The Economy_ Part 2 - Ann Arbor Dems

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					          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
                       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.
US Debt in Historical Perspective
             (includes government agencies)
             (only non-governmental entities)
What has Obama done for the
                      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)
                 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
             $80 billion in infrastructure
             $27 billion in renewable energy investment
             $288 billion in tax cuts for workers,
              homeowners, students, small businesses, and
Take-home point: The stimulus helped a lot of people
 and saved a lot of jobs
              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
“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 Romney’s NYT OpEd “Let Detroit Go Bankrupt”, Nov18, 2008
Note: Seasonally adjusted data. Detroit figures are for
the metropolitan area. Source: Bureau of Labor Statistics
Source: Bureau of Labor Statistics
What else has Obama done for the
    Cash for Clunkers: The Car Allowance Rebate
        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
       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
             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
   Requires financial institutions to have “funeral plans” – detailed
    accounting of how the company could be liquidated if it became
    insolvent so that it won’t 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 can’t raise interest on credit cards without advance notice
       Debit card fees must be in line with the actual cost of service
     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
 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.
                 Why report CEO pay?
                      Source: AFL-CIO PayWatch (
                                           Portion of income taken by the top 1% went
Real median income went down...            up---and peaked in 1929 and 2007
One of these things is not like the other
            Source: Economic Policy Institute
Is it a low minimum wage? Yes.
Or is it high CEO pay? Also yes.
          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 Americans—we are the

 Tax havens and loopholes (e.g. Cayman Islands)

 Regulatory capture: Lobbyists influence Congress to lower rates

  and add loopholes
         Distribution of income and taxes
These rates are on ordinary income. I've       As you can see, that's where the 1% get
marked the capital gains rate with a red line. most of their income.
      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.
      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
            –       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
              couldn’t afford their payments, they could sell. Even experts on
              Wall Street used the same assumption.
      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 doesn’t 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
     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
              won’t 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
     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
     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
       – 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%).
     Republican Sound-Bytes Refuted
   They say: “Obama is the food-stamp
      –   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
      –   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.

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