chapter 16

Question 1

public policy

Answer 1

The definition is a plan of action to address some
issue of concern. Pretty basic, but public policy is that—a plan of action by the government to
address an issue of public concern. For any given problem, there are different courses of action we
could take to address the problem. The government has to choose one of those courses of action.
Whatever one it chooses becomes our public policy

Question 2

social security

Answer 2

retirement benefit, disability payments, payroll tax

Question 3

retirement benefit

Answer 3

The first one is a retirement benefit. As the name implies,
this is money you get from the government once you’re retired. You should not depend on Social
Security for your entire income when you’re retired. That’s not what it does. It supplements your
income to help you pay your bills. So, when you get a professional job, you need to be putting away
money for your own retirement. Consider that the cake, and then Social Security benefits are icing
on the cake. They will help you complete your retirement funding, but you should be putting away
money on your own

Question 4

disability payments

Answer 4

The other type of Social Security benefit I want you to know about is disability payments. If you’re
disabled from working for over a year, Social Security will pay you money to help replace the wages
that you’re losing as a result of that disability

Question 5

payroll tax

Answer 5

a tax that
takes money out of people’s paychecks

Question 6

gross pay

Answer 6

total money that you earn

Question 7

net pay

Answer 7

what you actually get after money has been subtracted from your income

Question 8

retirement age

Answer 8

Number one, Congress could pass a law increasing the retirement age. In other words, you have to
wait longer to get Social Security benefits. The age for a full retirement under Social Security used to
be 65 years old, but for most people that’s now been increased to 67. So, the government has done
a little bit of this. But if Congress were to change it again and push it to like 70, then people would
have to wait longer to receive their benefits. That would mean less money is taken out of the system.
This is one proposed fix

Question 9

income cap

Answer 9

Another one is to change the income cap. Remember, you pay a 6.2 percent tax on your wages but
only up to $168,600. One proposal is to increase that cap. Maybe push it up to $300,000, or $500,000.
Or, maybe remove the cap altogether. Tax every dollar someone makes. You could do different things
with this cap, but if you change it, you would bring more tax revenue into the system because you’re
taxing more of the dollars that people make

Question 10

tax rate

Answer 10

A third alternative is to increase the tax rate. Right now, you pay a 6.2 percent tax. Maybe increase it
to 6.5 or 7 percent. If the tax rate goes up, more dollars come into the Social Security Trust Fund
because people are paying a higher percentage of their income

Question 11

means tested

Answer 11

Another alternative is to make Social Security means tested. Right now, if you worked and put
money into the system, you’re automatically entitled to take money out of the system. If we were to
make it means tested, we would say to certain people, “You already have enough money to retire on.
You don’t need Social Security, so you don’t get it. We’re going to save these Social Security benefits
for people whose retirement income is so low that they really do need the money to supplement their
income and pay their bills.” That’s the way Medicaid is, by the way. Everyone pays taxes that fund
Medicaid, but the only people eligible for Medicaid are poor people. So, the means-tested proposal
would introduce that idea into Social Security

Question 12

privatize

Answer 12

And then the last idea that has been proposed is to privatize Social Security. Right now, it’s a
government program. It’s funded and operated by the government. If we privatized it, that means
people’s Social Security money would be put in private funds like stocks, and bonds, and stuff like
that. The way it runs today, you have a fixed benefit. They have a formula that they will put your
information into, and out will come the number, and that’s how much money you get paid for Social
Security. It’s fixed. No matter how the economy is doing, that’s the number you’re entitled to. If we
privatized it, the amount you get would depend on the state of the economy, just like any other
investment. If you put money in the stock market, and the stock market goes down, you end up with
less money. But if the stock market goes up, you end up with more money. So, the idea here would
be to make your Social Security funds like other investments. You try and be as wise as you can to
invest in the right stocks, and bonds, and mutual funds to grow the money, but the amount you get
out is not fixed. It will depend on how successfully you navigated the market

Question 13

medicare

Answer 13

Now let’s talk about Medicare. This is a health insurance program operated by the government for
older people. Just like Social Security, Medicare is funded through a payroll tax, but the tax is lower.
The worker pays 1.45 percent of their income, and then the employer matches another 1.45 percent
for a total of 2.9 percent. So, the amount coming out of your check is 1.45 percent of your income.
Unlike Social Security, there’s no cap on how much income gets hit by this tax. Every dollar a person
makes, no matter how many dollars they make, gets hit by this 1.45 percent tax (and the employer
has to match another 1.45 percent). So, if someone makes $200 million, all $200 million are taxed.
Since Medicare is funded through a payroll tax, it faces the same long-term viability problem that
Social Security has. There are fewer workers paying tax to fund the program because fewer babies
are being born, and there are more people taking benefits out of the program because people are
living longer. How do we solve this problem? Some of the proposals that were made with Social
Security could also be applied here. You could increase the age that someone has to reach before
they’re eligible for the benefits. You could increase the tax rate so more than 1.45 percent gets taken
out of your check. You could make it means tested. So, there are ideas out there. You could probably
get creative and come up with some other plan as well. But until the government does come up with
some other plan, you have the same situation as with Social Security

