The U.S. is a mixed
economy: it plays a major rule in subsidizing, taxing, borrowing, lending. The
US has many regulations, as opposed to a truly free-market economy. Regulation
is designed to ensure economic efficiency and equity. Economic efficiency results when the output of goods and services
is the highest possible given the input used. Adam Smith supported a free
market economy as being optimal to achieving efficiency and leading companies
to be competitive. However, monopolies may emerge and eliminate competition,
leading to unfair price setting. Government regulation however can decrease
efficiency. A response to overregulation is deregulation. However, too little regulation can result. In 2008,
the housing economic crisis resulted as a result of banking and investment
firms not being regulated closely enough. Economic
equity occurs when an economic transaction is fair to each party. The
Securities and Exchange Act of 1934 was designed to protect investors from
dishonest or imprudent stock and bond brokers.
The economy tends to
follow a Boom-Bust Economic Cycle. The economy (GDP) peaks, then contracts. It
goes to a trough, and then expands, or recovers. Over time, the trend tends to
be upward. A recession is defined as a decline
in real (inflation-adjusted) GDP in two successive quarters (six months). A depression a situation in which there is a real
GDP decline of 10% or more, or a recession that is sustained for over two
years.
The US promotes economic
growth by supporting business in the following ways: Tax incentives, Corporate
subsidies, Infrastructure provisions, Trade treaty negotiations, Favorable
interest rates, Legal frameworks, Consumer of goods and services, Fiscal
Policy. The government promotes economic growth through taxing and spending
Demand-side
policies are the brainchild of John Maynard Keynes. Congress funds major
projects to provide jobs, hence income, which increases demand and books
production —> recovery from recessions. A potential problem is that
demand-side policies tend to increase budget deficits and government debt. The
current debt is $13 trillion; 15% of revenue is spent on interest payments. Deficit
is the amount of spending that exceeds earnings over a year. Demand-side
policies provide a short-term solution in the form of an economic stimulus.
Supply-side
policies were greatly promoted by Ronald Reagan. Congress stimulates business
activity — the supply of goods and services — through lower taxes to boost
investment. When companies suddenly have more money, they don’t necessarily
know what to do with the money. Supply-side policies tend to lead to more
socioeconomic inequality in society and to lower revenues and therefore budget
deficits and debt. Bush’s capital gains tax cut (28%—>15%) and highest
marginal rate tax cut (39%—>35%) did not increase economic activity enough
to compensate for lost revenue. Tax cuts and higher spending on Iraq War led to
$432 billion deficit (from a surplus!) and growth in debt from $5.7 trillion to
$10 trillion. Capital gain is money earned from selling stocks. The U.S.
has a corporate tax rate that is arguably uncompetitive, but it has the highest
corporate profits in the world. Many companies don’t pay taxes —> subsidies
(corporate welfare). $59 billion is spent on social assistance and public assistance;
wheat approximately $97 billion is spent on corporate subsidies.
Monetary policy is based
on adjustments in the amount of money in circulation. The government promotes
stable economic growth by controlling the money supply. A major thinker is
Milton Friedman. Central banks are the most important economic actors. The US
Federal Reserve Board plays important roles: supervising bank lending, limiting
risky banking activities, and providing emergency loans during crises (“lenders
of last resort”). There are two key actions: 1) Raising or lowering the
reserve rate, the amount of cash banks must deposit in the Federal Reserve,
2) Raising or lowering the interest rate on money leant to banks, which
shapes the rates banks lend to investors and consumers, and 3) buying and
selling of government securities, which affects the cost and supply of money. Low
interest rates stimulate borrowing, spending, and investment (cheaper to borrow
and pay back). Higher interest rates discourage borrowing, spending, and
investment (more expensive to borrow and pay back). Two major worries are
unemployment and inflation. The unemployment rate is the proportion of
the labor force actively seeking work, but unable to find jobs. The Bureau of
Labor Statistics (BLS) measures this. High unemployment means many people are
not earning income, which makes life harder for those individuals and families,
and leads to lower consumer spending in the economy. The inflation rate
is the rise in prices for consumer goods. The Consumer Price Index is the key
measure of inflation that relates the rise in prices over time, taken as
percentage increase of prices over a year. Causes of inflation are whatever
causes price increases: too much credit available, leading to over investment; Asset
“bubbles” caused by people willing to pay more than assets like houses are
worth because of confidence in ever-rising prices; Higher raw material prices:
especially energy; and higher labour costs: if wages grow faster than profits,
producers raise prices. Profit confidence: if MNCs can raise prices without
losing customers, they will
Inflation is a problem
because when prices rise, each dollar is able to purchase less than it used to,
therefore inflation = loss of purchasing power. Inflation and wages: “real
wages”. If wages are lower than inflation, workers earn less. If wages are
higher than inflation, workers earn more. The “real interest rate”: interest
rate - inflation rate. The Great Inflation of the 1970s occurred when widespread
availability of credit coupled with two oil price “shocks” in 1963 and 1979 led
to double-digit (13%) inflation. The response by the Federal Reserve was to
raise interest rates to 17.6%. This policy hurts borrowers, and helps lenders.
