Economic PolicyNovember 29, 2010

Long Term Growth and the Business Cycle in the United States

10000

10500

11000

11500

2000q1

2000q2

2001q1

2001q2

2001q3

2001q4

2002q1

2002q2

GD

P (

Co

nst

ant

2004

Do

llar

s)The Recession of 2001

Expansion

Recession Recovery

General Upward Trend

Monetary Policy

Fiscal Policy

The Structure of the Federal Reserve System

President

Senate

Federal ReserveBoard of Governors

7 Governors14-year terms

Chair serves 4-year term

Federal Open Market Committee7 Governors

6 Voting bank presidents7 Nonvoting bank presidents

Federal Reserve Banks12 Districts

12 Bank presidents

Member banks

nominates

confirms

Ben BernankeChairman of the Federal Reserve

Reasons Chair of Federal Reserve is Powerful

1. Close Communication with President.

2. Well-informed by talented professional staff.

3. Approves the appointment of 12 presidents of Federal Reserve Banks.

4. Inherits a Job held by Distinguished, Prestigious Leaders—until Greenspan?

Who Controls the Fed?Three Theories:

0. Not Congress

1. Bankers

2. Independent

3. PresidentA. Manipulates for Partisan advantage.B. Manipulates to get re-elected.

Recessions

1860 1870 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000

Presidential Elections and Economic Growth

0

1

2

3

4

5

No Election Not Seeking Reelection Seeking Reelection

Columns show the average percentage growth in GNP for each category for the years 1960 to 2001.

The Federal Deficit or Surplus, 1950-2009

0255075

100125150175200

United S

tate

s

Japa

nIta

ly

Gre

ece

France

United K

ingdom

Sweden

Ger

man

y

Spain

Denm

ark

Canad

a

Austra

lia

Cen

tral

Go

vern

men

t D

ebt

as P

erce

nt

of

GD

P (

2009

)

U.S. Federal Debt, though growing rapidly, is Smaller Than the Debt of

Other Countries

Fiscal Policy controversial

--Did Stimulus Work?Yes, Keynesian theory—Democrats No, monetarists--Republicans.

Divided Government reduces the likelihood of spending-based stimulus

Public Opinion About Taxes

U.S. Tax Burden is Less Than That in Many Other Democracies

0102030405060708090

100

United S

tate

s

Swed

en

Denm

ark

France

Italy

Ger

man

y

United K

ingdom

Gre

ece

Canad

a

Spain

Austra

lia

Japa

n

Tax

Pai

d a

s P

erce

nt

of

GD

P (

2008

)

Key Features of Tax System

1. Breadth of Tax System: How Many Tax Preferences?A. Home MortgageB. College ExpensesC. Medical InsuranceD. Charitable ContributionsE. Retirement Savings

Key Features of the Tax System (continued)

2. Progressivity of Tax System

A. Progressive Tax: Tax Rate on Rich is Higher (Income Tax)

B. Regressive Tax: Tax Rate on Poor is Higher (Social Security Tax)

C. Flat Tax: Rate is the Same for Everyone (Total Impact)

Percentage of Federal Income Tax Paid by Income Percentiles (2004)

Top 1% - 37%Top 5% - 57%

Top 10% - 68%Top 25% - 85%Top 50% - 97%

Income Inequality Is Greater in the United States Than in Many Other

Countries

0

0.1

0.2

0.3

0.4

0.5

United S

tate

s

United K

ingdom Ita

ly

Canad

a

Ger

man

y

France

Japa

n

Swed

en

Ineq

ual

ity

Major Components of the Federal Budget

Social Security

Medicare andMedicaidNationalDefenseInterest onDebtOther

35%

22%

17%

15%11%

Federal Revenues by Source

Social Insurance

Taxes40%

Excise Taxes3%

Other4%

Corporate Income Taxes

8%

Individual Income Taxes

45%

The End

How Americans Feel About the Economy Is a GoodPredictor of What They Think About the President

0

20

40

60

80

100

120

1955

1958

1961

1964

1967

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

Consumer Confidence Index President's Job Approval %