Question 14

payroll tax

Answer 14

Just like Social Security, Medicare is funded through a payroll tax, but the tax is lower

Question 15

medicaid

Answer 15

The next program is Medicaid. Sometimes I get tongue tied on these and mix up Medicare and
Medicaid, but they’re different programs, so you need to make sure you understand the difference.
Medicaid is a government-run health insurance program for poor people. Medicare is based on your
age; Medicaid is based on your income. So, the government is going to help pay for the medical bills
of people who fall below a certain income level.
How is the program funded and operated? It does not have a special payroll tax like Social Security
and Medicare, so the government has to come up with the money for Medicaid out of its regular
budget. This is money they get from the federal income tax, or borrowing, or however else they raise
money to cover their general expenses

Question 16

cooperative program

Answer 16

Medicaid is a cooperative program run by the federal government and the states. Each state has a
Medicaid program, and it’s part of an agreement with the federal government. The agreement says
the federal government will send some money to the states to pay for Medicaid, as long as the state
government contributes some money from its budget. So, you have state and federal funds coming
together to pay the benefits that people receive. And then each state is relatively free to run the
program within its own jurisdiction. The federal government is providing some rules that every state
has to comply with, but there is some freedom on a state-by-state basis for individual states to come
up with their own rules. For this reason, eligibility varies across the country. Some states might have
a tougher standard, and other states might have an easier standard to satisfy. So, if someone wants
to know if they’re eligible for Medicaid, they need to check with the appropriate authority in the state
where they live.

Question 17

federalism

Answer 17

This is an example of federalism affecting a government policy. You remember earlier in the course,
we had a whole discussion about federalism, which means the division of power between national
and state levels of government. Medicaid is run jointly by the national government and the states.
Each of them contribute money to the system, but each state has some freedom to run the program
within its jurisdiction as it sees fit. And because of that, the rules for eligibility differ on a state by
state basis.

Question 18

business cycle

Answer 18

Now, let’s move on and talk about economic policy. To start this discussion, you need to understand
the concept of a business cycle. If you just use your imagination, the business cycle is like a graph
with a line that goes up, then it goes down, then it goes up, then it goes down. Kind of like those heart
monitors in the hospital, or maybe a roller coaster. What are we measuring that goes up and down?
The answer is GDP (gross domestic product)

Question 19

GDP (gross domestic product)

Answer 19

GDP is a number that reflects how much is being
produced in your country. We’re talking about goods and services. So, if GDP is going up, it means
businesses are doing well. They’re producing more things; they’re providing more services. If GDP
goes down, it means we’re contracting. Businesses are not producing as much, and there aren’t as
many services being performed in the economy. It’s a measure of productivity, and it’s never just a
straight line. We’re either increasing our production or decreasing our production. So, it moves in a
cycle, and it’s a measure of the health of our economy.

Question 20

Inflation

Answer 20

Those higher prices are inflation. Inflation is defined as an increase in the prices for goods and
services. We don’t want GDP to go up so high and so fast that we get sticker shock at the gas pump,
for example. Same thing goes with the lows. When GDP declines, unemployment increases because
now there’s less demand for goods and services. Businesses are producing less, which means they
don’t need as many workers. They’re laying people off. Well, if the lows in the business cycle get too
low, then there are too many people out of work, which means fewer people are making money,
which means there’s less money to spend, which takes demand down even more. That’s going to
cause businesses to produce even less, and then you can get locked in a vicious pattern of decline

Question 21

unemployment

Answer 21

Now, think about the relationship of GDP to unemployment. When the roller coaster track is going
up, that means our GDP is increasing. We’re producing more goods and services. That would mean
a lot of people have jobs because they’re the ones doing that production. So, unemployment would
be low. When GDP is going up, there are fewer people out of work because we need workers to
provide those services and to produce those goods.
Well, when it peaks out and then GDP starts going down, that means we’re producing less. If we’re
producing less, there are fewer people working, because if you’re not putting out products or
services, then you don’t need people to do those things. So, you get layoffs and stuff like that. When
GDP is going down, unemployment is going up. Hopefully that makes sense. There’s an inverse
relationship between GDP and unemployment

Question 22

recession

Answer 22

This is where the words recession and depression come in. A recession is defined as a period of two
or more quarters of consistent economic decline. In other words, a recession is a bad low in the
economy