Less borrowing à
less investment à
jobs cut à less spending =
lower demand = lower prices = falling inflation. The outcomes were 1.3 million
jobs lost in US, 24% unemployment in the auto sector.
Third Wave of
Environmental Policy started with Silent Spring, a book by Rachel Carson
in 1962 that made people aware of DPP and started a wave of environmental
activism. This led to the EPA, National Environmental Policy Act, Clean Air
Act, and Clean Water Act. The Cuyahoga River in Ohio caught fire, showing the
need for action against water pollution. Earth Day was established in 1970. In
1970, President Richard Nixon signed the National Environmental Policy Act
(NEPA) and created the EPA. The NEPA mandated environmental impact statements
for public projects and has prioritized understanding our impacts on the
environment. The EPA conducts and evaluates research, monitors environmental
quality, sets and enforces standards, assists states in meeting standards, and
educates the public.
Problems in making
environmental policy: The tragedy of
commons: An economics theory that posits that individuals, acting
independently and rationally according to one’s self-interest, behave contrary
to the whole group’s long-term best interests by depleting some common
resource. The free rider problem: individual
companies benefit from the collective action of all, which optimizes cheating. Externalities (external costs): costs
borne by those who did not create the costs. Harming the environment is a cost
to the public, where the public has not chosen for that cost to be incurred
Industrial may seep into nearby lakes and rivers at a cost to society. The
Clean Air Act of 1963 and the Water Quality Act of 1965 required firms to
install antipollution devices. The ocean is an excellent example of a shared
resource that can easily be abused because its shared by many different nations
— Tragedy of the Commons.
Earth is warming to
between two and six degrees by 2100 due to carbon dioxide. United States is
leading producer of carbon dioxide, but has not reduced Kyoto treaty. Kyoto
requires reduction in greenhouse gas emissions to 1990 levels by 2010. States,
like California, are reducing emissions. America is mostly to blame for current
global warming. 25% of Americans deny climate change exists. 60% want
government to limit CO2 emissions. Over 50% want US to take action even if
other states do not. Republicans are shifting away from climate change denial.
The Keystone Pipeline from Alberta to Texas is a major issue.
In 2012, 49.7 million
live below the official poverty line - more than 16% of the population, or 1
out of every 6 people. Almost 20% of children (1 in 5) live in poverty. 58% of
Americans will spend at least one year in poverty between the ages of 25 and 78.
1.5 million households live in extreme poverty, surviving on less than $2 a day
before government support. Relative poverty: significantly less income and
wealth than other members of society —> measure of income inequality. OECD
and EU: income below 60% of the national median. In the US, income growth has
mainly occurred in the top 1% and top 10%.
Entitlement programs:
government benefits that certain qualified individuals are entitled to by law,
regardless of need, a.k.a. social insurance programs. Means-tested programs:
government programs only available to individuals below a poverty line, a.k.a.
public assistance programs. Social Insurance: Social Security, Unemployment
insurance, Medicare. Public Assistance Programs: Medicaid, Supplemental
Security Income, Temporary Assistance to Needy Families (TANF), Head Start,
Earned Income Tax Credit (EITC). In-kind benefits: Food stamps and housing
vouchers. Social Security provides payments to retired persons funded through
payroll taxes on employees and employers. The amount of money received after
retirement is contingent on the amount of money paid into the system while
working.
Problems arise on the
fact that the amount of money paid out to retirees comes from payroll taxes on
current workers’ salaries. The income problem is that middle class incomes have
been stagnant. The demographic problem: Post-WWII “baby boom” was followed by
declining birth rates, therefore there will be more people collecting in the
future but fewer people paying into the system —> social security is
mathematically unsustainable. Ratio of workers to Social Security beneficiaries
is declining. In 1945, 42 workers paid for one social security beneficiary. In
2005: 3.3 People were paying for each social security beneficiary. Republicans
would rather reduce the deficit than help the poor. Republicans would rather
keep military spending than reduce it. Both Republicans and Democrats want
to keep social security and Medicare benefits at current levels.