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Government and the Economy

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  1. Government and the Economy

  2. Government and the Economy • The government’s response to the 2008 economic meltdown raised fundamental questions regarding its role in the economy. • Minimalist state (Night Watchman): Provide rules for markets to function, without regard for who wins and who loses • Activist state: Use policy to encourage certain outcomes

  3. Goals of Economic Policy • Governments facilitate free markets • Set rules for exchange and punish violators • Define property rights, contracts, and standards for goods • Create money, allowing for easy exchange

  4. Goals of Economic Policy • Four fundamental goals of U.S. economic policy • Promote economic stability • Stimulate economic growth • Promote business development • Protect employees and consumers

  5. Government and the Economy • Tools for improving the economy • Spending • Tax cuts • Interest rate changes • Though the tools might be sophisticated, the choice of how and when to use them is very political

  6. Goals of Economic Policy • Public policy: An officially expressed purpose or goal backed by a sanction • Can be embodied in a law, a rule, a regulation, or an order

  7. Promoting Stable Markets

  8. Promoting Stable Markets

  9. Promoting Stable Markets • Governments protect the welfare and property of individuals and businesses • Maintain law and order (prevent theft and looting) • Protect against racketeering (which blocks free markets) • Prevent monopolies

  10. Promoting Stable Markets • Public Goods: Any good or service that is provided by the government because it either is not supplied by the market or is not supplied in sufficient quantities. • By supplying public goods, the government can allow markets to form and products to be created and to travel

  11. Promoting Economic Prosperity

  12. Promoting Economic Prosperity • Governments can also intervene in the economy to promote economic growth • Gross National Product (GNP) and Gross Domestic Product (GDP) • The total value of goods and services produced within a country

  13. Changes in Real Gross Domestic Product, 1960–2009

  14. Promoting Economic Prosperity • What factors contribute to economic growth? • Strong Investment • Technological Innovation • Sufficient and Productive Workforce

  15. Promoting Economic Prosperity • Strong Investment • Governments can help create stable investment climates that allow for investor and consumer confidence • Governments can regulate markets to prevent fraud and allow for safe transactions • Too big to fail. • Governments can also invest in companies directly or support them through purchases

  16. Promoting Economic Prosperity • Technological Innovation • The federal government directly supports innovation through the NSF and NIH • All findings from their support must be provided to the public at large • The military also invests huge sums in basic and applied research

  17. Promoting Economic Prosperity • Sufficient and Productive Workforce • America uses its immigration policy to attract needed workers • H-1B visa issues? • Issue of undocumented workers? • The federal government also helps support higher education through programs like student grants and loans

  18. Low Inflation

  19. Promoting Economic Prosperity • Full Employment • When the nation enters a recession, the government often spends extra funds to put people back to work • Low Inflation • The government now tries to regulate inflation by controlling the money supply • Trade-off?

  20. Promoting Business Development

  21. Promoting Business Development • The federal government subsidizes many industries, especially agriculture • Subsidies can depend on which senators and members of Congress head the relevant committees • Small Business Administration lends to small businesses at non-commercial rates and also helps these businesses after natural disasters

  22. Protecting Employees and Consumers

  23. Labor History • Bloody precedents and government non-interference – 19th and early 20th centuries • Suppression of labor unions • 1935 – NLRB Act – Labor’s Magna Carta • 1938 - Fair Labors Standards Act • Minimum wage law • 1950- Government Activism to ensure labor peace • The Reagan break of this tradition = Air Traffic Controllers Action

  24. Protection of Consumers • The heritage: Progressivism , The Jungle • USDA • 1960’s – R Nader – Unsafe At Any Speed. • 1972- Consumer Protection Agency • Independent agency • Additionally –Product Safety Commission, Food and Drug Administration, Department of Transportation. • 2007 – Consumer Product Safety Commission • Case of Chinese lead paint • consumer financial protection bureau

  25. Four Schools of Economic Thought

  26. Four Schools of Economic Thought

  27. Four Schools of Economic Thought • Laissez-faire capitalism • Government should protect markets and property and little else • Keynesian economics • Government smoothes economics cycles by spending more and taxing less during downturns and doing the opposite as the economy improves

