Chapter 16 Government and the Economy. Government role in the economy –Policy options that shape economic performance –Balance between support for economic

Chapter 16

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.


• 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.


• 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.


• Fundamental goals of U.S. economic policy

– Promote stable markets

– Stimulate economic growth

– Promote business development

– Protect employees and consumers


• 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


• 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


• 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


• 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.


• 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.


• 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.


• 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



• 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


• 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


• 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.


• 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


• 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




• 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


• 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


• Discretionary spending makes up only around 40 percent of all spending.


• 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.


• 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


• 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

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%

Thinking Critically About Economic Policy: Perspectives on Tax Cuts



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

http://www.wwnorton.com/college/polisci/we-the-people8/texas/ch/15/studyplan.aspx

Following this slide, you will find additional images, figures, and tables from the textbook.

The Goals of Economic Policy


Subsidies and Contracting

Digital Citizens

The Debate on Climate Change

The United States and GlobalClimate Change

Politics and the Great Recession of 2008

The Goals of Economic Policy

Protecting Employees and Consumers

Documents

Chapter 16 Government and the Economy. Government role in the economy –Policy options that shape economic performance –Balance between support for economic