Policy Synthesis

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.