POSI 2320 – Exam II Comprehensive Study Notes

Higher Education

• Largest revenue stream for Texas State University
  • Debate in class between federal revenue and tuition/fees; most recent data normally show tuition & fees edging out every other single line item, but both categories dwarf all others.
• Largest single source of student aid for students at four-year universities
  • Institutional grants (funded out of endowments, tuition cross-subsidies, and state set-asides).
• Biden v. Nebraska (2023)
  • Administration attempted to cancel up to \$20,000 in federally-held student loans for qualifying borrowers.
  • Supreme Court ruled plan exceeded executive authority under the HEROES Act; debt relief did not go forward.
• University cost-containment strategies
  • Increasing enrollment (economies of scale).
  • Expanding Internet/online courses.
  • Larger class sizes & fewer sections.
  • Cutting low-enrollment courses.
  • Greater use of graduate teaching assistants.
  • Travel restrictions & hiring freezes.

Labor Market & Macroeconomic Snapshot

• Current unemployment rate: 4.1\%.
• Labor-force participation rate: 62.3\%.
• Labor force vs. unemployment
  • Labor force = everyone working or actively seeking work.
  • Unemployment rate = share of labor force without a job but looking.

Federal Budget Basics

• Deficit vs. debt
  • Deficit: \text{Outlays} - \text{Revenues} in one fiscal year.
  • Debt: cumulative total of all past deficits minus surpluses.
• Current gross federal debt: \$37.1\text{ trillion}.
• Debt-to-GDP ratio: 124\% (debt bigger than the nation’s annual output).
• Dangers of large debt
  • Limits future policy choices; interest-payment crowd-out.
  • Potential tax hikes that discourage production.
  • Possible inflationary pressure if financed by monetary expansion.
• Largest foreign holder of Treasuries: Japan.

Federal Spending Categories

• Mandatory (a.k.a. “uncontrollables”) vs. discretionary spending
  • Mandatory: automatic formulas; can run without annual appropriations.
    • Social Security
    • Medicare
    • Interest on the debt
  • Discretionary: must be set in yearly appropriations bills (defense, education, R&D, etc.).
• Baseline vs. zero-based budgeting
  • Baseline: last year’s dollars + assumed growth; budget “cuts” often just smaller increases.
  • Zero-based: every program starts at 0; must justify all expenses anew.
• Office of Management & Budget (OMB)
  • Collects agency requests, assembles the President’s formal budget, sends to Congress.

Anti-Poverty Programs

• Number of major federal programs that target poverty: 13.
• Aggregate annual federal anti-poverty outlays: \$1.39\text{ trillion}.
• Poverty definition (Census Bureau): 11.5\% of U.S. population (2024).
• Texas poverty rate: higher than national average.
• Temporary Assistance to Needy Families (TANF)
  • Federal block grant + state maintenance-of-effort; time limits & work requirements.

Entitlements & Social Security

• Entitlement = benefit automatically given to anyone meeting criteria set by Congress; \frac{2}{3} of all entitlement dollars go to the elderly (Social Security & Medicare).
• Social Security = single largest line-item in federal budget.
• Reform proposals
  • Privatization (individual accounts) – higher returns but exposed to market risk & admin costs.
  • Immigration reform (guest-worker or legalization) – expand contributor base.
  • Tax increases – raise or remove the taxable wage cap (currently \$176{,}100 in 2025).
  • Benefit reductions – new benefit formulas, raise eligibility age (≈ 8\% payout cut per year of age increase).
  • Ethical question: would benefit cuts “break the compact” with retirees who paid in?

U.S. Health-Care System

• International rankings
  • U.S. does not have the highest life expectancy.
  • U.S. does not have the lowest infant mortality.
  • U.S. does spend the most per capita: \$13{,}493.
  • Highest national obesity rate.
• Key models
  • Socialized medicine: gov’t owns facilities & employs providers (e.g., Veterans Affairs).
  • Single-payer: private providers, gov’t insurer (Medicare, Medicaid).
  • Out-of-pocket: pay cash if no insurance, no public program.
• Uninsured prior to ACA: 16\% of population; now ≈ 9\%.
  • Most likely uninsured: young adults, low-wage/part-time workers, undocumented, gig economy.
• Medicare (elderly) vs. Medicaid (poor); both = single-payer systems, enacted 1965 (LBJ).
  • Average lifetime Medicare taxes paid \approx \$100{,}000; average benefits \approx \$300{,}000.
• Affordable Care Act (Obamacare) major provisions
  • Individual mandate (repealed for tax years 2019+) and subsidies up to 400\% of poverty line.
  • Employer mandate: firms \ge 50 full-time workers must offer coverage or pay penalty.
  • Optional Medicaid expansion to 138\% of poverty (Texas did not expand).
  • Guaranteed issue / pre-existing condition protections.
  • Dependent coverage to age 26.
  • Contraceptive-coverage rule (scaled back after Burwell v. Hobby Lobby).
• Cost drivers
  • Cost-shifting (uncompensated care built into premiums).
  • Defensive medicine & malpractice threat → unnecessary tests.
  • Community-rating of high-risk enrollees.
  • High administrative & billing overhead.
• Defensive medicine: ordering extra tests mainly to avoid lawsuits.
• Tort reform: caps & procedural limits to curb frivolous malpractice suits.
• Partisan divide: liberals/Democrats most likely to favor universal coverage.

