ECON & HEG IN DEBATE

Part OneEconomics

What is Economics?

The study of how we use limited resources to meet unlimited wants

This means that SCARCITY is at the heart of our understanding of modern economics

“Invisible Hand”

Ascribed to Adam Smith (who was not necessarily a capitalist)

Claims that markets direct individual self-interest towards socially desirable outcomes

Has become the foundation of free market capitalism

“Capitalism”

Economic system based on the private ownership of the means of production

Is driven by the production of goods and services for a profit

Types of capitalism Mercantilism Free-market economy Social market economy State-ownership Mixed economy

“Socialism”

Economic system based on collective ownership of the means of production

Is driven by the production of goods and services to meet social needs

Covers a variety of sociopolitical systems Anarchism (libertarian socialism) Authoritarian communism Democratic socialism Syndicalism

“Supply & Demand”

Describes how many markets determine prices

If supply increases relative to demand, prices DECLINE…

If supply decreases relative to demand, prices INCREASE

If demand increases relative to supply, prices INCREASE

If demand decreases relative to supply, prices DECREASE

“Elasticity”

Describes the degree to which one economic variable affects others

ELASTIC variables exhibit large responses to relatively small changes in another variable

INELASTIC variables exhibit small responses to relatively large changes in another variable

“GDP”—Gross Domestic Product

Value of expenditures on final goods and services

U.S. GDP has increased steadily—when you hear about “economic growth”, they are usually referencing GDP

‘Recession’ means 6 months (2 quarters) of negative growth

GDP as a measure of economic performance can be misleading—non-monetarized labor, shift of non-monetarized labor into the market

“Keynesianism”

School of economic thought arising from the ideas of John Maynard Keynes

Claims that markets often produce inefficient outcomes that can/should be corrected by government intervention

Interventionary instruments include Fiscal policy Monetary policy

Debate about effectiveness usually centers on interpreting the effectiveness of FDRs response to the Great Depression

“Supply Side Economics”

Theory that economic growth should be stimulated by lowering barriers to production

Generally means lowering tax rates on income (individual and corporate) and capital gains

Strongly associated with “Ronald Reagan” and “trickle down economics”

“The Markets” Commodities: exchange, in bulk, of

everything from orange juice to petroleum—include both ‘spot’ and ‘futures’ contracts

Currency: exchange of different national currencies

Debt: issuance and trading of bonds (promises to pay in the future)

Equity: issuance and trading of stocks (shares in a company)

“Competitiveness”

Describes the ability of a particular group (company, sector, nation) to sell goods in a given market RELATIVE to other groups in the same market

Competitiveness expresses profitability, which is directly tied to income, wealth, etc.

EXP: Saudi vs. tar sand oil production

“Productivity”

Describes the efficiency of production Productivity increases when greater

output becomes possible with the same input

Often couched in terms of “worker productivity”, but is also a measure of technological efficiency

Growth rates of 1-2% are good

“Exchange Rates”

Rate at which one currency is exchanged for another and/or the value of one nation’s currency in terms of another currency

Appreciation: increase in value of a currency relative to others—benefits consumers and hurts producers, ceteris paribus

Depreciation: decrease in value of a currency relative to others—benefits producers and hurts consumers, ceteris paribus

Currencies typically are pegged, floating, or mixed

“Employment Rate”

Is usually expressed in terms of ‘unemployment’

The official unemployment rate is 7.6%--percentage of the workforce that is seeking employment but is unable to find a position

Including the number of people who are no longer actively seeking employment takes the rate up to 15%+

‘Normal’ unemployment levels are between 4 and 6 percent

“Inflation” & “Deflation”

Inflation: rise of general level of prices of goods and services over time

Deflation: decline of general level of prices of goods and services over time

PREDICTABILITY is key, although economies tend to do best with relatively low, steady inflation (1-4%)

Deflation, over any extended period, and hyper-inflation can quickly wreck economies

“Interest Rates”

Rate at which interest is paid by a borrower to a lender for the use of money

Are important because they directly affect consumer spending, the housing market, etc, and thus impact all financial markets

Key interest rates are: Federal funds rate (rate for overnight, uncollateralized

loans between banks) Prime rate—general FFR+3%

Are generally linked to inflation on an inverse basis

Stagflation!

“Confidence” Consumer confidence: expression of

consumer sentiment about the current and future status of the economy

Often used as a predictor of future consumer behavior

Particularly important because consumer spending makes up over two-thirds of the economy

Business confidence: expression of business sentiment about the current and future status of the economy

Often used as a predictor of future business behavior (hiring, tech investment)

“Income (in)Equality”

Expression of the relative distribution of income (and wealth) across the population

Is highly variable, both across time and between countries

Income inequality is growing rapidly in the U.S.

