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8. WHAT MACROECONOMIC ACTIVITIES ARE POLICY ISSUES FOR U.S. AGRICULTURE? Larry D. Sanders Fall 2005 Dept. of Ag Economics Oklahoma State University 1 INTRODUCTION Purpose: – to understand macroeconomic policy issues & options Learning Objectives: 1. Become aware of macroeconomic policy issues. 2. Understand key macroeconomic issues, options & consequences. 3. Become aware of current macroeconomic environment & outlook. 2 MACROECONOMIC POLICY: HISTORICAL REVIEW 1930s – Keynes: More govt. is a solution to counter severe market failures – FDR: New Deal 1940s – WWII: Helped end Depression; proved Keynes right – Employment Act of 1946 1960s – Galbraith: welfare state—technocracy controls thru big business & big govt. Current – Neo-Conservative view: less social govt. & more free market – Growing Populist view: big business needs to be reigned in by govt. 3 MACROECONOMIC GOALS HIGH EMPLOYMENT--Prevent Depression, Unemployment, Recession PRICE STABILITY--Keep inflation down EFFICIENCY--Micro & Macro EQUITABLE DISTRIBUTION OF INCOME--Equity, Re-distribution, Fight poverty GROWTH--Increase quantity & quality FREE MARKET ECONOMIC SECURITY CUT TAXES 4 MACROECONOMIC POLICY AGENTS Fiscal Policy (changes in federal spending; changes in taxation) – President – Congress Monetary Policy – Federal Reserve System » Change money supply with changes in interest rates 5 MACROECONOMIC POLICY MONETARY (changes in interest rates) FISCAL (changes in govt spending or taxes) LOOSE Increase M (reduce i): Inflation TIGHT Cut/Steady M (increase i): Cuts inflation or leads to deflation Increase G (increase spending or cut taxes): Inflation Cut/Steady G (decrease spending or increase taxes): Cuts inflation or leads to Stagflation 6 Macro Policy: Alternatives & Consequences Loose Fiscal & Monetary Policy (Pre-Carter; Reaganonomics; Bush2-nomics?) – Increasing: interest rates, domestic investment, crowding out, employment, debt costs – Decline in inflow of foreign capital & value of $, increased exports, reduced imports, hi exchange rate stress, hyperinflation, overvalued farm assets – Stabilization policy likely results Loose Monetary & Tight Fiscal Policy (Carternomics) – Increasing interest rates, decline in foreign capital, weakened $, improving trade deficit – Increasing inflation, cashflow & cost price stress, stagflation (?), decline in off-farm employment 7 Macro Policy: Alternatives & Consequences (cont) Loose Fiscal & Tight Monetary Policy (Reaganomics, Bush2-nomics 2d Term?) – Hi real interest rates, lo investment, hi debt cost, inflow of foreign capital, lower living standard, budget deficit – Strong $, trade deficit worsens, protectionism, lower inflation, decreased farm income/ financial crisis, costprice squeeze, devalued farm assets Tight Fiscal & Monetary Policy – Hi interest rates, strong $, trade deficit worsens – Reduced economic activity, decline in inflation, recession (?), decline in off-farm employment, depression (?), decline in loan access, decline in technology adoption 8 Macro Policy: Alternatives & Consequences (cont) Moderate – – – – – Fiscal & Monetary Policy (Clintonomics) Moderate real interest rates, increased investment, lo unemployment, lower growth in debt costs Lo inflow of foreign capital, moderate value of $, trade deficit improves, decline in protectionism, moderate inflation Increase in technology transfer, national income Decline in farms, increase in farm size, increase in off-farm income Uncertainty with global economy & structural change 9 Macro Policy: Alternatives & Consequences (cont) Bush2-nomics?