three big things we gotta know

THE TIME AND RISK TEST

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Three Big Things We

Gotta Know

Battle of the Theories

Supply Side versus

Keynesian

What is

“Supply Side Economics”?

Supply Side Economics

A school of economics and thinking popularized by President Reagan in the 1980s



Term is widely used today



Term is widely used today Liberals disparage it by calling it ‘trickle

down’ economics




down’ economics Presidents Reagan and Bush (43) were

‘supply siders’

Supply Side Economics A school of economics and thinking

popularized by President Reagan in the 1980s


down’ economics Presidents Reagan and Bush (43) were

‘supply siders’ Is Dr. S??


Presidents Clinton, Carter, Nixon and Obama were/are not. Bush (43) changed mid-stream and went to the dark side

What is a supply sider?

First: the belief that economic growth can be most effectively created by policies that incent people to produce (or supply) goods and services; hence the name

What is a supply sider?

First: the belief that economic growth can be most effectively created by policies that incent people to produce (or supply) goods and services; hence the name

The foundation of supply side: the government can stimulate growth and prosperity by lowering marginal tax rates

Supply Side

Supply siders believe that high marginal tax rates discourage income, output and the efficient use of SRTHAU

Supply Side


But what are marginal tax rates?

Supply Side


But what are marginal tax rates? MTR: refers to the tax rate on the ‘last

dollar’ earned

Supply Side Supply siders believe that high marginal

tax rates discourage income, output and the efficient use of SRTHAU

But what are marginal tax rates? MTR: refers to the tax rate on the ‘last

dollar’ earned In the “progressive” U.S. tax system,

taxes rise with income earned… you pay a higher tax rate on $500,000 income than on $50,000 income

Supply Side, redux

Therefore, as the marginal tax rate rises, you get to keep less of what you earn

Supply Side, redux

Therefore, as the marginal tax rate rises, you get to keep less of what you earn

Supply siders believe that high MTRs cause the highly productive to work less, invest less and thus create less supply and dampen growth

Supply Side, redux Therefore, as the marginal tax rate rises,

you get to keep less of what you earn Supply siders believe that high MTRs

cause the highly productive to work less, invest less and thus create less supply and dampen growth

High MRTs do two things: people are not incented to work harder/make more money and they seek ‘tax shelters’ for income, taking money out of efficient use

For Example….

During President Reagan’s eight years in office (1981-1989), the top marginal tax rate declined from 70% to 28%

For Example….


On eight of 10 economics measures, the economy performed better during Reagan than before or after

For Example….


On eight of 10 economics measures, the economy performed better during Reagan than before or after

Inflation plunged, employment rose, real income all grew

Big Point#2

The

Laffer Curve

Laffer Curve

Named after economist Arthur Laffer

Laffer Curve

Named after economist Arthur Laffer Describes the trade-offs between tax

rates and tax revenues

Laffer Curve

Named after economist Arthur Laffer Describes the trade-offs between tax

rates and tax revenues Laffer contends there are two

consequences to tax rates: arithmetic and economic

Laffer Curve

Named after economist Arthur Laffer Describes the trade-offs between tax rates

and tax revenues Laffer contends there are two

consequences to tax rates: arithmetic and economic

Arithmetic: tax rates are lowered, tax revenues will be lowered by the decrease of the rate. Opposite is also true: higher taxes, more $

Laffer Curve

Economic effect recognizes the positive impact that lower tax rates have on work, output and employment. Raising tax rates has the opposite effect

Laffer Curve

Economic effect recognizes the positive impact that lower tax rates have on work, output and employment. Raising tax rates has the opposite effect

Laffer curve proponents contend that lowering tax rates can, in fact, increase tax revenues

To quote Laffer

“Over the past 100 years, there have been three major periods of tax-rate cuts in the U.S.: the Harding-Coolidge cuts of the mid-1920s; the Kennedy cuts of the mid-1960s; and the Reagan cuts of the early 1980s. Each of these periods of tax cuts was remarkably successful as measured by virtually any public policy metric.”

Laffer Sez

“Over the four years prior to 1983, federal income tax revenue declined at an average rate of 2.8 percent per year, and total government income tax revenue declined at an annual rate of 2.6 percent. Between 1983 and 1986, federal income tax revenue increased by 2.7 percent annually, and total government income tax revenue increased by 3.5 percent annually.”

Last Laffer

Also works with capital gains tax

Last Laffer

Also works with capital gains tax Reagan reduced capital gains from 28%

to 20%

Last Laffer

Also works with capital gains tax Reagan reduced capital gains from 28%

to 20% CG tax revenues leaped 50% from 1980

to 1983

Who is John Maynard

Keynes … and why is he so

popular again?

J.M. Keynes (say ‘canes’)

British economics born 1883, died 1946


British economics born 1883, died 1946 President Obama is a Keynesian


British economics born 1883, died 1946 President Obama is a Keynesian We’ve taken a multi-trillion $ flyer on the

old boy’s’ theories so we’d best see whazup


British economist born 1883, died 1946 President Obama is a Keynesian We’ve taken a multi-trillion $ flyer on the

old boys’ theories so we’d best see whazup

Considered by some the most influential economist of the 20th and now 21st centuries

What is Keynesian theory? Foundation: an interventionist

government that uses fiscal and monetary policies to mitigate the negative effects of recessions, depressions and booms



Became popular during the Great Depression that began worldwide in 1929



Became popular during the Great Depression that began worldwide in 1929

Keynes contended that when people lost confidence, they slow down spending

What is Keynesian theory? When spending slows, it impacts others,

who in turn lose confidence, thus slowing their spending

What is Keynesian theory? When spending slows, it impacts others,

who in turn lose confidence, thus slowing their spending

The cure? The government should expand money supply (fire up the presses) and spend money. The bigger the downturn, the bigger the spending/printing

What is Keynesian theory? Keynesians claim that the Great

Depression was cured by government spending, in this case for WWII



After WWII, Keynesian was all the rage worldwide



After WWII, Keynesian was all the rage worldwide

And after falling out of favor during 70s-90s, he’s baaaaaaack

What is Keynesian theory? U.S. and other countries (China, EU,

Japan, India, etc.) tried to “spend their way” out of current recession

What is Keynesian theory? U.S. and other countries (China, EU,

Japan, India, etc.) tried to “spend their way” out of current recession

Obamanomics: Keynesians on steroids

Obamanomics

2009: $

So with all that spending, we must be more prosperous, right?

So with all that spending, we must be more prosperous, right?

National unemployment rate: 9.6% Florida unemployment rate: 12%

Assignment for February 8

Next week we begin our next section of Basic Economics: “The National Economy”

Assignment for February 8

Next week we begin our next section of Basic Economics: “The National Economy”

Read and study chapter 15: “National Output”

three big things we gotta know

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