The Economy: Part 2

1
The Economy Part 2

• How do I explain this to my brother-in-law?
• Patrick Julius
• B.S. cognitive science, graduate student in
  behavioral economics

2
Keynes 101

• Unemployment happens when supply exceeds demand
  and products remain unsold.
• Government spending makes up the gap in demand,
  putting people and factories back to work.
  Countercyclical spending and automatic
  stabilizers smooth economic shocks.
• Once the economy is restored to full capacity,
  spending can be cut back and economic growth will
  lead to increased tax revenue.
• Deficits in a growing economy are a concern,
  because they lead to long-term debt. George W.
  Bush's deficits were much more abnormal than
  Obama's are, because they occurred during a time
  of relatively strong growth.
• Take-home point Deficit spending can be the
  least bad option during times of economic
  hardship.

3
US Debt in Historical Perspective
(includes government agencies)
(only non-governmental entities)
4
What has Obama done for the economy?

5
Actions Obama Took

• Administered TARP bank bailouts started by Bush
  to combat the credit crisis
• Bailed out the auto industry
• Saved a 1-3 million jobs throughout the auto
  industry supply chain
• Prevented a 1 trillion loss in the credit
  default swap market
• Passed 787 billion stimulus (Feb. 2009)
• 1/3 to states to prevent the layoff of police
  officers, teachers, etc. at risk of losing their
  jobs because of state budget shortfalls (300
  Billion)
• 1/3 in tax cuts for working-class families (over
  200 Billion)
• 1/3 to states for infrastructure projects (300
  Billion)
• Extended unemployment benefits
• Payroll tax cut
• Middle class tax cuts affecting 95 of taxpayers
• Small business tax cuts
• Small business loans
• Passed banking regulation (Dodd-Frank)

6
The Stimulus

• The American Recovery and Reinvestment Act
• 100 billion in education
• 60 billion in health care funding
• 147 billion in relief to state and local
  governments
• 80 billion in infrastructure
• 27 billion in renewable energy investment
• 288 billion in tax cuts for workers, homeowners,
  students, small businesses, and families
• Take-home point The stimulus helped a lot of
  people and saved a lot of jobs

7
Effect of the Stimulus

• Since the bottom in 2010 we have added 2.4
  million jobs (more than during the entire Bush
  administration)
• Up to 3.7 million jobs created or saved (1/3 of
  stimulus was to save jobs)
• 114,400 teaching jobs saved
• 45,000 jobs added in auto industry since bailout
• Increased GDP by up to 3.1
• Stimulus decreased unemployment by up to 1.8
• Extension of unemployment benefits saved millions
  of jobs by allowing people to continue buying --
  supported businesses
• Since 8.8 million jobs lost (half under Bush,
  half under Obama), we are still digging our way
  out

8

• If General Motors, Ford and Chrysler get the
  bailout that their chief executives asked for
  yesterday, you can kiss the American automotive
  industry goodbye.
• --Mitt
  Romney(2008)
• Source Mitt Romneys NYT OpEd Let Detroit Go
  Bankrupt, Nov18, 2008

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Note Seasonally adjusted data. Detroit figures
are for the metropolitan area. Source Bureau of
Labor Statistics
10
Source Bureau of Labor Statistics
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What else has Obama done for the economy?

• Cash for Clunkers The Car Allowance Rebate
  System
• Led to 400,000 new vehicle sales, averaging 50
  better gas mileage than the vehicles they
  replaced
• Added 40,000 full-time-equivalent jobs
• Increased gross personal income by 2 billion
  (offsetting most of the 3 billion cost)
• Doubled GDP growth for the third quarter of 2009
• Take-home point Cash for Clunkers reduced air
  pollution and stimulated manufacturing at the
  same time

12
Financial Reform Dodd-Frank

• First step towards regulating the shadow banking
  system
• Non-bank financial institutions that pose a risk
  to the financial system can be required to submit
  to Fed supervision.
• Discourages too big to fail by increasing
  capital, leverage, and other requirements as
  companies grow in size and complexity.
• Provides authority to regulate over the counter
  derivatives
• Hedge funds and private equity advisers must
  register with SEC and provide data on portfolios
  so risks can be monitored
• Regulators can impose capital and margin
  requirements on swap dealers
• Swap dealers must provide regulators with data
  allowing them to monitor systemic risks

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What does Dodd-Frank do?

• Volcker Rule Limits deposit banks from investing
  in risky assets
• Gets rid of conflicts of interest for Ratings
  Agencies, preventing financial institutions from
  being able to shop around for the best rating
• Requires financial institutions to have funeral
  plans detailed accounting of how the company
  could be liquidated if it became insolvent so
  that it wont become a burden on the tax payer.
• Requires the TARP bailout to be repaid
• Extensive consumer protection
• Mortgage and loan terms must be clear
• Banks cant raise interest on credit cards
  without advance notice
• Debit card fees must be in line with the actual
  cost of service

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What else does Dodd-Frank do?

