Chapter 16

1. Chapter 16 Government and the Economy

2. Government and the Economy

3. 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.

4. 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.

5. 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.

6. 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.

7. Goals of Economic Policy • Fundamental goals of U.S. economic policy • Promote stable markets • Stimulate economic growth • Promote business development • Protect employees and consumers

8. 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

9. Promoting Stable Markets

10. Changes in Real Gross Domestic Product, 1961–2009

11. Protecting Employees and Consumers

12. 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

13. 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

14. 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

15. 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.

16. 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.

17. 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.

18. 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

19. Promoting Economic Prosperity

20. 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.

21. 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

22. 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.

23. Promoting Business Development

24. Four Schools of Economic Thought

25. 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

26. 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.

27. Tools of Economic Policy Monetary policies manipulate the growth of the entire economy by controlling the money available to banks.

28. 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

29. 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

30. Tools of Economic Policy

31. Tools of Economic Policy

32. 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

33. 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

34. U.S. Budget Deficits and Surpluses, 1960–2010

35. Uncontrollables as a Percentage of Total Federal Budget

36. Tools of Economic Policy • Discretionary spending makes up only around 40 percent of all spending.

37. 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.

38. 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

39. 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

40. Environmental Policies

41. 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

42. 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.

43. 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

44. Who are the 1 Percent? CHAPTER 16

45. 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).

46. Occupations of the Top 1 Percent < 30% 10–30% 5–10% 3.2% Real estate < 5% 8.4% Lawyers 13.9% Financial professions 3.8% Blue collar / service 4.6% Computers, engineering, technical fields 4.2% Skilled sales 4.3% Not working or deceased 31% Executives, managers, supervisors (nonfinance) 3% Business operations (nonfinance) 15.7% Medical 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).

47. Thinking Critically About Economic Policy: Perspectives on Tax Cuts

48. Thinking Critically About Economic Policy: Perspectives on Tax Cuts

49. Thinking Critically About Economic Policy: Perspectives on Tax Cuts

50. Public Opinion Poll Which of the following should be the primary goal of the federal government’s economic policy? • Promoting stable markets • Promoting economic prosperity • Promoting business development • Protecting the economic interests of employees and consumers