Religious Freedom & the Courts

• Free Exercise Clause = First Amendment.
• Tests used by Supreme Court
  • Compelling-interest test (strict scrutiny): federal actions must show compelling interest & least-restrictive means.
    • West Virginia v. Barnette (1943)
    • Wisconsin v. Yoder (1972)
  • General-applicability test: state laws valid if religion-neutral & generally applied.
    • Employment Division v. Smith (1990).
• When federal gov’t accused → compelling-interest test; when state/local → general-applicability (unless RFRA-like statute).
• Burwell v. Hobby Lobby (2014) applied the compelling-interest standard; closely held corporations exempted from contraceptive mandate.

Tax Policy

• Largest source of federal revenue: Individual income tax (≈ 49\% of all receipts).
• Largest tax paid by many households: Social Security payroll tax.
• Pre-2017 U.S. statutory corporate rate 35\% — highest in OECD → offshoring of profits/jobs.
• Tax Cuts & Jobs Act (TCJA, 2017)
  • Lower individual brackets; doubled standard deduction.
  • Child tax credit \$1{,}000 \to \$2{,}000.
  • 10{,}000 cap on state & local (SALT) deduction.
  • Corporate rate cut 35\% \to 21\%.
  • Repealed ACA individual mandate penalty.
• “Big Beautiful Bill” (BBB, 2025 proposal)
  • Extends TCJA individual cuts.
  • Child credit \$2{,}000 \to \$2{,}200.
  • Higher SALT cap.
  • Medicaid work requirements for able-bodied adults w/o dependents.
  • Tax deductions for tips & overtime.
  • \$ toward border-wall construction.
• Distribution: top 50\% of taxpayers pay 97\% of income-tax revenue.
• Capital gains tax: levy on profit from selling an asset > purchase price.
• Flat tax arguments
  • Simplicity (replace 100k-page code).
  • Universality (no loopholes).
  • Fairness (progressive code allegedly punishes success).
• National sales tax arguments
  • Simplicity; taxes consumption not income → encourages saving & exposes underground economy.

Deficits, Debt, & Partisan Preferences

• Short-term effect on deficit/debt
  • \uparrow Spending → \uparrow Deficit/Debt.
  • \downarrow Spending → \downarrow Deficit/Debt.
  • \uparrow Taxes → \downarrow Deficit/Debt.
  • \downarrow Taxes → \uparrow Deficit/Debt.
• Which party favors which?
  • Republicans: spending cuts, tax cuts.
  • Democrats: spending increases, tax increases.

Schools of Macroeconomic Thought

• Classical (Adam Smith): laissez-faire, self-correcting markets.
• Keynesian: government creates demand via spending deficits during recessions.
• Supply-side: lower taxes & regulation → higher production, “trickle-down.”
• Monetarist: fine-tune economy by adjusting money supply (Federal Reserve).
• Adam Smith = philosopher of laissez-faire capitalism.
• Current Fed Chair: Jerome Powell (since 2018; succeeded Janet Yellen).

Trade Policy

• Protectionism: tariffs/quotas shielding domestic producers.
  • U.S. protectionist during 19th-century industrialization & early 1930s (Smoot-Hawley).
• Smoot-Hawley Tariff Act (1930)
  • Avg. tariff > 40\%, sparked retaliatory trade war, deepened Great Depression.
• Largest two-way goods-trade partner (2024): Canada (closely followed by Mexico & China).
• Comparative advantage: countries specialize in goods with lowest opportunity cost → total world output rises.
  • U.S. winners: consumers (lower prices), export industries, high-skill labor, shareholders.
  • Losers: import-competing sectors & their workers (e.g., low-skill manufacturing).
• “Three-pronged” U.S. trade strategy
  1. Global agreements (WTO).
  2. Regional pacts (NAFTA/USMCA).
  3. Bilateral deals.
• Pros of free trade
  • Cheaper consumer goods.
  • Larger export markets.
  • Greater competition & innovation.
• Cons
  • Job dislocation; wage pressure in import-competing industries.
  • Strategic dependence on foreign supply chains.
• WTO (World Trade Organization): 160+ members, adjudicates disputes & enforces global trade rules.
• NAFTA → USMCA (entered 2020): U.S., Mexico, Canada free-trade pact with new auto-rules-of-origin, labor & environmental standards.
• Trans-Pacific Partnership (TPP): U.S. withdrew 2017; the remaining 11 countries formed CPTPP.

Quick Reference Equations & Figures

• Annual deficit: Dt = Gt - Tt where Gt = outlays, T_t = revenues.
• Gross debt: \text{Debt}t = \sum{i=1}^{t} D_i.
• Debt-to-GDP: \frac{\text{Debt}}{GDP} = 1.24 (i.e., 124\%).