Transcript Economy Policy - Birmingham Public Schools

Party Politics
 The Democrats are usually worried about
unemployment
 Job Creation
 Infrastructure
 Republicans are usually worried about deficit spending
and high taxes
 Free markets
Various Economic Theories
• Monetary Policy —the Chicago School—Milton
Friedman—Free market Capitalism!
• Book Free to Choose was a best seller in the 1970’s and
became a PBS T.V. series
• http://www.youtube.com/watch?v=KKbHA76-Hi0
• Inflation: Too much money chasing too few goods
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•
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It devalues currency
Makes business planning difficult
Makes saving irrational
 Solution
 Control the money supply—see p. 500 and the Federal
Reserve System
 Some interesting Friedman clips:
 http://www.youtube.com/watch?v=RWsx1X8PV_A&feat
ure=related
 Hippies v. Friedman
Fiscal Policy of Keynesianism
– Economic growth is main concern
•
A balance between savings and spending
– Too much spending can lead to inflation
– Too little spending/too much saving can lead to recession
– In the absence consumer spending the government
should spend
– When inflation occurs government should raise taxes
– Important point: don’t worry about deficits—
the economy will grow out of it
An additional comment:
“animal spirits”
 Even apart from the instability due to speculation,
there is the instability due to the characteristic of
human nature , that a large proportion of our positive
activities depend on spontaneous optimism rather
than mathematical expectations . . . Most. . . of our
decisions to do something positive . . . can only be
taken as the result of animal spirits – a spontaneous
urge to action rather than inaction, and not as the
outcome of a weighted average of quantitative benefits
multiplied by quantitative probabilities
 Economic Planning—John Kenneth Galbraith
 Need for an industrial policy
 Forces of competition are too weak
 Markets alone cannot manage the economy
 Solution:
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A national policy of government investment in infrastructure
and social goods
Wage and price controls to control inflation if necessary
(yes, he was a socialist)
Galbraith lived to be 98 years old. He died in 2006
Galbraith’s Influence
 Galbraith worked as a speech writer for United States
Presidents Franklin D. Roosevelt John F. Kennedy and
Lyndon B. Johnson as well as presidential candidates
Adlai Stevenson, Robert Kennedy, and George
McGovern.
• Galbraith’s book, "The Affluent Society" appeared in
1958, making Mr. Galbraith known around the world.
In it, he depicted a consumer culture gone wild, rich in
goods but poor in the social services that make for
community. He argued that America had become so
obsessed with overproducing consumer goods that it
had increased the perils of both inflation and
recession by creating an artificial demand for frivolous
or useless products, by encouraging overextension of
consumer credit and by emphasizing the private sector
at the expense of the public sector.
Friedman in the middle—Galbraith on the right—
he was 6’ 8” tall—George Stigler on left
SEE the
Map of the Federal Reserve !!!
In Your text:
It is the Monetary System
The FRS DISTRIBUTES, through the
banks, the money for our economy
Forbes Magazine: The World’s Most Powerful People
#7 Janet Yellen
Chair, Federal Reserve, Washington, United States
Age
Residence
Citizenship
Marital Status
Children
Education
69
Washington, DC
United States
Married
1
Bachelor of Arts / Science, Brown University; Doctorate, Yale University
Janet Yellen on Forbes Lists
#7 Powerful People (2015) #6 in
2014
#4 Power Women (2015)
Janet Yellen made history in 2014 when she became the first female head of the Federal
Reserve. The Yale and Brown educated economist has barely had a moments rest since
then: She took over shortly after the central bank began unwinding its recession era
bond buying program and then deftly ushered markets through six cuts that brought
monthly purchases to $0 from a peak of $85 billion. The Fed started to loosen the
economic reigns further by beginning to hike interest rates in Jan 2016 -- a feat that was
anticipated earlier, but hasn't attempted since 2004. With so much at stake a single
word from Yellen can send asset prices swinging
Supply Side Economics
 Arthur Laffer 1980’s—big influence on Ronald
Reagan’s economic advisors
 Lower marginal tax rates would result in higher tax
revenues
 See handout—the
policy did not work.
At 100% tax rate people won’t work therefore no
income to tax and no revenue going to government
Pareto optimal
tax rate
resulting in the
highest revenue
and most
productive
economy
At 0% tax rate, there is no revenue going to
government
Reaganomics
Reaganomics
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•
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Cut taxes—especially on upper incomes
Reduce domestic spending
Increase military spending
Trickle Down Economics—Supply Side Economics
What happened?
– Some stimulation to the economy
– Oil prices decreased—an increase in production/imports
– An increase in income inequality
– National debt increased to 12.2% of the GDP
– (under Clinton national debt was -9.8% of GDP—a projected
surplus)
– Reagan raised taxes several times
The Budget
 Main issues
 How much revenue do we want to raise?
 How much spending and on what priorities?
 Entitlements make up 2/3rds of the budget
 Can only be reduced by an act of Congress
 Many constituents for each entitlement program makes
this difficult
Self Check #1:
1) What are the peaks and troughs
of the natural economic cycle, and
WHAT DOES A SMART FISCAL
POLICY RECOMMEND AT THESE
TIMES?
Self-Check#2:
a) What is the Budget PROCESS,
and
b) Explain the difference in
mandatory and discretionary
spending.
From your text book AND the chart on next
slide.
See p. 507
 What is the tax burden on Americans relative to other
industrial democracies?
 Read pp. 507—509 in your textbook: “The Rise of the
Income” Tax
 Look To the Summary: pages 509 + 510.
Which programs are the two
largest segments of spending in
the BLUE region?
Which component is the largest
spending in the ORANGE
region?
Does this pie graph represent
the FY deficit, 2016?
Review:
1. What are Entitlements?
2. How do I figure a rough estimate of the deficit from the charts?
3. Bonus: From the charts, is there a positive or negative FY
contribution to the Social Security Trust Fund?
CBO Budget Graphic 2015