* – Actions/impacts: » Tax cuts » Rapidly increasing budget deficit » Large job loss, slight recovery; unemployment relatively high » Very low interest rates (first term Fed response to low inflation) » Trade deficit rising » Global economy mixed – Appears to be a “borrow and spend” politician » Rising interest rates (2d term Fed response to inflation) *Also, see slides at end of this presentation 10 Macroeconomic Situation: US (1993-1997) 1993 6568 GDP($b.) PerCap DispInc(92$) 18078 (96$) Unemp (%) 7.4 LEI (92) 98.8 Bud bal($b.) -330 Trade bal($b.) -136 AgTrade($b.) 18 Hld inc(avg$) 41428 Farm hld inc (% of US) 97 Farm % 12 1994 6955 1995 1996 7401 7638 18431 18861 19116 1997 8305 6.8 5.6 101.4 100.8 -225 -177 -175 -191 19 26 43133 44938 5.4 102 -151 -235 27 47123 19493 21838 4.9 103.9 -50 -242 21 (net) 49692 99 10 107 16 106 12 99 11 11 Macroeconomic Situation: US (1998-2002) 1998 8782 GDP($b.) PerCap DispInc(92$) 19963 (96$) 22800 Unemp (%) 4.7 LEI (96) Bud bal($b.) 70 Trade bal($b.) -259 AgTrade($b.) 17 Hld inc(avg$)51855 Farm hld inc (% of US) 115 Farm % 12 1999 9297 2000 9825 2001 2002 10082 10469 22671 4.2 108.8 124 -340 12 54842 23471 4.0 109.9 232 -473 11.8 57045 23602 4.7 109.5 268 -462 13.7 58208 117.3 9.9 108.6 4.2 110.2 113.7 8.6 5.3 24300 5.8 111 -157.8 -493 12.3 (net) 57852 12 Macroeconomic Situation: US (2003+) (Current as of 2005) 2003 10971 2004 2005 1173412400 GDP($b.) PerCap DispInc(00$) 28065 29475 Unemp (%) 6.0 5.5 LEI (96) 113 116 Bud bal($b.) -374 -413 Trade bal($b.) -527 -686 AgTrade(net$b.) 10.5 9.7 Hhld inc(avg$) 59067 60528 Farm hld inc 116 (% of US) Farm Inc 11.2 16.3 (% farm hhld income) 30,400 5.2 138 -331 -720 4.5 2006 2007 5.1 -314 -324 13.7 13 Macroeconomic Situation: World Economic Growth (1993-97; Annual % change in real GDP) Economy 1993 World (%) 1.5 Less US (%) 1.1 Developed less US 0.1 Transition 6.3 Developing Asia 8 Latin Am. 4.3 Mideast 3.4 Africa 1 1994 1995 3.0 2.8 2.7 2.8 1996 3.5 3.4 1997 3.4 3.0 2.1 8.1 2.1 -1.3 2.8 -0.8 2.3 1.4 8.8 5.3 -0.3 3.2 8.3 1.4 4.4 2.9 7.4 3.7 4.7 5.2 5.8 5.2 4.4 2.8 14 Macroeconomic Situation: World Economic Growth (1998-2004; Annual % change in real GDP) Economy 1998 1999 World (%) 2.2 3.1 Less US (%)1.4 2.5 US 4.3 4.1 Developed less US 1.6 2.1 Transition -1.4 4.5 Developing Asia 0.2 6.6 Latin Am. 2.0 0 Mideast 3.9 -0.9 Africa 3.1 3.1 2000 4.0 4.2 3.8 2001 2002 1.5 1.7 1.8 1.7 0.2 2.4 2003 2004 05 2.6 3.8 3.1 2.5 3.6 2.8 2.4 3.6 3.5 7.1 1.4 5.1 1.0 3.9 1.6 6.1 2.3 6.6 1.6 4.7 7.1 3.8 5.7 3.7 0.3 -0.9 5.7 -1.4 3.2 3.6 3.4 3.3 6.1 1.6 2.7 4.1 7.2 5.8 7.4 4.1 6.4 5.6 4.815 World Economic Growth, 1993-2006 (annual % change in real GDP) 10 8 6 World less US Developed less US Transition 4 2 05 20 03 20 01 20 99 19 97 19 95 19 -2 19 93 0 16 World Economic Growth, 1993-2006 (annual % change in real GDP) 10 8 World Asia Latin America Mideast Africa 6 4 2 05 20 03 20 01 20 99 19 97 19 95 19 -2 19 93 0 17 Federal Funds Rate July 1990-Nov 2005 9 8 7 6 5 4 3 2 1 0 Fed Funds Rate (%) 1-Nov Mar 22 Aug10 04 1-Oct-01 1-Apr Mar-00 Nov-98 Dec-95 May-94 Jul-92 Sep-91 Jan-91 Jul-90 4.00% (highest since May 01) Note: Discount Rate is typically ½ % lower than Fed Funds Rate Fed Funds Rate: rate charged by Reserve Bank for borrowing immediately available funds, primarily for 1 day; Discount Rate: rate charged for credit to depository institutions, including 90-day commercial paper 18 Another Trend: Increasing Foreign Ownership of US Debt Early 1990s: 20% Mid-90s: 35% Current (2005): 52% (share & actual $ highest ever Major holders – Foreign banks – Japan – China 19 SUMMARY Economic goals change over time – Stresses importance of risk management & strategic planning Macroeconomic policy matters to agriculture Success in the 1990s resulted from – Federal Reserve decisions – Clinton-GOP Congress decisions – World economy improving – State & private response to macroeconomic environment – Trade agreements 20 SUMMARY --Recent US Economic Status Clinton years(1993-2000) – Longest sustained economic growth in US