the
public debt
Requires explicit actions by
the President or Congress
Consider the Difference Between
Government Expenditures (G) and
Tax Revenues (T):
T–G
T – G < 0 → Deficit
T – G > 0 → Surplus
T – G = 0 → Balanced Budget
Deficit
DEFICIT
400,000
Million Dollars ($)
0
-400,000
-800,000
-1,200,000
-1,600,000
30 35 40 45 50 55 60 65 70 75 80 85 90 95 00 05 10
Year
• Record high deficits during the Obama Administration
• 1998-2001 surplus years in recent times
“There are 1011 stars in the galaxy. That
used to be a huge number. But it’s only a
hundred billion. It’s much less than the
national deficit. We used to call them
astronomical numbers. Now we should call
them economical numbers.”
- Richard Feynman
Debt and the Deficit
Public debtT = Public debtT-1 + DeficitT
Total Public Debt, 1966-2012
PUBLIC_DEBT
20,000,000
Million Dollars ($)
16,000,000
12,000,000
8,000,000
4,000,000
0
1970
1975
1980
1985
1990
1995
2000
2005
2010
Year
Public debt currently $16.6 trillion as of 2-27-2013.
Total Public Debt on a Per Capita
Basis, 1966-2012
PUBLIC_DEBT_PC
60,000
50,000
Dollars ($)
40,000
30,000
20,000
10,000
0
1970
1975
1980
1985
1990
1995
2000
2005
Year
Debt per person as of 2-27-2013 was $52,632.
2010
Fiscal Policy Tools
Expansionary actions:
Cut taxes
Increase government spending
Effects of action:
Increase disposable income
Increase aggregate demand
Contractionary actions:
Increase taxes
Cut government spending
Effects of action:
Decrease disposable income
Decrease aggregate demand
Congress & Obama
A federal budget deficit requires
the U.S. Treasury to issue more
government securities to balance
sources and uses of funds…
An increase in the sale of
government securities
reduces the pool of private
capital available to finance
investment expenditures,
raising interest rates…
Higher interest
rates depresses gross private
domestic investment
and personal consumption
expenditures
Recent Situations:
2007-2009 Financial Crisis
Dodd-Frank Act
Quantitative Easing
Passage of Obama Care
The 2007-2009 Financial Crisis
• Subprime Mortgages, Housing Bubble
• Between $10-20 trillion in costs:
• Lost output, reduced wealth, extended unemployment, and
extraordinary government intervention programs
• Crippled confidence, lost opportunities, increased uncertainty
• Adverse impacts will likely endure for a long time
• Reduced capacity to respond to the next crisis
Insurance “is a system whereby a person who can’t pay, gets
another person who can’t pay, to guarantee that he can pay.”
- Charles Dickens, Little Dorritt
Dodd-Frank Act
• Signed into law July 21, 2010; brought about significant change
to financial regulation in the U.S.
• Long on process, short of results
• Has not been simplified and codified quickly
• 849 pages; 8,800 pages of
regulations; approx. 1/3
finalized!
• DFA contributes complexity
and confusion to regulatory
discipline; increases
economic uncertainty
Quantitative Easing
• The Fed has cut interest rates as far as they can go and the
economy is still struggling
• Done by the Fed three times:
• QE I – November 2008
• QE II – August 2010
• QE III – September 2012
• Unconventional monetary public tool used by the FED to
stimulate the economy
• Buy up assets like long-term treasuries or mortgage-backed
securities from commercial banks and other institutions, which
drive long-term interest rates down
• Provides consumers/investors incentives to increase
expenditures, thereby stimulating GDP (in theory)
Passage of Obama Care
• Creation of additional
uncertainty
• Increases in costs of
medical care
• Interference with the
private sector
Commonalities
• Government Intervention – Socialism (Increase
in Taxes; Increase in Government Expenditures)
• Redistribution of Wealth, Movement to
Egalitarianism
• Sizeable Increase in Uncertainty
• Slow Economic Growth
Where Should We Go from
Here?
(A Normative Question)
“The budget should be balanced, the treasury should be
refilled, public debt should be reduced, the arrogance of
officialdom should be tempered and controlled, and the
assistance to foreign lands should be curtailed lest
bankruptcy occurs. People must again learn to work, instead
of living on public assistance.”
-- Cicero, 55 B.C.
Policies to Promote Growth
• Lower Corporate Tax Rates
• House Ways and Means Committee Chairman Dave Camp, (R-MI)
would lower the top corporate tax rate to 25%.
• America’s corporate tax rates are the highest in the industrial
world, which has an average corporate rate of 23%.
• Canada, our largest trading partner, has a 15% rate, as does
Germany.
• Make it easier for foreigners who want to work, the highly skilled
and those with modest skills, to come to America legally
Policies to Promote Growth
• Reduce the regulatory burden
• 2013 will see a deluge of new regulations, ranging from
EPA standards for hydraulic fracturing to new DoddFrank Act regulations
• We must pass something akin to Representative Lamar
Smith’s Regulatory Accountability Act of 2011 to make
agencies demonstrate that regulations are cost effective
• Institute the Fair Tax
• Balance the Budget – Gramm (TX), Hollings (SC),
Rudman (NH)
The Bottom Line
“We need to stimulate production and savings. Everything the
government is doing is going to suppress that.”
Peter Schiff, CEO of Euro Pacific Capital, Inc.
Outspoken opponent to Keynes and Bernanke
• Create incentives to work, to save, and to invest – Reagan
Playbook (supply-side economics)
• Public debt, both marketable debt and promises to citizens, crowds
out capital investment.
• The almost unprecedented increase in the ability of the population
to move resources to the future using debt rather than capital could
result in a significant reduction in the rate of economic growth in
the coming decades
• Need to balance the budget
• Seriously explore the institution of the Fair Tax
“Capitalism is the only system that can make freedom,
individuality, and the pursuit of values possible in practice.”
Ayn Rand, The Romantic Manifesto
“When the people find they can vote themselves money, that
will herald the end of the republic.”
Benjamin Franklin
Reading Assignments
• What Everyone Should Know About Economics and Prosperity –
James Gwartney and Richard Stroup (119 pages)
• Economics in One Lesson – Henry Hazlitt (218 pages)
• The Fatal Conceit – Friedrich Hayak (180 pages)
• How an Economy Grows and Why it Crashes – Peter Schiff