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econ policy

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  1. 1. Economic Policy
  2. 2. Laissez-Faire •  Prevailing  a+tude  prior  to  the  Great   Depression   •  Absence  of  government  control  -­‐  economy   must  be  le<  alone  to  flourish   •  Market-­‐based  compe@@on  will  deliver  good   for  the  greatest  amount  of  people    
  3. 3. Great Depression •  In 1929, the stock market crashed and ushered in the Great Depression •  The worst and longest economic collapse in the history of the industrialized world •  By 1933, more than 15 million Americans - ¼ of the nation’s workforce - were unemployed  
  4. 4. John Maynard Keynes •  A British economist who argued that gov't spending had to increase •  More money in people's pockets would increase aggregate demand (total amount of spending in an economy) •  As people spent more, more goods and services would be produced, creating new jobs
  5. 5. Interventionism •  A  policy  that   encourages  the   government  to   take  an  ac@ve   role  in  guiding   and  managing   the  economy   •  The  New  Deal  is  a  classic  example  –government   began  to  regulate  private  businesses,  provide   Social  Security,  and  spend  money  to  create  jobs    
  6. 6. Reaganomics •  Reagan  claimed  that  economic                                 stability  can  be  assured  not  by                   increasing  demand,  but  by                     increasing  aggregate  supply                                     (total  amount  of  goods  and                 services  available  in  an  economy)   •  More  produc@on  means  more  jobs,  which   happens  when  government  stays  out  of   business’s  way  (fewer  taxes/regula@ons)   •  Massive  tax  cuts  of  the  1980s,  especially  for  the   wealthy,  are  known  as  “trickle-­‐down  economics”  
  7. 7. The Kansas Experiment Kansas  put  “trickle-­‐down”  into  effect  in  2012.     How  did  it  work  out?    
  8. 8. Economic Stability •  Economic  Stability:  a  situa@on  in  which  there  is   economic  growth,  rising  na@onal  income,  high   employment,  and  steadiness  in  the  general  level  of   prices   •  Economic  Instability:     – Infla@on:  a  rise  in  the  general  price                                 levels  of  an  economy    OR   – Recession:  a  short-­‐term  decline  in  the  economy  that   occurs  as  investment  sags,  produc@on  falls  off  and   unemployment  increases  
  9. 9. Monetary Policy •  Used  by  Federal  Reserve  Board  (“Fed”)  -­‐  central   bank  of  the  U.S.   •  Monetary  Policy  involves  changes  in:     – interest  rates  (amount  paid  to  borrow  money)     – and  money  supply  (the  amount  of  dollars  circula@ng  in   the  economy)   – In  general:   •  Lowering  interest  rates  and  increasing  the  money   supply  will  increase  aggregate  demand  (to  expand   economy)   •  Raising  interest  rates  and  decreasing  the  money   supply  will  decrease  aggregate  demand  (to  contract   economy)  
  10. 10. Fiscal Policy •  Used  by  Congress  and  the  President   •  Fiscal  policy  involves  changes  in  taxing  and   spending     •  In  general:   – Lowering  taxes  and  increasing                     government  spending  should                         increase  aggregate  demand                                       (to  expand  economy)   – Raising  taxes  and  decreasing  government  spending   should  decrease  aggregate  demand  (to  contract   economy)  
  11. 11. American Recovery and Reinvestment Act of 2009 Immediately  a<er  taking  office,  because  of  the   Great  Recession,  President  Obama  pushed  through   Congress  a  s@mulus  package  –  $831  billion  of  direct   spending  on  infrastructure,  educa@on,  health,                    energy,  federal  tax                    incen@ves  and  expansion                    of  unemployment  benefits                    to  get  people  spending                    again.                      How  well  did  it  work?  
  12. 12. Federal Budget - Revenues •  Federal  government:   – individual  income  taxes  and  Social  Security  taxes   make  up  over  80%  of  revenue   – corporate  income  taxes   – capital  gains  taxes  –  on  investments   – tariffs  –  on  imports   •  State  and  Local  Governments:   – raise  about  85%  of  their  funds  from  sales  taxes,   property  taxes  and  individual  income  taxes    
  13. 13. Taxes •  Propor@onal  Tax  (Flat  Tax):   – Takes  same  percentage  of                     income  or  wealth  from  all                         taxpayers  (EX)  everyone  pays  12%)   •  Progressive  Tax:   – Those  with  higher  incomes  or  those  who  are  wealthier   pay  a  higher  propor@on  of  their  income  in  taxes                     (EX)  middle  class  pays  20%  and  wealthy  pay  30%)   •  Regressive  Tax:   – Poor  people  pay  a  higher  propor@on  of  their  income  in   taxes  than  those  with  higher  incomes  or  those  who  are   wealthier  (EX)  sales  tax)  
  14. 14. Federal Budget - Expenditures •  Mandatory  spending:   – Certain  programs  that  must  be  funded  by  law   (Congress  has  no  choice  unless  they  change  the  law)   – Most  of  it  involves  en@tlement  programs  (Social   Security,  Medicare/Medicaid)  and  interest  on  the   na@onal  debt   •  Discre@onary  spending:   – Programs  Congress  can  choose  to  fund  every  year   – Majority  of  this  goes  to  Defense  
  15. 15. Consequences •  Because  more  spending  and  tax  cuts  are  needed   during  a  recession,  the  government  engages  in   deficit  spending  –  spending  more  than  it  takes  in.   •  Deficit  spending  forces  government  to  borrow,   which  leads  to  debt  -­‐  the  U.S.  owing  money.     Currently,  the  combined  public  debt  of  the  U.S.  is   nearly  $20  trillion.   EX)  Reaganomics  did  grow  the  economy,   but  his  tax  cuts  and  huge  military  spending   produced  largest  budget  deficits  ever.    The   na@onal  debt  tripled  during  the  1980s.  

econ policy

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