Economy and politics
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Economy and Politics. Are you better off now than you were four years ago Economy performing poorly, presidents lose 1960 Nixon, Carter 1980, Bush in 1992 Economy performing well, presidents win LBJ 1964, Nixon 1972, Reagan 1984, Clinton 1996 Important for Congress and Realignment.

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Economy and Politics

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Economy and politics

Economy and Politics

  • Are you better off now than you were four years ago

  • Economy performing poorly, presidents lose

    • 1960 Nixon, Carter 1980, Bush in 1992

  • Economy performing well, presidents win

    • LBJ 1964, Nixon 1972, Reagan 1984, Clinton 1996

  • Important for Congress and Realignment


Macroeconomic policy

Macroeconomic Policy

  • Fiscal- change tax and spending policy

  • Monetary- change money supply

  • Microeconomic policy

    • Education, labor, technology, transportation, subsidies to industry etc


Fiscal policy

Fiscal Policy

  • Keynes- govt can fine tune the economy

  • Recession- Government run deficits, stimulate demand

  • Prosperity- run surpluses, cool economy, prevent inflation

  • JFK/LBJ tax cut and 1960s boom


Limits of fiscal policy

Limits of Fiscal Policy

  • Political Limitations

    • love the gas; hate the breaks

    • slow response time

  • Economic Limitations-

    • is economy growing or receding?

  • Erosion of Fiscal Flexibility

    • The sticky pedal

    • Anti- tax movement

  • Budget on Autopilot


Monetarism

MONETARISM

  • #1 tool--raising or lowering interest rates

  • Reduce interest rates, increase supply of money, people borrow more, economy grows.

  • Big advantage– speed


The federal reserve system

THE FEDERAL RESERVE SYSTEM

  • Fed Board of Governors, Federal Reserve Banks, FOMC

  • Will Rogers, "there are two things that can disrupt the American economy. One is a war. The other is a meeting of the Federal Reserve Board."


Who is this man

Who is this Man?


Interest rates the fed

Interest Rates & the Fed

  • Fed recently increased interest rates

  • Who made that decision?

  • Any Guesses?


Insulation for politics

Insulation for Politics

  • Raise their own budget

    • Bowling alleys on Wall Street!!!

  • Appointment process & 14 year terms

  • Business confidence in Fed

  • Monetary policy too arcane


Jawboning

Jawboning

  • Congressional Hearing on Fed

  • Greenspan's "We have to bring the existing instabilities to a level of stability reasonably shortly. I think we know where we have to go. I do not think we underestimate the severity of the problems with which we are dealing,"

  • Investors-- quarter-point rate cut is coming


Is independence a good idea

Is independence A Good Idea?

  • Improves mgmt of economy, fewer recessions,

  • Politicians hate to take away the punch bowl as the party gets going

  • Odysseus and the Sirens


Banker dominance

BANKER DOMINANCE

  • Fed is Iron Triangle with Bankers

  • Bankers nominate the Federal Reserve bank presidents who cast five votes on the Open Market Committee

  • Obsession with fighting inflation

  • People who benefit from low inflation, are not those who suffer from high unemployment!!!!!!!!


Monetarism1

MONETARISM

  • #1 tool--raising or lowering interest rates

  • Reduce interest rates, increase supply of money, people borrow more, economy grows.

  • Big advantage– speed


Interest rates the fed1

Interest Rates & the Fed

  • Fed recently increased interest rates

  • Who made that decision?

  • Any Guesses?


The maestro

The Maestro


Who controls the economy

FOMC


Insulation for politics1

Insulation for Politics

  • Raise their own budget

    • Bowling alleys on Wall Street!!!

  • Appointment process & 14 year terms

  • Business confidence in Fed

  • Monetary policy too arcane


Minnesota fed bank

Minnesota Fed Bank


Jawboning1

Jawboning

  • Congressional Hearing on Fed

  • Greenspan's "We have to bring the existing instabilities to a level of stability reasonably shortly. I think we know where we have to go. I do not think we underestimate the severity of the problems with which we are dealing,"

  • Investors-- quarter-point rate cut is coming


Is independence a good idea1

Is independence A Good Idea?

  • Improves mgmt of economy, fewer recessions,

  • Politicians hate to take away the punch bowl as the party gets going

  • Odysseus and the Sirens


Bias of the fed

Bias of the Fed

  • Bankers nominate the Federal Reserve bank presidents who cast five votes on the Open Market Committee

  • Obsession with fighting inflation

  • NAIRU- 6%

  • People who benefit from low inflation, are not those who suffer from high unemployment!!!!!!!!


Political business cycle

Political Business Cycle

  • Pres manipulate economy to engineer their reelections

  • Success– Bush and Reagan

  • Failures– Carter and Bush


Budget deficits

Budget Deficits

  • Major issue in American politics

  • Solution is simple, cut benefits, raise taxes

  • Citizens wants less taxes;

  • cut spending for welfare, foreign aid, and space.

  • Politicians seek seek blame avoidance techniques


Bracket creep

Bracket Creep

  • Let Inflation work for you!

    • Auto cuts in benefits and taxes

    • Congress never has to raise taxes

  • End of Bracket Creep

    • Politicians can no longer avoid taxes


Where do taxes come from go

Where do Taxes come from/go?


Taxes what economists like

Taxes- What Economists Like

  • broad based taxes

    • Income tax

    • Excise tax

    • Sales tax


What elected officials and voters like

What elected officials (and voters) like

  • Tax preferences/deductions

  • Good or Bad

    • Charities, education, local taxes, mortage interest

    • "warfare welfare" $7.6 billion

    • "mansion subsidiary" $6.7 billion

    • "skybox scandal" $5.5 billion

  • Problems with preferences


Tax reform

Tax Reform

  • 2 main issues-- the breadth and progressivity of the tax system

    • 1986 tax reform

    • 1993 34% upper bracket

  • Flat Tax

    • 18% for everyone

    • Reduce loopholes


Flat tax con

Flat Tax--Con

  • Would hurt charities, home buyers

  • Would not raise enough money

  • Main beneficiaries would be wealthy

    • $24,650 taxed at a 15 percent rate

    • $50,000 taxed at 28% rate

    • $1 million taxed at 36% rate


Flat tax pro

Flat Tax- pro

  • Why penalize hard work, investment

  • Simplicity

  • Internet world

  • Already have a flat tax-- Social insurance taxes


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