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Economics on Main Street:
Concepts for American Voters
May 2012
Policy Responses to Downturn
• scale of economic challenge
housing 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 responses
financial 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?
nonrival
use by one does not diminish availability to others.
(defense & police, flood control, radio broadcast)
non-excludable
impossible 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
Spending & Taxes in Context
Government
Share of GDP
Taxes as
Share of GDP
GDP
per Capita
Denmark-SwedenFrance
52%
47%
$33,000
Canada-GermanyJapan
39%
33%
$33,000
U.S.
37%
28%
$44,000
Turkey-MexicoSouth Korea
28%
26%
$17,000
Guatemala-UgandaBangladesh
17%
14%
$1,900
Source: OECD (2007), CIA Factbook (2011)
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)
Current U.S. Debt: $14.3 Trillion (about 50% from earlier periods)
Contribution of Recent Policy Choices (2002-2012)
Bush Tax Cuts
Iraq & Afghanistan
Automatic Stabilization
Stimulus Spending
Bush DDS
Obama Tax Cuts
Obama DDS
What is a responsible limit on
personal debt (home mortgage)?
Bush Med Drug Ben
1947 - 120% of GDP
current - 100% of GDP
Obama Health Reform
TARP & FRB Actions
0
200
400
600
800
1000 1200 1400 1600
$ Billion
Sources: New York Times, Department of the Treasury, Congressional Budget Office
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 ahead
investing in economic growth as priority
balanced approach to markets & regulation
inequality and joblessness as societal concerns
deficits & debt as manageable concerns
• an absolute pleasure
you 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