Transcript Government and the Economy

Chapter 16
Government and the
Economy
Government and the Economy
Government and the Economy
• Government role in the economy
– Policy options that shape economic performance
– Balance between support for economic prosperity and
environmental, labor, and safety concerns
– Economic policy is frequently controversial.
• Many have ideas about spending, priorities, and economic theories
that are at odds with a given administration’s and Congress’s
approach to the national economy.
Government and the Economy
• The government’s response to the 2008 economic
meltdown raised fundamental questions regarding its
role in the economy.
– Minimalist state (Night Watchman):
• Government provides rules for markets to function,
without regard for who wins and who loses.
– Activist state:
• Government uses policy to encourage specific
outcomes.
Goals of Economic Policy
• Public policy: an officially expressed purpose or goal
backed by a sanction or reward
– Can be a law, a rule, a regulation, or an order
– There may be rewards for compliance.
– There may be penalties for failure to comply.
Government and the Economy
• Elements to economic policy, focus on three specific
tools for improving the economy
– Spending
– Tax cuts
– Interest rate changes
• Though these tools may be sophisticated, the choice
of how and when to use them is very political.
Goals of Economic Policy
• Fundamental goals of U.S. economic policy
– Promote stable markets
– Stimulate economic growth
– Promote business development
– Protect employees and consumers
Goals of Economic Policy
• Governments facilitate stable markets.
– Set rules for exchange and punish violators
– Define property rights, contracts, and standards for goods
– Create money, allowing for easy exchange
Promoting Stable Markets
Changes in Real Gross Domestic Product,
1961–2009
Protecting Employees and Consumers
Promoting Stable Markets
• Governments protect the welfare and property of
individuals and businesses.
– Maintain law and order (prevent theft and looting)
– Protect against racketeering (which blocks free markets)
– Prevent monopolies
Promoting Stable Markets
• Public goods: any good or service that is provided by
the government because it either is not supplied by
the market or is not supplied in sufficient quantities.
– By supplying public goods, government can allow markets
to form and travel, products created
Promoting Economic Prosperity
• Governments can also intervene in the economy to
promote economic growth.
• Gross National Product (GNP) and Gross Domestic
Product (GDP)
• The total value of goods and services produced
within a country
Promoting Economic Prosperity
• What factors contribute to economic growth?
– Strong investment
– Technological innovation
– Sufficient and productive workforce
• To be sure, both parties have a well-established
history of supporting development (billions in
government subsidies, grants, and programs) across
all three of the above.
Promoting Economic Prosperity
• Strong investment
– Governments can help create stable investment climates
that allow for investor and consumer confidence.
– Governments can regulate markets to prevent fraud and
allow for safe transactions.
– Governments can also invest in companies directly or
support them through purchases.
Promoting Economic Prosperity
• Technological innovation
– The federal government directly supports innovation
through the NSF and NIH.
• All findings from publicly funded research must be
provided to the public at large.
– The military also invests huge sums in basic and applied
research.
Promoting Economic Prosperity
• Sufficient and productive workforce
– America uses immigration policy to attract needed workers
in specific industries.
– The federal government also helps support higher
education through programs like student grants and loans.
– Job training programs
Promoting Economic Prosperity
Promoting Economic Prosperity
• Full employment
– When the nation enters a recession, the government often
spends extra funds to put people back to work.
• Low inflation
– The government now tries to regulate inflation by
controlling the money supply.
Promoting Business Development
• The federal government subsidizes many industries,
especially agriculture.
– Can depend on which senators and members of Congress
head the relevant committees
– Small Business Administration lends to small businesses
at noncommercial rates
Promoting Business Development
• Protecting employees and consumers
– National Labor Relations Board
• Oversees union elections, can mediate labor disputes
– Consumer Product Safety Commission, USDA, FDA, and
many other agencies work to ensure only safe products.
Promoting Business Development
Four Schools of Economic Thought
Four Schools of Economic Thought
• Laissez-faire capitalism
– Government should protect markets and property and little
else.
• Keynesian economics
– Government smoothes economic cycles by:
• Spending more and taxing less during downturns
• Doing the opposite as the economy improves
Four Schools of Economic Thought
• Monetarists
– Focus on the money supply
– The Fed makes it easy to borrow during downturns.
– Promoting investment and purchasing
• Supply-side economics
– Government should try to keep taxes low to encourage
maximum investment and consumer purchasing at all times.
Tools of Economic Policy
Monetary policies manipulate the growth of the entire economy
by controlling the money available to banks.
Tools of Economic Policy
• Federal Reserve Bank (“The Fed”)
– Lends to banks and holds their short-term reserves
(money!)
– Controls reserve requirement
– Performs open-market operations (buys and sells
government bonds)
– Sets the federal funds rate
• Lower rate when wants to stimulate investment so that
banks can provide cheaper credit
Tools of Economic Policy
• Fiscal policy: the use of taxes and spending to
influence the economy
– Specific taxes can draw on certain sectors of the economy
or certain classes of households.
• Excise tax: tax on specific goods, like gas or cigarettes
Tools of Economic Policy
Tools of Economic Policy
Tools of Economic Policy
• Progressive taxes impact higher earners more than
lower earners.
– Graduated income taxes
– Luxury taxes
• Regressive taxes have higher impact on low earners.
