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Principles of Macroeconomics

Principles of Macroeconomics. Economic Crisis. COST/BENEFIT OF CHOICES. BENEFITS COSTS QUESTIONS. COST/BENEFIT OF CHOICES. BENEFITS. COST/BENEFIT OF CHOICES. Households received up to $1200 tax rebate check from Bush’ tax rebate plan of 2008

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Principles of Macroeconomics

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  1. Principles of Macroeconomics Economic Crisis Macroeconomics, May 5, 2009, Martha Stuffler

  2. COST/BENEFIT OF CHOICES BENEFITS COSTS QUESTIONS Macroeconomics, May 5, 2009, Martha Stuffler

  3. COST/BENEFIT OF CHOICES BENEFITS Macroeconomics, May 5, 2009, Martha Stuffler

  4. COST/BENEFIT OF CHOICES Households received up to $1200 tax rebate check from Bush’ tax rebate plan of 2008 Less FIT withholding and more disposable income per paycheck up to $800 under Obama plan for 2009 Macroeconomics, May 5, 2009, Martha Stuffler

  5. COST/BENEFIT OF CHOICES COBRA Health Care Subsidy – Continues health insurance coverage if laid off since September 1, 2008 Workers pay 35% of their health-insurance premiums and the government pays the remaining 65% If laid off since September 1, 2008, but didn't sign up for COBRA coverage, get a second chance to choose COBRA and benefit from the subsidy Macroeconomics, May 5, 2009, Martha Stuffler

  6. COST/BENEFIT OF CHOICES Federal law requires most companies with 20 or more employees to let former employees keep group health-insurance coverage for up to 18 months after they leave their jobs 65% COBRA subsidy lasts for nine months, with premiums then rising to the full price Macroeconomics, May 5, 2009, Martha Stuffler

  7. COST/BENEFIT OF CHOICES Unemployment insurance benefits have been extended 3 times. For example, a California employee who previously would be eligible for 26 weeks of benefits, can now collect unemployment for up to 79 weeks. Macroeconomics, May 5, 2009, Martha Stuffler

  8. COST/BENEFIT OF CHOICES Some households will be able to refinance their home loan if they have enough income and good credit to qualify for a new loan at a lower rate of interest Other households will be able to get both the principle balance on their mortgage lowered and the interest rate lowered Macroeconomics, May 5, 2009, Martha Stuffler

  9. COST/BENEFIT OF CHOICES Some households experience foreclosure and lose the burden of a mortgage and related housing costs Foreclosure is commonplace today given the number of ARMs Would you want to be stuck with a $600K mortgage on a property with a market value of $400K? Macroeconomics, May 5, 2009, Martha Stuffler

  10. COST/BENEFIT OF CHOICES More $ for highways, police, parks and schools College tuition tax credit More Pell Grant money Use 529 College Saving Plan to buy computer and software, not just pay for tuition and books Tax credit for energy efficient windows and appliances Extended food stamps programs Macroeconomics, May 5, 2009, Martha Stuffler

  11. COST/BENEFIT OF CHOICES UAW jobs and their benefits are protected UAW may ultimately gain partial ownership of Chrysler and possibly General Motors Macroeconomics, May 5, 2009, Martha Stuffler

  12. COST/BENEFIT OF CHOICES Fed currently committed to low interest rates Financial Institutions bailouts prevent insolvency or allow for takeovers Stability in our financial system Macroeconomics, May 5, 2009, Martha Stuffler

  13. COST/BENEFIT OF CHOICES Effective oversight and regulation of financial institutions Federal Reserve Board of Governor’s undertaking Bank Stress tests for 19 US large banking institutions, report was delayed and now is due May 7, 2009 Using Assumptions: Macroeconomics, May 5, 2009, Martha Stuffler

  14. COST/BENEFIT OF CHOICES Macroeconomics, May 5, 2009, Martha Stuffler

  15. COST/BENEFIT OF CHOICES Tax breaks for small business include two provisions, designed to encourage business spending, come in the form of bigger depreciation write-offs ONLY FOR TAX YEARS 2008 AND 2009 Macroeconomics, May 5, 2009, Martha Stuffler

  16. COST/BENEFIT OF CHOICES Section 179 Deduction almost doubled — Maximum write-off is generally increased to $250,000 (up from only $128,000 before the new law). For 2009-2010, the maximum deduction will revert back to $125,000 (plus inflation adjustments) unless Congress takes further action. Macroeconomics, May 5, 2009, Martha Stuffler

  17. COST/BENEFIT OF CHOICES 50% first-year bonus depreciation: For new qualifying assets that are acquired and placed in service during calendar year 2008 with the placed-in-service deadline extended through Dec. 31, 2009, for certain long-lived assets. Under the 50% first-year bonus depreciation, a business can immediately deduct half of the cost of a new asset if it is purchased and placed in service during 2008. Macroeconomics, May 5, 2009, Martha Stuffler