history – Highest job creation in US history – First balanced federal budget in decades – Mixed/cyclical for agriculture 21 SUMMARY --Recent US Economic Status Bush 1st Term [2001-03 Recession; (2001-02)Malaise (2002-03)] – 2.5-3 million jobs lost (more than any previous President) – Projected federal budget deficits highest ever – State economies in poor shape (Service cuts? Tax break cuts? Tax increases?) – Farm economy (market) generally down(Cattle market up) – Jobless recovery economy (unemployment 6-10%) – Outsourcing of jobs increasing GW 22 Summary --Recent US EconomicStatus (continued) Reasons – – – – – – for GW Bush 1st term economic slump? Bush tax cuts Cyclical downturns 9/11 & “terror hangover” Fed overly cautious in 2000 w/r/t inflation Federal spending continues relatively high Corporate scandals Dissenters claim conservative agenda to create crisis to force drastic changes in federal social spending over next 10 years 23 SUMMARY --Economy not responding as expected Either not responding as expected, or could be in worse shape – Fed’s loose policy of low interest rates should have spurred economic growth sooner, more broad-based – Federal spending should have spurred economic growth; slow start in 2004, finally picks up in 2005 – Federal tax cuts should have spurred economic growth sooner The reason may be structural in nature – Economy is improving for some sectors, not for others – Economy is improving/continuing to reward those with wealth base 24 SUMMARY (continued) Outlook unstable (but may be manageable at macro and micro level) – Jobless recovery turned around with more jobs, lower unemployment in 2005 – Fed interest rates on rise; not likely to stop until mid-to-late 2006 – Oil prices uncertain, but higher in short term than 2004 – Mideast strife, Wars on terrorism & Iraq – Trade agreement uncertainty NOTE: – AS INSTABILITY IN AGRICULTURAL MARKETS INCREASES, AGRICULTURAL VULNERNABILITY TO MACROECONOMIC FORCES WILL INCREASE, LIKELY INCREASING INSTABILITY & NEED FOR MANAGEMENT SKILLS & RISK MANAGEMENT 25 Long Waves in Economic Activity (40-60 year cycle) TROUGH 1785-90 1845 1895 1933 2001? PEAK 1815 1850s 1873 DEPRESSION 1842-49 (1858) 1873-1879; 1892-97 1914-19 (1920); 1929-39 1969 (1982)* Between 2009-2029 Between 2022-2042 NOTES: (*) Decline more a recession than depression. (?) May be cyclical activity rather than long waves 26 Long Wave Economic Activity 6 5 4 3 Economic Index 2 1 17 85 18 45 18 60 18 75 18 95 19 33 20 01 20 32 * 0 27 “Just the facts ma’m, just the facts.” Jack Webb, Dragnet “Liars can figure but figures don’t lie.” Ronald Reagan 28 Additional Budget Outlook Information http://www.senate.gov/~budget/democratic/ch arts_econoutlook.html http://www.senate.gov/~budget/democratic/pr ess/2001/rev_bdgtoutlook100401.pdf http://www.senate.gov/~budget/democratic/pr ess/2002/cbofactsheet082702.pdf http://www.economicindicators.gov Also: recent federal data 29 Agricultural Programs in a Time of Budget Concerns The following slides (3141) are excerpted from presentation by Craig Jagger, Chief Economist, US House Ag Committee, Sep 05, for National Public Policy Education Conference. 30 31 32 33 34 Budget Reconciliation Sharing the Pain of Cutting Federal Spending on Mandatory Programs to Reduce the Deficit. • Budget Reconciliation: Instructions in the Congressional Budget Resolution to authorizing committees to draft changes to existing laws to achieve specified reductions in “mandatory spending.” • Mandatory Programs for Agriculture • Under the jurisdiction of the House Ag Committee • Typically multi-year programs such as under the farm bill • Food stamps, commodity program, and conservation program funding are major mandatory spending categories. • All multi-year mandatory funding is provided up front when the farm bill or other House Ag Committee bill is passed. 