– Sales taxes, excise taxes, FICA taxes
Recall in terms of rate/impact not actual dollars
Tools of Economic Policy
• Spending and budgeting
– Office of Management and Budget
• President’s budget office
– Congressional Budget Office
• Nonpartisan and highly respected
• Discretionary spending
– Federal spending on programs that are controlled through
the regular budgeting process
U.S. Budget Deficits and Surpluses, 1960–2010
Uncontrollables as a Percentage of Total Federal
Budget
Tools of Economic Policy
• Discretionary spending makes up only around 40
percent of all spending.
Tools of Economic Policy
• Regulation and antitrust policy
– Monopolies are not subject to the normal rules of supply
and demand.
– Antitrust regulation is designed to prevent them.
• There is no objective manner to discern how much
regulation is needed for the country.
– Regulation tends to increase after a disaster in a given
policy domain.
Tools of Economic Policy
• Subsidies and Contracts
– Subsidies encourage people to do things they otherwise
could not afford to do
• $92b in 2007, not including agriculture
• Contracting
– The government purchases billions in services in the
private sector
– Can set rules to encourage certain outcomes
The Environment and the Economy
• Environmental regulation
began in 1969
– 1969 National
Environmental Policy Act
(NEPA)
– Clean Air Act
Amendments 1970
– 1972 Clean Water Act
– 1974 Safe Drinking Water
Act
Environmental Policies
Environmental Policies
• “Greening” America
– Mitigation: reducing greenhouse gas emissions
– R&D alternative energy technologies
– Adapting to warmer climate
• Mitigation: reducing emissions
– Higher MPG standards for new cars
• 35 miles per gallon by 2020
– Higher gas taxes
Environmental Policies
• Promoting alternative technologies
– Allows the government to spend more money without
asking Americans to make sacrifices
• Adaptation policies
– The infrastructure needed to grapple with rising sea levels
is almost frightening to comprehend.
Business and Labor in the Economy
• Organized labor not the power it once was
– 35 percent of workforce was unionized in the 1950s
– 12.3 percent today, largely in the public sector and in certain
clustered industries and states
• Business is represented by three large umbrella
organizations:
– U.S. Chamber of Commerce, the Business Roundtable,
National Association of Manufacturers
WHO ARE AMERICANS?
Who are the 1 Percent?
CHAPTER 16
WHO ARE AMERICANS?
U.S. Real Average After-Tax Income, 1979–2007
1979 = 100%
400%
Top 1 percent
350%
81st to 99th percentile
21st to 80th percentile
300%
Lowest quintile
250%
200%
150%
100%
1979
1985
1990
1995
2000
2005
2007
SOURCES: Congressional Budget Office, “Trends in the Distribution of Household Income between 1979 and 2007,” October 25, 2011, www.cbo.gov/publication/42729;
Jon Bajika, et al., “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality,” 2012, http://web.williams.edu/Economics/wp/BakijaColeHeimJobs
IncomeGrowthTopEarners.pdf (both accessed 5/23/12).
WHO ARE AMERICANS?
Occupations of the Top 1 Percent
< 30%
10–30%
5–10%
3.2%
< 5%
8.4%
Real estate
Lawyers
3.8%
Blue collar /
service
13.9%
Financial
professions
4.6%
Computers,
engineering,
technical fields
4.2%
4.3%
Skilled sales
Not working
or deceased
31%
Executives, managers,
supervisors (nonfinance)
3%
15.7%
Medical
Business
operations
(nonfinance)
8.1%
Other
SOURCES: Congressional Budget Office, “Trends in the Distribution of Household Income between 1979 and 2007,” October 25, 2011, www.cbo.gov/publication/42729;
Jon Bajika, et al., “Jobs and Income Growth of Top Earners and the Causes of Changing Income Inequality,” 2012, http://web.williams.edu/Economics/wp/BakijaColeHeimJobs
IncomeGrowthTopEarners.pdf (both accessed 5/23/12).
Thinking Critically About Economic Policy:
Perspectives on Tax Cuts
Thinking Critically About Economic Policy:
Perspectives on Tax Cuts
Thinking Critically About Economic Policy:
Perspectives on Tax Cuts
Public Opinion Poll
Which of the following should be the primary goal of
the federal government’s economic policy?
a)
b)
c)
d)
Promoting stable markets
Promoting economic prosperity
Promoting business development
Protecting the economic interests of employees
and consumers
Public Opinion Poll
Which of the following do you believe has the greatest
impact on the economy of the United States?
a)
b)
c)
d)
U.S. president
U.S. Congress
The chairman of the Federal Reserve
Individual state governments
Public Opinion Poll
Which of the following tax systems would be best for
the United States?
a) Progressive tax system (higher earners pay more)
b) Flat tax system (all earners pay the same)
c) Regressive tax system (higher earners pay less)
Public Opinion Poll
Do you believe the federal government’s economic
policy should include attempts to minimize tax
disparities between the lowest and highest earners?
a) Yes
b) No
Public Opinion Poll
Do you believe the federal government should
eliminate Social Security and Medicare programs and
require individuals to have their own supplemental
income and insurance?
a) Yes, end it
b) No, keep it
c) Make it optional
Chapter 16: Government and the Economy
• Quizzes
• Flashcards
• Outlines
• Exercises
wwnorton.com/we-the-people
Following this slide, you will find additional images,
figures, and tables from the textbook.
The Goals of Economic Policy
Promoting Economic Prosperity
Subsidies and Contracting
Digital Citizens
The Debate on Climate Change
The United States and Global
Climate Change
Politics and the Great Recession of 2008
The Goals of Economic Policy
Protecting Employees and Consumers