  18. COST/BENEFIT OF CHOICES Small Businesses: Businesses that employ less than 500 employees will increase as they have during the last 3 recessions, why? Increases in energy efficient automobiles Increases in energy efficient appliances and devices Macroeconomics, May 5, 2009, Martha Stuffler

  19. COST/BENEFIT OF CHOICES Expectations may improve Stock market prices may rise Household wealth may rise More labor market opportunities Paradox of Thrift – More savings for business investment Macroeconomics, May 5, 2009, Martha Stuffler

  20. COST/BENEFIT OF CHOICES COSTS Macroeconomics, May 5, 2009, Martha Stuffler

  21. COST/BENEFIT OF CHOICES Increasing Size of Government Macroeconomics, May 5, 2009, Martha Stuffler

  22. COST/BENEFIT OF CHOICES CBO Estimates we will add $11.1T in debt by 2019 MORE THAN DOUBLING OUR CURRENT US NATIONAL DEBT September 30, 2008 US DEBT: $10.0T Estimated Debt Increase: $11.1T TOTAL PROJECTED US DEBT: $21.1T Macroeconomics, May 5, 2009, Martha Stuffler

  23. COST/BENEFIT OF CHOICES Ratio of US Debt to US GDP as of September 30, 2008: Current ratio of debt to GDP is 78% What will it rise to? Macroeconomics, May 5, 2009, Martha Stuffler

  24. COST/BENEFIT OF CHOICES Using CBO Real GDP estimates: US debt may be $22.4T by 2019 Rise to equal to or more than 100% of GDP Macroeconomics, May 5, 2009, Martha Stuffler

  25. COST/BENEFIT OF CHOICES Macroeconomics, May 5, 2009, Martha Stuffler

  26. COST/BENEFIT OF CHOICES Macroeconomics, May 5, 2009, Martha Stuffler

  27. COST/BENEFIT OF CHOICES Macroeconomics, May 5, 2009, Martha Stuffler

  28. COST/BENEFIT OF CHOICES 2008 Social Security Trustees Annual Report about the status of Social Security and Medicare reads The report on the state of entitlement programs is rather grim—the combined unfunded liabilities of both programs are $101T Macroeconomics, May 5, 2009, Martha Stuffler

  29. COST/BENEFIT OF CHOICES Unfunded liabilities are the amounts government must be able to pay in order to make good on its promises—there are no assets available to cover these liabilities. Macroeconomics, May 5, 2009, Martha Stuffler

  30. COST/BENEFIT OF CHOICES Pensions of employees working for bankrupt firms are covered by the (PBGC) Pension Benefit Guaranty Corp The PBGC created in 1974 insures 44 million workers covered by defined benefit pension plans Macroeconomics, May 5, 2009, Martha Stuffler

  31. COST/BENEFIT OF CHOICES Macroeconomics, May 5, 2009, Martha Stuffler

  32. COST/BENEFIT OF CHOICES Increasing Size of Government April 2008 sixteen economists from The Brookings Institute and The Heritage Foundation authored “Taking Back Our Fiscal Future” in which they made policy recommendations “generated by a deep concern about the nation’s long-term fiscal outlook,” they agreed that Macroeconomics, May 5, 2009, Martha Stuffler

  33. COST/BENEFIT OF CHOICES Unsustainable deficits in the federal budget threaten the health and vigor of the American Economy. The first step toward establishing budget responsibility is to reform the budget decision process so that the major drivers of escalating deficits—Social Security, Medicare, and Medicaid—are no longer on autopilot. Macroeconomics, May 5, 2009, Martha Stuffler

  34. COST/BENEFIT OF CHOICES April 2009, “Number of Federal Subsidy Programs Tops 1,800” Chris Edwards, Director of Tax Policy Studies, Cato Institute, reported the rise in government subsidy programs Macroeconomics, May 5, 2009, Martha Stuffler

  35. COST/BENEFIT OF CHOICES Macroeconomics, May 5, 2009, Martha Stuffler

  36. COST/BENEFIT OF CHOICES In 8 short years, from 2000 to 2008, there has been an increase of 27% in government subsidy programs How should we expect this number to change after 2008? Macroeconomics, May 5, 2009, Martha Stuffler

  37. COST/BENEFIT OF CHOICES USA Today, January 2008 “Subsidies Keep Small-Airport Flight in the Air” reported The Department of Transportation (DOT) pays a few small airline $110 million a year total so that they can profitably carry as few as four passengers per day to nearby hubs, often for rock-bottom fares. Macroeconomics, May 5, 2009, Martha Stuffler