• Makes derivatives and swaps more transparent,
  shining light on shadow markets
• Requires derivatives to be traded on public
  exchanges
• Regulates credit rating agencies to reduce
  conflicts of interest
• Increases transparency on executive compensation
• Requires publicly-traded companies to put
  executive pay up to shareholder vote every 3
  years
• Requires all corporations to report pay ratio
  between executives and employees
• Take-home point Dodd-Frank placed much-needed
  reins on out-of-control financial markets, but
  didn't go far enough.

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Why report CEO pay?Source AFL-CIO PayWatch
(aflcio.org)
Portion of income taken by the top 1 went
up---and peaked in 1929 and 2007
Real median income went down...
16
One of these things is not like the other
ones...Source Economic Policy Institute
17
Is it a low minimum wage? Yes.
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Or is it high CEO pay? Also yes.
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What's up with tax rates?

• On paper, income tax rates increase with income
  (progressive taxation). In practice, most rich
  people pay very little taxes. The majority of our
  tax burden falls on the middle class.
• How does this happen?
• Capital gains Investment income is taxed at 15
  while wage income is taxed up to 35
• 50 of capital gains go to 0.1 of Americanswe
  are the 99.9
• Tax havens and loopholes (e.g. Cayman Islands)
• Regulatory capture Lobbyists influence Congress
  to lower rates and add loopholes

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Distribution of income and taxesSource
rationalrevolution.net
These rates are on ordinary income. I've marked
the capital gains rate with a red line.
As you can see, that's where the 1 get most of
their income.
21
Republican Sound-Bytes Refuted

• They say 50 of Americans pay no taxes.
• No, in 2009, 50 of American households paid no
  Federal Income Tax because their taxable income
  was below the minimum for income tax
• 2009 was exceptional due to the recession and
  many short-term tax breaks in the Stimulus in
  most years about 35 pay no Federal Income Tax
• Payroll taxes, state taxes, and sales taxes
  disproportionately affect the poor. In 2010
• Poorest fifth of population paid 16.3 of income
  in taxes
• Second poorest fifth paid 20.7
• A GAO study found that in every year from 1998 to
  2005, approximately 55 percent of large
  corporations paid NO corporate income tax.

22
Republican Sound-Bytes Refuted

• They say The financial crisis was caused by
  poor people buying homes they couldn't afford.
• If it had just been about mortgage defaults, we
  could have handled it.
• The total value of mortgages in default in 2008
  was only 300 billion the cost of the financial
  crisis was near 15 trillion.
• It was the vast net of credit default swaps that
  spread the contagion through the whole system.
• This argument claims that the tail wagged the dog
  it was the ravenous appetite on Wall Street for
  subprime mortgages, which were being rated AAA
  and brought in huge profits due to the high
  interest rates, that led to the collapse of
  lending standards.
• People assumed that housing prices would only go
  up, so if they couldnt afford their payments,
  they could sell. Even experts on Wall Street used
  the same assumption.

23
Republican Sound-Bytes Refuted

• They say Regulations are strangling business.
• Lack of financial regulation just cost us tens of
  trillions of dollars. Overregulation is bad.
  That doesnt make under-regulation good.
• When polled, small business owners consistently
  report that lack of demand and cost of health
  care are hurting them more than regulation
• Obama has ordered reviews of all business
  regulations, and has removed almost as many as he
  added
• Dodd-Frank explicitly exempts institutions with
  less than 150 million in assets

24
Republican Sound-Bytes Refuted

• They say, Taxing the job creators will kill
  jobs
• The market collapse that resulted in over 10
  unemployment was almost entirely the result of
  activity on Wall Street the derivatives market
  the wealthy.
• Companies are sitting on record levels of capital
  they wont spend it to start hiring until there
  is demand.
• All modern companies depend on technological
  innovations originally pioneered by tax-supported
  research and development
• The transistor (the basis of the computer chip)
• Word processors and spreadsheets
• Graphical User Interfaces (Windows and the Mac)
• The internet

25
Republican Sound-Bytes Refuted

• The stimulus was a failure.
• According to CBO estimates, the ARRA
• Increased real GDP growth by 3
• Lowered the unemployment rate by 10
• Increased the number of people employed by 2
  million
• Increased the number of full-time equivalent
  workers by 3 million

26
Republican Sound-Bytes Refuted

• They say Republicans cut taxes Democrats raise
  taxes.
• Cutting the payroll tax was a Democrat-led
  initiative which was opposed by the majority of
  Republicans.
• The ARRA included 288 billion in tax cuts.
• Both Reagan and George H.W. Bush raised taxes
  when the situation required.
• Under Reagan, the Democratic Congress
  consistently passed budgets smaller than the
  administration requested.
• Reagan's capital gains rate at the end of his
  Administration was the same as his ordinary
  income rate (28 today capital gains are taxed
  at only 15).

27
Republican Sound-Bytes Refuted

• They say Obama is the food-stamp President.
• The number of hungry people in America
  dramatically increased as the result of the
  recession. If food stamps hadn't been increased,
  many people would have starved.
• Food stamps are one of the most effective
  economic stimulus policies available they have a
  fiscal multiplier of 1.73, a 73
  return-on-investment
• The total cost of the Supplementary Nutrition
  Assistance Program is less than 0.5 of our GDP.
• Obama increased funding to SNAP by 20 billion
  previously George W. Bush increased it by 19
  billion.