National Debt

Governments usually borrow through the use of bonds

U.S. national debt has two parts Public debt—securities held by non-federal

investors ($12T) Inter-Government debt—IOUs held by federal

accounts on other federal entities ($5T) Influences interest rates, and more

broadly, market sentiment

Oil Prices

Influence the economy—a little bit

Dedev

Premise 1: economic collapse is inevitable

Premise 2: collapse sooner is better than collapse later

Part 2Leadership

Major US Foreign Policy Schools

Realist Maximalists Neoconservatives George H.W.

Realist Minimalists Isolationists Offshore balancers (Layne)

Liberal Maximalists Wilsonians (spread democracy around the world) Clintonians (power used in the spread of ideals)

Liberal/Constructive Minimalists Fukuyama (let markets do their work) Diamond (let freedom do its work politically)

Measuring Hegemony

How does one define hegemony? Easiest definition is holding a preponderance of power relative to other states—power as a goal of states, a measure of influence, an outcome of victory, control over resources and capabilities

Hegemony can be measured along several axes Military power (power projection)—ability to enforce

your will through military might Economic power—ability to pay for militaries, bribe

allies, exert pressure on other states Cultural power—attractiveness of yoru way of life Ideological power—attractiveness of your ideas

Polarities The international system is often

describes as having “poles,” conglomerations of power around one or more states Apolar (no dominant power) Unipolar (one dominant power) Bipolar (two competing powers) Multipolar (multiple competing powers)

Hegemony can also be described in terms of global and regional influence

Status of the Current System

Major powers (global influence) Middle powers (global prominence,

regional influence) Other states of influence

Major Powers

China European Union France Germany Great Britain Japan Russia United States

Middle Powers

Australia Brazil Canada Egypt India Indonesia Iran Israel Italy Pakistan South Africa South Korea Turkey

Other States of Influence

Oil Producers (Iraq, Kuwait, Saudi, Venezuela)

High Population States (Bangladesh, Mexico)

Emerging Regional Powers (Ethiopia, Nigeria, Vietnam, Thailand)

Major Aid Providers (Nordic states, Netherlands)

Is the U.S. a Hegemon?

Military Power Outspends the world Unmatched power projection capabilities

(aircraft, carriers, missiles) Unmatched surveillance capabilities Unmatched technological edge (smart

weapons, space weapons, etc) Large population base from which to draw

soldiers)

The U.S. [cont’d]

Economic Power One-fourth of the world’s gross product Center of technological innocation Most important banks and stockmarkets Massive corporate power Huge trade flows—mutual dependenceis Magnet for high-skilled labor from other

countries Vast personal wealth

The U.S. [cont’d]

Cultural Influence Media English language (2 billion speakers/learners) Pop culture

The U.S. [cont’d]

Ideological Influence Democratic attractiveness Free markets Reputation [does Obama fix this?]

Sustainability of Hegemony

Equilibrium theory says that powers will be balanced, and various theories of decline argue that a state can only remain dominant for so long before it loses the economic, military, and/or political capacity to do so

That raises the question—who might replace the U.S. as a unipolar power, or challenge the U.S. in a bi- or multi-polar system?

Contender #1: European Union

Pros High degree of soft

power Large population Powerful economy Strong education

system Powerful

corporations Relatively large

collective military

Cons Military is weak,

out-dated, and relatively poorly trained

Lags in miltiary tech development

Aging population Lack of unified

decisionmaking structures

Contender #2: China

Pros Huge population Surging economy

and manufacturing capacity

Large military Strong central

government Desire to lead/have

a presence on the global stage

Cons Population strains and

population aging Relative lack of tech

innovation, esp. in military matters

Fragile central government

Economic development is subject to outside disruption

External resource dependence

Lack of military power projection capability

Contender #3: Japan

Pros Tech innovation Robust economy Access to military

tech goodies

Cons Tough

neighborhood, not popular with neighbors

Aging, declining population

External resource dependence

Inward-focused security culture

Contender #4: Russia

Pros Big military Huge resource

base Continental

footprint Strong central

government

Cons Aging, declining,

drunken population Suspicious

neighbors Internal

factionalism

Contender #5: India

Pros Large number of

well-educated persons

Huge population (big army!)

Cons Population

pressures High rates of rural

poverty Lack of wealth

Other Potential Powers

Brazil Indonesia Iran Nigeria Pakistan