2. Laissez-Faire
• Prevailing
a+tude
prior
to
the
Great
Depression
• Absence
of
government
control
-‐
economy
must
be
le<
alone
to
flourish
• Market-‐based
compe@@on
will
deliver
good
for
the
greatest
amount
of
people
3. Great Depression
• In 1929, the stock market crashed and
ushered in the Great Depression
• The worst and longest economic collapse
in the history of the industrialized world
• By 1933, more than 15
million Americans - ¼
of the nation’s
workforce - were
unemployed
4. John Maynard Keynes
• A British economist who
argued that gov't spending
had to increase
• More money in people's
pockets would increase
aggregate demand (total
amount of spending in an
economy)
• As people spent more, more goods and
services would be produced, creating new jobs
5. Interventionism
• A
policy
that
encourages
the
government
to
take
an
ac@ve
role
in
guiding
and
managing
the
economy
• The
New
Deal
is
a
classic
example
–government
began
to
regulate
private
businesses,
provide
Social
Security,
and
spend
money
to
create
jobs
6. Reaganomics
• Reagan
claimed
that
economic
stability
can
be
assured
not
by
increasing
demand,
but
by
increasing
aggregate
supply
(total
amount
of
goods
and
services
available
in
an
economy)
• More
produc@on
means
more
jobs,
which
happens
when
government
stays
out
of
business’s
way
(fewer
taxes/regula@ons)
• Massive
tax
cuts
of
the
1980s,
especially
for
the
wealthy,
are
known
as
“trickle-‐down
economics”
8. Economic Stability
• Economic
Stability:
a
situa@on
in
which
there
is
economic
growth,
rising
na@onal
income,
high
employment,
and
steadiness
in
the
general
level
of
prices
• Economic
Instability:
– Infla@on:
a
rise
in
the
general
price
levels
of
an
economy
OR
– Recession:
a
short-‐term
decline
in
the
economy
that
occurs
as
investment
sags,
produc@on
falls
off
and
unemployment
increases
9. Monetary Policy
• Used
by
Federal
Reserve
Board
(“Fed”)
-‐
central
bank
of
the
U.S.
• Monetary
Policy
involves
changes
in:
– interest
rates
(amount
paid
to
borrow
money)
– and
money
supply
(the
amount
of
dollars
circula@ng
in
the
economy)
– In
general:
• Lowering
interest
rates
and
increasing
the
money
supply
will
increase
aggregate
demand
(to
expand
economy)
• Raising
interest
rates
and
decreasing
the
money
supply
will
decrease
aggregate
demand
(to
contract
economy)
10. Fiscal Policy
• Used
by
Congress
and
the
President
• Fiscal
policy
involves
changes
in
taxing
and
spending
• In
general:
– Lowering
taxes
and
increasing
government
spending
should
increase
aggregate
demand
(to
expand
economy)
– Raising
taxes
and
decreasing
government
spending
should
decrease
aggregate
demand
(to
contract
economy)
11. American Recovery and
Reinvestment Act of 2009
Immediately
a<er
taking
office,
because
of
the
Great
Recession,
President
Obama
pushed
through
Congress
a
s@mulus
package
–
$831
billion
of
direct
spending
on
infrastructure,
educa@on,
health,
energy,
federal
tax
incen@ves
and
expansion
of
unemployment
benefits
to
get
people
spending
again.
How
well
did
it
work?
12. Federal Budget - Revenues
• Federal
government:
– individual
income
taxes
and
Social
Security
taxes
make
up
over
80%
of
revenue
– corporate
income
taxes
– capital
gains
taxes
–
on
investments
– tariffs
–
on
imports
• State
and
Local
Governments:
– raise
about
85%
of
their
funds
from
sales
taxes,
property
taxes
and
individual
income
taxes
13. Taxes
• Propor@onal
Tax
(Flat
Tax):
– Takes
same
percentage
of
income
or
wealth
from
all
taxpayers
(EX)
everyone
pays
12%)
• Progressive
Tax:
– Those
with
higher
incomes
or
those
who
are
wealthier
pay
a
higher
propor@on
of
their
income
in
taxes
(EX)
middle
class
pays
20%
and
wealthy
pay
30%)
• Regressive
Tax:
– Poor
people
pay
a
higher
propor@on
of
their
income
in
taxes
than
those
with
higher
incomes
or
those
who
are
wealthier
(EX)
sales
tax)
14. Federal Budget -
Expenditures
• Mandatory
spending:
– Certain
programs
that
must
be
funded
by
law
(Congress
has
no
choice
unless
they
change
the
law)
– Most
of
it
involves
en@tlement
programs
(Social
Security,
Medicare/Medicaid)
and
interest
on
the
na@onal
debt
• Discre@onary
spending:
– Programs
Congress
can
choose
to
fund
every
year
– Majority
of
this
goes
to
Defense
15.
16. Consequences
• Because
more
spending
and
tax
cuts
are
needed
during
a
recession,
the
government
engages
in
deficit
spending
–
spending
more
than
it
takes
in.
• Deficit
spending
forces
government
to
borrow,
which
leads
to
debt
-‐
the
U.S.
owing
money.
Currently,
the
combined
public
debt
of
the
U.S.
is
nearly
$20
trillion.
EX)
Reaganomics
did
grow
the
economy,
but
his
tax
cuts
and
huge
military
spending
produced
largest
budget
deficits
ever.
The
na@onal
debt
tripled
during
the
1980s.