  28. Four Schools of Economic Thought • Monetarists • Focus on the money supply; the Fed makes it easier to borrow during downturns, promoting investment and purchasing • Supply-Side Economics • The government should try to keep taxes low to encourage maximum investment and consumer purchasing

  29. Tools of Economic Policy • Monetary policies manipulate the growth of the entire economy by controlling the availability of money to banks • Role of the Federal Reserve System

  30. Tools of Economic Policy • Federal Reserve Bank (“The Fed”) • Lends to banks and holds their short-term reserves • Controls reserve requirement • Performs open-market operations (buys and sells government bonds) • Sets the Federal Funds Rate

  31. Tools of Economic Policy • Fiscal Policy: The use of taxes and spending to influence the economy • Specific taxes can draw on certain sectors of the economy or certain classes of households

  32. The United States of Inequality •

  33. About Taxes • • Myths and realities …

  34. Tax Fairness is… • Equal % • % Income received v. % taxes paid • Ability to pay • Should include all taxes in calculations of burden • A system that helps insure that those who benefit most, pay the most • A system that contributes toward social just distribution of resources – those who labor should be able to care for themselves and their families • Tax avoidance issues

  35. One Set of Principles

  36. It’s so Unfair?Heritage Foundation

  37. It’s so unfair (2)

  38. •

  39. Who Doesn’t Pay Taxes • Another Way of Looking at Who Pays No Federal Income Tax • A separate TPC analysis categorized people who do not owe federal income tax in 2011 in a different way.* It found that of the filers who don’t owe federal income tax for 2011: • 50 percent are in this category because their incomes are so low that they are less than the sum of the standard deduction and personal and dependent exemptions for which the household qualifies.  As TPC Senior Fellow Roberton Williams has noted, “the basic structure of the income tax simply exempts subsistence levels of income from tax.”**  Some 62 percent of the households who will owe no federal income tax in 2011 have incomes under $20,000.

  40. Who Doesn’t Pay Taxes • Another 22 percent do not owe federal income tax because they are elderly people who benefit from tax provisions to aid senior citizens, such as the exemption of Social Security benefits from income tax for beneficiaries who have incomes below $25,000 for single filers and $32,000 for joint filers and the higher standard deduction for the elderly. • Another 15 percent (of the households who don’t owe federal income tax) don’t owe the tax because they are low-income working families with children who qualify for the child tax credit, the child and dependent care tax credit, and/or the earned income tax credit, and the credit(s) eliminate their income tax liability.***  • * Rachel Johnson, James Nunns, Jeffrey Rohaly, Eric Toder, and Roberton Williams, “Why Some Tax Units Pay No Income Tax”, Urban-Brookings Tax Policy Center, July 2011; and Roberton Williams, “Why Do people Pay No Federal Income Tax” TPC TaxVox, July 27, 2011. For a further discussion of this TPC analysis, see Aviva Aron-Dine, “Trends”, Milken Institute Review, First Quarter 2012, pp. 5-11.** Roberton Williams, “Why Do People Pay No Federal Income Tax?”, TPC TaxVox, July 27, 2011*** The remainder of those who do not owe federal income tax, about 13 percent, don’t owe federal income tax because of itemized deductions or other tax benefits.

  41. Tools of Economic Policy • Fiscal Policy: The use of taxes and spending to influence the economy • Specific taxes can draw on certain sectors of the economy or certain classes of households

  42. Tools of Economic Policy

  43. Tools of Economic Policy

  44. Tools of Economic Policy • Progressive taxes impact higher earners more than lower earners • Graduated income taxes • Luxury taxes • Regressive taxes do the opposite • Sales taxes, excise taxes, FICA taxes • Greenspan/Reagan and Social Security tax story

  45. Tools of Economic Policy • Spending and Budgeting • Office of Management and Budget • President’s budget office • Congressional Budget Office • Non-partisan and highly respected • Discretionary Spending • Federal spending on programs that are controlled through the regular budgeting process

  46. U.S. Budget Deficits and Surpluses, 1960–2010