Policies of the State

1. Policies of the State

2. State Activity • UK, Sweden, US • Very different…but very similar • Late 20th century, we see a push for strong government • Even expanded in many cases • When do we see increased demand for state activity in the US? • On the same token, when do we see demand drop?

3. OK…but the Third World is Different…Right? • Industrialized democracies are prosperous…democracies…per capita average income of over $20k • 2/3 of the world population does not fit in this category, however • Most are poor…some have mineral wealth…some have industrialized • On average, government operates at a lower level of involvement • But even that amount depends (see Table 4.1) • Why?

4. On the Whole, Why Are States Expanding? • People are becoming more prosperous • Government has gotten better at secret taxes • Elections lead to a bidding up of services • Internal pressures for bureaucracy to expand • Governments have less control in a globalized society

5. Constraints • Gross Domestic Product • PPP per capita GDP • How much of comparable things people in different states can buy • Effects of being a democracy • Broad needs • Life expectancies and mortality rates

6. Defense • Monopoly powers • Why? • Table 4.2 shows some great variation, however • U.S. spends 4% of GDP (highest advanced industrialized democracy) • North Korea spends 25% • What are the problems for Third World countries when they devote large funds to defense? • Then why do they?

7. Education • Most basic service • What makes it tough for Third World? • Table 4.3 • Differences

8. Research and Development • Industrialized countries need technological development • Competitive edge • They have given up on basic industries • Why? • Table 4.4 • Government-sponsored, industry-specific, and universities

9. Health and Social Welfare • Governments expected to provide reasonable services • Health, housing, old age security, disability/disaster • Difficulties for Third World: • Life is a catastrophe • Surplus funds • Large military budgets • Tables 4.5 and 4.6 • Life expectancies and infant mortality

10. It’s The Economy…Stupid

11. Citizen Concerns • What do we worry about when it comes to the economy? • Why are we concerned with these aspects more than others?

12. GROWTH • Performance Indicator 1 • Baumol’s Disease • Pay in service sector will increase at a rate greater than inflation, even though workers are not producing any more than previously done • Thus prices must increase or quality drops • College tuition, symphony concerts, hospitalization • States can make a difference in per capita GDP performance • Some make big mistakes in guiding investment in the economy

13. GROWTH • Rents • Transfers of money that do not relate to production • Building roads and education through taxes is productive • Pork barrel and patronage are not • Sends money to pockets of dominant coalitions • Inefficient! • Import-substitution industrialization • Try to encourage industry within state • High tariffs on imports • Then companies wrongfully take advantage

14. INFLATION AND UNEMPLOYMENT • Performance Indicator 2 • Inflation • General rise in prices…currency is worth less • Occurs when we have lots of $ to spend relative to what we want to buy • Excess demand • We bid against each other, driving up prices • Causes: • Deficit spending • Shortage of important goods • Monopolies • Trade restrictions • Effects of inflation over 5% annually: • Churns the society up—big winners and big losers • Diverts attention away from productive investment

15. INFLATION AND UNEMPLOYMENT • Unemployment • Not enough jobs for those that want to work • Those who can’t work are devastated and it is highly inefficient • To control inflation, government raises interest rates. Higher interest rates lead to more unemployment. • Government jobs programs

16. What About Distribution? • Two options to help equality • Subsidies and aids for the poor • Progressive taxation • As opposed to regressive… • Table 5.1 • Poorer states have greater inequality • Democracy makes a difference with social welfare • Governments can make a special effort to redistribute • Incomes are unequal in all systems

17. Independent Central Banks • Tools to help us make better economic policy • Set-up by government…handle transactions, coordinate private banks, control interest rates • Some are independent and some are controlled • Why might we want them to be separate? • “To take away the punch bowl when it looks as though people are beginning to enjoy the party…” • States with more independent central banks jhave stronger records on inflation

18. Corruption • This is an impediment to sound economic policy • Use of public resources for private gain • Effects are horrid • But different levels in different places • Thus…we can control it in theory • Cynicism, lack of faith, but also direct economic costs

19. Effects of Globalization? • Look at the world economic crisis • Are we set up like dominoes? • If so, how do we separate ourselves? • Currency markets, each day, move about a trillion dollars • IMF will come in and save you…along with upping interest rates to curb inflation and restraining government spending

20. Rational Choice • What is it?