Economic PolicyThe Roots of Stabilizing the Economy and

The Roots of Government Intervention

Is the US Federal Debt Out of Control? Is it necessary?http

://www.youtube.com/watch?v=O_TjBNjc9Bo

Deficits and DebtFederal Deficit –

annual budget shortfall

Federal Debt- sum total of annual deficits

Nearing debt ceiling and continuing to rise

$53,108 per citizenThreatens Social

Program futureSocial SecurityMedicareGovernment

Pensions

Economic TermsGross Domestic Product (GDP)

The total market value of the goods and services produced in a country during a year

Inflation General rise in price of goods

over time, erosion of currencyRecession

General slowdown in economic activity typically triggered by dramatic drop in spending

Depression Sustained deepening recession

Economic Policy ChangesLaissez-Faire Doctrine Mixed Economy“Let do” or “Let it be”Hands-off government

policy “Invisible Hand” is

superior to Government regulation

Federal Government limited to:Taxation through tariffsPublic works projectsPublic land policy

Both State and Private Sector direct the economyGovernment

intervention when beneficial

Arose during Great Depression through New DealResult of

Industrialization

Early Government Economic InterventionStates, not Federal

Government, took active roleRoads, Railroads,

Business RegulationFederal Government

encouraged business through tax rates and tariffs

Civil War marks shift in necessity of policy Industrialization and

railroads cause need of federal intervention Monopolies, Interstate

Commerce, and “Industrial” Agriculture

Federal Reserve Act of 1913Regulated national

banking to combat market fluctuations

New Deal and Mixed EconomyGreat Depression showed the

volatile nature of laissez-faire Capitalism Unregulated speculative

trading of stocks High risk loans Overproduction by factories Results in high

unemployment (25-35%) and loss of millions in investments

Hoover supports laissez-faire policy Causes panic and the Stock

Market continues to plummet

FDR and New Deal 1932 marks shift in US

economic policyStrong government

participation and intentional government overspending to counteract reduced private spending Keynesian Economics

Stabilizing the EconomyMonetary Policy (Indirect)

Fiscal Policy (Direct)Government control of

nation’s money supply and interest rates

Federal Reserve Manipulates reserve

requirement Altering discount rate

Rate at which banks borrow money from regional Fed

Buying and selling of securities (Open Market Operations)

Government policies on taxation, spending and debt management First significant use under

KennedyTaxation

Lower taxes lead to greater spending

Spending Direct government spending

promotes growthTypically inadequate in solving

economic fluctuations by itself

Federal Reserve Banking Districts

2008 RecessionCauses

Deregulation of Banks Subprime home loans

Decrease in Taxation Increase in spending

Wars in Iraq and Afghanistan

Wall Street Speculation

Tightening of Credit After Crash, credit was

nearly frozen

EffectsNear collapse of credit

for business, home, and personal loans Government intervention

frees up Banks creditLowered faith in US

Dollar and payment of credit Loss of AAA credit rating

High UnemploymentVast expansion of

National Debt for Keynesian policies

How is the Tax Rate on the highest earners different during Iraq and Afghanistan than other wars?

The US Defense Budget is the size of the next top 12 Nation’s Defense Budgets

2008 Recession and Government InterventionMonetary Intervention Fiscal InterventionLowering of interest

rateshttp://

www.tradingeconomics.com/united-states/interest-rate

Increase in Federal Reserve powers to regulate securities markets

$475 billion in TARP funds to banks97% returned by end of

2012$831 billion in stimulus

packagehttp://www.whitehouse.g

ov/recovery/

Retaining Bush era tax cuts

Has the US recovery been successful?What do you think caused the Recession?Was government intervention necessary to

save the economy from further downward spiraling?

Is Keynesian policy, Reaganomics, or Laissez-Faire policy a better route for helping the economy?