Government and the Economy

Government and the Economy

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): Provide rules

for markets to function, without regard for who wins and who loses

– Activist state: Use policy to encourage certain outcomes

Goals of Economic Policy

• Governments facilitate free markets– Set rules for exchange and punish violators– Define property rights, contracts, and standards

for goods– Create money, allowing for easy exchange

Goals of Economic Policy

• Four fundamental goals of U.S. economic policy– Promote economic stability– Stimulate economic growth– Promote business development– Protect employees and consumers

Government and the Economy

• Tools for improving the economy– Spending– Tax cuts– Interest rate changes

• Though the tools might be sophisticated, the choice of how and when to use them is very political

Goals of Economic Policy

• Public policy: An officially expressed purpose or goal backed by a sanction– Can be embodied in a law, a rule, a regulation, or

an order

Promoting Stable Markets

Promoting Stable Markets

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

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, the government can

allow markets to form and products to be created and to travel

Promoting Economic Prosperity

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

Changes in Real Gross Domestic Product, 1960–2009

Promoting Economic Prosperity

• What factors contribute to economic growth?– Strong Investment– Technological Innovation– Sufficient and Productive Workforce

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

• Too big to fail.

– Governments can also invest in companies directly or support them through purchases

Promoting Economic Prosperity

• Technological Innovation– The federal government directly supports

innovation through the NSF and NIH• All findings from their support must be provided to the

public at large

– The military also invests huge sums in basic and applied research

Promoting Economic Prosperity

• Sufficient and Productive Workforce– America uses its immigration policy to attract

needed workers• H-1B visa issues?• Issue of undocumented workers?

– The federal government also helps support higher education through programs like student grants and loans

Low Inflation

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

• Trade-off?

Promoting Business Development

Promoting Business Development

• The federal government subsidizes many industries, especially agriculture– Subsidies can depend on which senators and

members of Congress head the relevant committees

– Small Business Administration lends to small businesses at non-commercial rates and also helps these businesses after natural disasters

Protecting Employees and Consumers

Labor History

• Bloody precedents and government non-interference – 19th and early 20th centuries– Suppression of labor unions

• 1935 – NLRB Act – Labor’s Magna Carta• 1938 - Fair Labors Standards Act

– Minimum wage law• 1950- Government Activism to ensure labor peace• The Reagan break of this tradition = Air Traffic Controllers

Action

Protection of Consumers

• The heritage: Progressivism , The Jungle– USDA

• 1960’s – R Nader – Unsafe At Any Speed.• 1972- Consumer Protection Agency

– Independent agency– Additionally –Product Safety Commission, Food and Drug

Administration, Department of Transportation.

• 2007 – Consumer Product Safety Commission– Case of Chinese lead paint

• consumer financial protection bureau

Four Schools of Economic Thought

Four Schools of Economic Thought

Four Schools of Economic Thought

• Laissez-faire capitalism– Government should protect markets and property

and little else

• Keynesian economics– Government smoothes economics cycles by

spending more and taxing less during downturns and doing the opposite as the economy improves

Four Schools of Economic Thought

• Monetarists– Focus on the money supply; the Fed makes it

easier to borrow during downturns, promoting investment and purchasing

• Supply-Side Economics– The government should try to keep taxes low to

encourage maximum investment and consumer purchasing

Tools of Economic Policy

• Monetary policies manipulate the growth of the entire economy by controlling the availability of money to banks

• Role of the Federal Reserve System

Tools of Economic Policy

• Federal Reserve Bank (“The Fed”)– Lends to banks and holds their short-term

reserves– Controls reserve requirement– Performs open-market operations (buys and sells

government bonds)– Sets the Federal Funds Rate

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

The United States of Inequality

• http://www.stanford.edu/group/scspi/cgi-bin/facts.php

About Taxes

• http://www.cbpp.org/cms/?fa=view&id=3505

• Myths and realities …

Tax Fairness is…

• Equal %• % Income received v. % taxes paid• Ability to pay• Should include all taxes in calculations of burden• A system that helps insure that those who benefit most, pay

the most• A system that contributes toward social just distribution of

resources – those who labor should be able to care for themselves and their families

• Tax avoidance issues

One Set of Principles

It’s so Unfair?Heritage Foundation

It’s so unfair (2)

• http://ctj.org/ctjreports/2013/04/who_pays_taxes_in_america_in_2013.php#.U2JJfYFdV8F

• http://www.ctj.org/pdf/taxday2013report.pdf

Who Doesn’t Pay Taxes

• Another Way of Looking at Who Pays No Federal Income Tax• A separate TPC analysis categorized people who do not owe federal

income tax in 2011 in a different way.* It found that of the filers who don’t owe federal income tax for 2011:

• 50 percent are in this category because their incomes are so low that they are less than the sum of the standard deduction and personal and dependent exemptions for which the household qualifies.  As TPC Senior Fellow Roberton Williams has noted, “the basic structure of the income tax simply exempts subsistence levels of income from tax.”**  Some 62 percent of the households who will owe no federal income tax in 2011 have incomes under $20,000.