  38. COST/BENEFIT OF CHOICES For example, a roundtrip in Montana from Mile City to Billings—a two-hour drive away—costs passengers just $88 on Big Sky Airlines because the government kicks in $779. Flying roundtrip from Lewistown Montana to Billings—also a two hour drive—costs $88 as well on Big Sky. The government cost: $1343 per passenger. Just two people per day took the Lewistown-to-Billing flights on average in 2006. according to the DOT. Macroeconomics, May 5, 2009, Martha Stuffler

  39. COST/BENEFIT OF CHOICES GAO July 2007 Report looked into the Student Loan Program August 1, 2007 Press Release from Senators Kennedy and Durbin titled “NEW GAO REPORT UNDERSCORES ADMINISTRATION'S FAILURES TO SAFEGUARD FEDERAL STUDENT LOAN PROGRAM” read Macroeconomics, May 5, 2009, Martha Stuffler

  40. COST/BENEFIT OF CHOICES The U.S. Department of Education has failed to safeguard the nation’s federal student loan programs and should immediately increase its oversight of lenders and schools and fully enforce the law. Today’s report comes after months of congressional and state investigations have uncovered unethical financial relationships among lenders, school financial aid officers, and public officials responsible for overseeing the federal student loan program Macroeconomics, May 5, 2009, Martha Stuffler

  41. COST/BENEFIT OF CHOICES Under current law, lenders participating in the federal loan program are prohibited from using inducements or gifts to curry favor with colleges or universities. The report … found that the Department does not have a sufficient oversight program in place to identify and address questionable lender behavior, such as inducements. Macroeconomics, May 5, 2009, Martha Stuffler

  42. COST/BENEFIT OF CHOICES In addition, the report found that despite repeated requests from lenders for the Department to provide direction on inducements, the Department had not updated its inducement guidelines in nearly 20 years and, in some cases, did not respond to lenders’ inquiries at all. http://www.gao.gov/new.items/d07750.pdf Macroeconomics, May 5, 2009, Martha Stuffler

  43. COST/BENEFIT OF CHOICES U.S. Office of Management and Budget, 2008 reported Medicare and Medicaid made an estimated $23.7 billion in improper payments in 2007.  These included $10.8 billion for Medicare and $12.9 billion for Medicaid.  Medicare’s fee-for-service reduced its error rate from 4.4 percent to 3.9 percent. Macroeconomics, May 5, 2009, Martha Stuffler

  44. COST/BENEFIT OF CHOICES Medicare and Medicaid lose an estimated $60 billion or more annually to fraud, including $2.5 billion in South Florida. (Miami Herald: August 11, 2008) U.S. Department of Health and Human Services estimated, “Every $1 spent on Medicare fraud prevention would stop $10 in fraud.” Macroeconomics, May 5, 2009, Martha Stuffler

  45. COST/BENEFIT OF CHOICES Inspector General report, Department of Health and Human Services, August 2008 reported, Nearly one of three claims (29 percent) Medicare paid for durable medical equipment was erroneous in FY 2006 American College of Radiology, 2004 reported, Medicare and private health insurers pay up to $16 billion a year for needless imaging tests ordered by doctors. Macroeconomics, May 5, 2009, Martha Stuffler

  46. COST/BENEFIT OF CHOICES Medicare spends less than 0.2 cents of every $1 of its $456 billion annual budget combating fraud, waste and abuse.(Miami Herald, August 11, 2008) U.S. Senate Permanent Committee on Investigations, 2008 reported: Medicare paid dead physicians 478,500 claims totaling up to $92 million from 2000 to 2007. These claims included 16,548 to 18,240 deceased physicians Macroeconomics, May 5, 2009, Martha Stuffler

  47. COST/BENEFIT OF CHOICES THE US GOVERNMENT IS GETTING BIGGER Besides our $22T projected national debt, why is it important to understand the effects of increasing size of government? Macroeconomics, May 5, 2009, Martha Stuffler

  48. COST/BENEFIT OF CHOICES SHORT ANSWER: Empirical evidence indicates that the size of government as a percent of GDP is negatively related to economic growth Macroeconomics, May 5, 2009, Martha Stuffler

  49. COST/BENEFIT OF CHOICES Gwartney, Lawson and Holcombe April 1998 in “The Size and Functions of Government and Economic Growth” prepared a report for the US Joint Economic Committee which concluded There is overwhelming evidence that both the size of government and its expansion have exerted a negative impact on economic growth during the last several decades. As government outlays in the United Stated have grown from 28.4% of GDP in 1960 to 34.6% in 1996, investment as a share of GDP, labor productivity, and real GDP growth have fallen. Macroeconomics, May 5, 2009, Martha Stuffler

  50. COST/BENEFIT OF CHOICES Data for 23 OECD (Organization of Economic Cooperation and Development) countries also revealed that higher government expenditures were correlated with both less investment and lower rates of growth during the 1960-96 period. An analysis of data for a larger set of 60 nations illustrates the same thing. Macroeconomics, May 5, 2009, Martha Stuffler

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