Question 23

depression

Answer 23

A depression is a super bad low. Things dip even below recession level, and we’re just
stuck in a really bad pattern of people being laid off, which creates less money in the economy, which
creates even less demand for products. So, even more people are getting laid off, and
unemployment gets really high

Question 24

fiscal policy

Answer 24

Who makes fiscal policy? Congress and the president. The tools they use to make fiscal policy are
taxes and spending. Think about how it would work. Let’s assume the economy is in a recession.
There’s a lot of unemployment; not much demand for goods and services because people don’t have
a lot of money

Question 25

taxes and spending

Question 26

Keynesian economics

Answer 26

According to this theory called Keynesian economics, the government should spend
money. Do things to inject money into the economy so people get money in their hands and start
spending it. That will stimulate the economy and increase productivity

Question 27

economic stimulus

Answer 27

Well, this means the government’s going to go into debt. You saw stuff like this during COVID where
they gave relief checks. People can’t go to work, so they have less money, which means there’s less
demand for goods and services. That’s causing the economy to decline. So, if we give them things
like COVID relief payments, they will get money in their hands, start spending, create higher demand
for goods and services, and it will help businesses get back on track—economic stimulus

Question 28

budget deficit

Answer 28

As it turns out, our government is better at spending money than raising taxes to pay off its debt.
Every year the government runs a budget deficit. In other words, the government spends more money
than it takes in. So, on the balance sheet at the end of the year, the government is in the red. It owes
money. The amount by which the government overspends in a fiscal year is called a budget deficit

Question 29

national debt

Answer 29

How is that different from the national debt? The national debt is all of our budget deficits added
together. Our current national debt is roughly $35 trillion. Just to clarify, 35 trillion is the number 35
followed by twelve zeroes. And we add to that because every year lately, the government has run a
budget deficit. So remember, the national debt is the combination of all our budget deficits, and the
total national debt is roughly $35 trillion and climbing. This is because the people in charge of our
fiscal policy are better at borrowing than taxing to pay off the money they borrowed

Question 30

monetary policy

Answer 30

Now, let’s leave that behind and talk about a different kind of policy to smooth out the ups and downs
of the business cycle. This one is called monetary policy, and it is not made by Congress and the
president. Monetary policy is made by an institution called the Federal Reserve

Question 31

Federal Reserve (the fed)

Answer 31

The Federal Reserve is headed by a group of people appointed by
the president and confirmed by the Senate. They sit on a board, and this board has some tools at its
disposal to try and affect what happens in the economy. I want you to know about two of those tools:
interest rates and open market operations

Question 32

interest rate

Answer 32

You probably already understand the concept of an interest rate. If you borrow money, the person
who loans the money is going to charge interest. Like rent on the money. One thing the Fed does to
regulate the economy is manipulate interest rates. You don’t need to know how they do this, just
know that they have ways they can influence the interest rate (how much you would have to pay to
borrow money

Question 33

open market operations

Answer 33

Now, let’s talk about open market operations. This means the Fed goes into the financial
marketplace and starts buying or selling securities

Question 34

security

Answer 34

The word security means a financial instrument,
like a stock or a bond that you would trade as an investment. The Fed is acting like you would act if
you had money to invest. You would go buy stocks and bonds, and build a portfolio of financial
securities. You would hold on to those securities, and then when it was in your best interest, you
would sell them and get money back. You’re just managing your portfolio like this

Question 35

expansionary monetary policy

Answer 35

When the economy is doing poorly (we’re
either in a recession or headed for a recession) and the Fed wants to stimulate the economy, they
will engage in what we call expansionary monetary policy. They want to expand the economy to
increase demand for goods and services. They could do that by decreasing the interest rate, which
means people will borrow more money because it’s cheaper to do so. Then they have more money
to spend, which will create demand in the marketplace. They could also do it by purchasing
securities in the open market. When the Fed purchases securities, it pays people money for those
securities. That puts more money into circulation, gives people more to spend, so they’ll buy more
things, and that will increase demand

Question 36

contractionary monetary policy

Answer 36

On the opposite side of this, if the economy is going too fast, people are buying too much, businesses
are producing too much, and it’s creating inflation. So, the Fed wants to cool the economy down. It
will engage in what we call contractionary monetary policy. You want the economy to contract, to
pull back. They could increase interest rates. Make it more expensive for people to borrow money.
People will borrow less money, which leaves them less money to spend, and it decreases demand.
Businesses will produce less. The economy will slow down. The Fed could also help the economy
contract by selling securities on the open market. When the Fed sells bonds and other securities,
people have to pay money to buy those things. This is like a vacuum cleaner sucking dollars out of
circulation. People have less money to spend, which decreases demand for goods and services,
which puts businesses in a position where they have to produce less. You cool the economy down;
you can get inflation under control