Economics on Main Street:Concepts for American Voters

May 2012

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)

• 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).

• 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

Public Goods &Sustainable Social Contracts

Economics of Public Goods

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))

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))

Public Goods &Sustainable Social Contracts

Deficit & Debt Concerns

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

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)

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

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

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

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

Thank You!

Economics on Main Street:Concepts for American Voters

May 2012