35 Budget Reconciliation & Discretionary Spending (Appropriations) • Discretionary Spending (Appropriations) for Agriculture • Under the jurisdiction of the House Appropriations Committee and the Agricultural Appropriations Subcommittee • Programs and funding are reviewed every year. • Agency salaries and expenses and research funding are major discretionary spending categories. • Funding typically is provided one year at a time in an annual appropriations bill. • The Budget Resolution specifies a maximum level for appropriations that may be lower than in prior years but cutting discretionary spending is done outside of reconciliation in regular appropriations bills. 36 Budget Reconciliation (Continued) • Cuts are made from baseline spending—CBO’s projections (with any Budget Committee Adjustments) of mandatory spending over the next 10 years under the assumption that current laws continue. • Only reduced spending caused by legislated changes are credited—No credit is given for lower than expected costs from changes in market conditions or USDA implementation decisions different than expected. • Cuts can come from any program under the jurisdiction of the Ag Committees: commodity, conservation, crop insurance, trade, rural development, research, foods stamps, or forestry. • The 10-year mandatory baseline for programs under the jurisdiction of the House Ag Committee is about $540 billion. 37 Are We Having Fun Yet? • Proposed cuts may lead to interest group wars. Every program has a constituency. • Policy changes that save money may be viewed as more attractive than they otherwise would be. • Can lead to “bad” policy if policies are designed to capture quirks in CBO baselines or estimating assumptions. • Programs with perceived problems could be viewed as likely candidates for cutting. • Cost trade-offs and savings opportunities can be heavily dependent on CBO Baselines and Scoring. 38 Under CBO’s Current Sept., 2004 Baseline, Food Stamps Are Over Half of the Costs of Programs Under the Jurisdiction of the House Agriculture Committee House Agriculture Committee Jurisdiction CBO 10-Year Projections: FY 05-14 Budget Authority CBO Sep 04 Baseline Food Stamps $294.2 CCC Commodity Prog $128.9 Farmer Conservation $48.5 Crop Insurance $37.1 Other Nutrition $8.0 Rsch & Inspect. $7.5 CCC Other (Exc Conserv.) $7.2 CCC Export Prog & Guar $5.8 Forest Serv $2.3 Transportation $0.6 Comm & Rural Dev $0.5 0 50 100 150 200 250 300 350 $ Billion 39 CHIMPS Mandatory Program Cuts Taken by the Appropriators • • • • Appropriations cuts in mandatory programs are called CHIMPS: Changes In Mandatory Programs. It is against the House Rules to “legislate on appropriations bills.” But appropriators indirectly do so by, for example, limiting salaries and expenses to carry out a conservation program of greater than $xxx million. CHIMPS represent a one-way street—Appropriators can cut Ag Committee mandatory farm bill programs but Ag Committee can’t cut their discretionary programs. For FY 04 Ag CHIMPS were 31% of total CHIMPS. Ag Appropriations are 2% of total appropriations. Since FY 2002, $3.1 billion has been taken from House Ag Committee programs. 40 Consequences of CHIMPS • Producers don’t get full benefits intended when the farm bill was passed and that the Ag Committees paid for. • Upsets the delicate balances and compromises that were struck during negotiations on the 2002 farm bill. • May set up a potential fight between Ag Committees seeking reconciliation cuts and Appropriators who have come to depend on limiting our programs to make their ever tightening budget targets. 41 Budget Reconciliation Update (5 Nov 05) House Ag C. Senate Ag C. 2006 2006-2010 (----------$bil.------------) -.617 -3.7 -.196 -3.014 Note: Senate has passed Reconciliation bill 42