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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
• 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
• 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.
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
• 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
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
• “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?
U.S. Real Average After-Tax Income, 1979–2007
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/BakijaColeHeimJobsIncomeGrowthTopEarners.pdf (both accessed 5/23/12).
1979 = 100%
400%
350%
300%
250%
200%
150%
100%
1979 1985 1990 1995 2000 2005 2007
Top 1 percent
81st to 99th percentile
21st to 80th percentile
Lowest quintile
WHO ARE AMERICANS?
8.4%Lawyers
8.1%Other
5–10%
13.9%Financial
professions
15.7%Medical
10–30%
Occupations of the Top 1 Percent
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/BakijaColeHeimJobsIncomeGrowthTopEarners.pdf (both accessed 5/23/12).
31%Executives, managers,
supervisors (nonfinance)
< 30%
3.2%Real estate
4.2%Skilled sales
4.3%Not working or deceased
3%Business
operations(nonfinance)
3.8%Blue collar /
service
4.6%Computers,engineering,
technical fields
< 5%
Public Opinion Poll
Which of the following should be the primary goal ofthe federal government’s economic policy?
a) Promoting stable marketsb) Promoting economic prosperityc) Promoting business developmentd) 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) U.S. presidentb) U.S. Congressc) The chairman of the Federal Reserved) 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