GHSGT Review Economics. Unit 1 – Fundamental Concepts of Economics.
Economics on Main Street: Concepts for American Voters May 2012.
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Transcript of Economics on Main Street: Concepts for American Voters May 2012.
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Economics on Main Street:Concepts for American Voters
May 2012
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Policy Responses to Downturn
• scale of economic challengehousing market & financial markets meltdown
in 2008, household asset losses of $13 Trillion (90% of GDP)
2009, $1.4 Trillion decline in consumer-business spending
• review of policy responsesfinancial crisis: Troubled Asset Relief Program (TARP), FRB
recession: 2008 Stimulus, automatic stabilizers, American Recovery & Renewal Act (ARRA), American Jobs Act (AJA)
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• 2008 Stimulus (Outflow -$100B)tax refunds received Spring and Summer of 2008 (70% spending)
• TARP (Outflow -$602B, Balance -$214B)Fannie & Freddie (bulk of remaining balance), Large Banks and hundreds of Small Banks (repayments plus interest), AIG and Toxic Assets ($80B out, $40B in), Auto Firms ($80B out, $40B in)
• FRB (“lender of last resort”, Balance +$125B)loans at premium rates: Large Banks (domestic & international), thousands of Small Banks, Central Banks (Can, Jpn, Europe).
timely intervention in Commercial Paper Market: short term cash flow for hundreds of U.S. Businesses (including CAT).
peak FRB lending: $1.5 Trillion (December 2008).
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• automatic stabilizers (Outflow: -$1.3 Trillion)reduced revenue flows (income tax, corporate tax, capital gains, etc.)
increased “main street” spending (unemployment insurance, food stamps, etc.)
• ARRA (Spring 2009, Outflow: -$756B)(39%) tax breaks: individuals ($183B), payroll ($105B), business ($34B)
(31%) contracts-grants-loans: education ($90B), trans-infra ($62B), eng-env ($25B)
(30%) income support: medicaid & medicare ($91B), ui-exp ($61B), family ($40B)
• AJA (Fall 2011, Outflow -$447B, failed in Congress)(55%) tax breaks: individuals ($175B), payroll ($65B), business ($5B)
(31%) c-g-l: trans-infra ($90B), state-local-govt ($35B), neighborhoods ($15B)
(14%) income support: ui-reemployment ($62B)
• government employment (April 2007-2012)overall decline of 164,000 . . . . local education decline of 105,000
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Public Goods &Sustainable Social Contracts
Economics of Public Goods
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Economics of Public Goods• why are some goods and services reasonable
candidates for public sector provision?nonrivaluse by one does not diminish availability to others.(defense & police, flood control, radio broadcast)non-excludableimpossible or very costly to prevent sharing of benefits.(defense & police, flood control, wilderness & parks)
• minimal role of government?(defense & police, law & courts, disaster prevention,basic infrastructure (water, sewage, bridges, roads))
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Economics of Public Goods• consumer demand for some goods & services
expands with income so much that share grows(vacation travel, eating out, household appliances)
• societal demand for public provision often follows a similar pattern(fire prevention, transport network, wilderness & parks)
• additional market failure arguments(public invest (education, infrastructure, research),regulation (food safety, environment, financial markets),equity & stabilization (safety net, insurance, stimulus))
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Public Goods &Sustainable Social Contracts
Deficit & Debt Concerns
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GovernmentShare of GDP
Taxes asShare of GDP
GDPper Capita
Denmark-Sweden-France 52% 47% $33,000
Canada-Germany-Japan 39% 33% $33,000
U.S. 37% 28% $44,000
Turkey-Mexico-South Korea 28% 26% $17,000
Guatemala-Uganda-Bangladesh 17% 14% $1,900
Source: OECD (2007), CIA Factbook (2011)
Spending & Taxes in Context
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Running a Deficit• if we spend like Canada and tax like Mexico . . .
(current debate regarding extent of public sector)(starving the beast, or simply not paying our bills)
• what’s wrong with running a deficit?(monetary & inflation, borrowing & interest rates)(debt, must pay out of future (or past) GDP)
• when does it make sense to run deficit?(beneficial effects when in deep recession)(public investments in growth at low interest rates)
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TARP & FRB Actions
Obama Health Reform
Bush Med Drug Ben
Obama DDS
Obama Tax Cuts
Bush DDS
Stimulus Spending
Automatic Stabilization
Iraq & Afghanistan
Bush Tax Cuts
0 200 400 600 800 1000 1200 1400 1600
Contribution of Recent Policy Choices (2002-2012)
$ Billion
Current U.S. Debt: $14.3 Trillion (about 50% from earlier periods)
Sources: New York Times, Department of the Treasury, Congressional Budget Office
What is a responsible limit on personal debt (home mortgage)?
1947 - 120% of GDPcurrent - 100% of GDP
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Long Term Concerns• if we spend like Canada and tax like Mexico . . .
(accumulating costs from political stalemate)
• health care costs(medicare (& medicaid) growing share of budget)(part demographics, but must solve cost increases)
• state & local – unsustainable commitments(medicaid growing share of state budgets)(state & local pension puzzles)
• supporting recovery in short term
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You Tackle the Deficit• NY Times exercise based on budget choices.– David Leonhardt, CBO scoring, Fall 2010.– You have 33 options, impact in 2015 & 2030.– You can eliminate deficit with 8 to 12 picks.
• Making your selections– No restrictions on your preferences.– Visit all categories (spending, taxes)– Turn in selection sheet.
• Review of top choices
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Concluding Thoughts
• challenges aheadinvesting in economic growth as priority
balanced approach to markets & regulation
inequality and joblessness as societal concerns
deficits & debt as manageable concerns
• an absolute pleasureyou have been an outstanding class of learners
raise your hand, pat your back, job well done
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Thank You!
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Economics on Main Street:Concepts for American Voters
May 2012