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Chapter 18: Economic Policy Economic Policy includes Promoting the economy The Federal Reserve Federal Budget: spending and taxes Regulating business and its products Protecting society and the environment How do you measure your own financial stability? How do you know if you’re doing ok? What factors do you have to balance with work? How do we do the same thing on a national and international arena? Economic stability = Employment: high Incomes: rising Prices: slight inflation Growth: business is good PIG-E What is government balancing economy with? Quality of life: For workers For consumers For business owners For investors For society as a whole Environment Health Economy Terms Economic stability: PIG-E Inflation: A rise in the general price levels Recession: Short term decline Unemployment Growth is up is down Investments lag Production is cut back Depression: Long term decline How did we get into this Great Recession? Mortgage loans Packaging and selling of loans International investors bought and wanted more Mortgage crisis More loans LOOSER standards Defaults Housing prices dropped How did we get into this “Great Recession”? Part II Ripple effects: construction, incomes, investments Credit default swaps or Derivatives: Insurance on investments (the loan pkgs) and then the opposite: bets that they will fail “Global Pool of Money Got Too Hungry” http://www.npr.org/templates/story/story.php ?storyId=90327686 What can the government do? Bailouts Stimulus: tax cuts, spending Regulations Federal reserve actions Promote new business 1. Bailouts: help companies stay in business Bought Fannie Mae and Freddie Mac Put together a deal to keep AIG afloat Massive loans to banks: to keep them from failing AND to promote lending again GM: Gov’t bought shares 2: Stimulus Tax cuts Kennedy in 1964, Reagan in 1981 and G.W. Bush in 2001 and 2003 and 2008! And 2009! Maintained 2010 What are potential downsides to lowering taxes? Spending: Keynesian Economic Theory FDR’s New Deal: Works Programs Stimulus packages: 2008 and 2009: create jobs, help states 2011? Where does the $$ come from? Taxes Borrowing 3. Regulations Economic Regulation: business practices SEC Social Regulation: effects of business Consumer protection: FDIC Health and safety OSHA: Occupational Safety and Health Administration Environmental protection EPA: Environmental Protection Agency New Deal Regulations Wagner Act: legalized unions Fair Labor Standards Act: Minimum Wage 44 hour week 25 cents/hour Social Security FDIC, SEC New Deal legacy: Gov’t involvement in managing the economy is expected Figure 18.2- Minimum Wage Growth 4. The Federal Reserve “The Fed” Created Board in 1913 of Governors Chair of the board: Ben Bernanke The Fed’s tools Interest rates: Change to speed up or slow economy The rate that banks borrow from the Fed, which affects lending rates 2008 rate cuts: BIG and frequent Still low: near 0% Reserve Requirements Open Market Operations The Budget Deficit and the Debt Federal budget deficit The amount by which federal spending exceeds income. $ out is more than $ in. Budget surplus: 1998 Budget deficit by 2003 Tax cuts, war expenses, stagnating economy 2008 and since: more deficit from stimulus National Debt: Deficits + interest Is debt good or bad? Necessary for economic recovery? in times of crisis? For good? Limits: future options? economic stagnation? Power given to foreign investors? How much is the national debt? $14 trillion To whom do we owe the money? Mostly: the Fed and foreign investors Congress and the Budgetary Process President prepares Sends to Congress in January or February of each year. Congress decides on spending Table 18.1- Federal Budget Process The Effects of Globalization on the economy Positives: Increased competition benefits consumers Expands the market for American products Criticisms: “Fair Trade” not “Free Trade” Job losses Small businesses hurt Environment Workers rights more http://www.npr.org/templates/story/story.php?sto ryId=99927343 (National Debt for Beginners from NPR: Planet Money. Looks like good links to other NPR economy stories too at the bottom.) On the federal gov’t buying Fannie and Freddie http://www.npr.org/templates/story/story.php?storyI d=94377295 http://www.npr.org/templates/story/story.php?storyI d=94366330&ps=rs