Who Doesn’t Pay Taxes

• Another 22 percent do not owe federal income tax because they are elderly people who benefit from tax provisions to aid senior citizens, such as the exemption of Social Security benefits from income tax for beneficiaries who have incomes below $25,000 for single filers and $32,000 for joint filers and the higher standard deduction for the elderly.

• Another 15 percent (of the households who don’t owe federal income tax) don’t owe the tax because they are low-income working families with children who qualify for the child tax credit, the child and dependent care tax credit, and/or the earned income tax credit, and the credit(s) eliminate their income tax liability.*** 

• * Rachel Johnson, James Nunns, Jeffrey Rohaly, Eric Toder, and Roberton Williams, “Why Some Tax Units Pay No Income Tax”, Urban-Brookings Tax Policy Center, July 2011; and Roberton Williams, “Why Do people Pay No Federal Income Tax” TPC TaxVox, July 27, 2011. For a further discussion of this TPC analysis, see Aviva Aron-Dine, “Trends”, Milken Institute Review, First Quarter 2012, pp. 5-11.** Roberton Williams, “Why Do People Pay No Federal Income Tax?”, TPC TaxVox, July 27, 2011*** The remainder of those who do not owe federal income tax, about 13 percent, don’t owe federal income tax because of itemized deductions or other tax benefits.

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

Tools of Economic Policy

Tools of Economic Policy

Tools of Economic Policy

• Progressive taxes impact higher earners more than lower earners– Graduated income taxes– Luxury taxes

• Regressive taxes do the opposite– Sales taxes, excise taxes, FICA taxes– Greenspan/Reagan and Social Security tax story

Tools of Economic Policy

• Spending and Budgeting– Office of Management and Budget

• President’s budget office

– Congressional Budget Office• Non-partisan 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

Tools of Economic Policy

• Discretionary spending makes up only around 40% of all spending

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

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 many services in the

private sector– Can set rules to encourage certain outcomes

The Environment and the Economy

• Environmental regulation truly began in 1969– 1969 National

Environmental Policy Act (NEPA)

– Clean Air Act Amendments of 1970

– 1972 Clean Water Act – 1974 Safe Drinking

Water Act

The Debate on Global Warming

Debate on Global Warming

• America holds 10% of the world’s population but draws 25% of the energy produced– Almost all of which comes from fossil fuels

• How much should the nation sacrifice in terms of economic growth and consumption in order to respond to global warming?

Environmental Policies

Environmental Policies

• “Greening” America– Mitigation: reducing greenhouse gas emissions– R&D of alternative energy technologies– Adapting to a warmer climate

Environmental Policies

• Mitigation: Reducing Emissions– Tougher MPG standards for new cars

• 35MPG by 2020

– Higher gas taxes

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

Politics of Economic Policy Making

• Disagreement on how to achieve sound economy and on what economic priorities should be– Dems= equality and unemployment, government

regulation to achieve social objectives– Rep= Economic freedom

• Clash of expectations and ideas– The Crash of ’29 and FDR

• New Expectations

Politics of Economic Policy Making -2

• Keynesianism – Use spendi8ng and tax policy to promote growth and

low unemployment

– Role of CEA in 70’s

– Greenspan era

• Prosperity and elections• Groups that matter – many!

– Organized labor and business

• Protection from unfair foreign competition.

Business and Labor in the Economy

• Organized labor is no longer the power it once was– 35% of workforce was unionized in the 1950s– 12.3% today, largely in the public sector and in

certain clustered industries

• Business is represented by three large umbrella organizations– U.S. Chamber of Commerce, the Business

Roundtable, National Association of Manufacturers

WHO ARE AMERICANS?

Chapter 16

THE INCOME GAP

WHO ARE AMERICANS?

The Income Gap

SOURCE: Statistical Abstract of the United States, 2010, Table 678.

Top Five Percent*

$67,261

Pre-Tax Income, 1950–2008

In constant(2008) dollars

Next to Top Fifth**

$41,247

Middle Fifth**

$29,676

Second Fifth**

$22,298

Bottom Fifth**

$12,968

Top Five Percent*

$200,000

Next to Top Fifth**

$113,205

Middle Fifth**

$75,000

Second Fifth**

$49,325

Bottom Fifth**

$27,800

* Income at lower limit of top 5%.

** Income at upper limit of each fifth.

1950 1960 1970 1980 1990 2000

WHO ARE AMERICANS?

The Income Gap

SOURCE: Center on Budget and Policy Priorities, “Income Gaps Hit Record Levels in 2006, New Data Show,” April 17, 2009, www.cbpp.org (accessed 3/8/10).

Top Fifth + 87%

Change in After-Tax Income, 1978–2008

Top one percent + 256%

Next to Top Fifth + 32%

Middle Fifth + 21%

Second Fifth + 18%

Bottom Fifth + 11%

Thinking Critically About Economic Policy: Perspectives on Tax Cuts

Public Opinion Poll

Which of the following do you believe should be the PRIMARY goal of the 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

Do you believe the federal government’s level of involvement in the American economy should increase, remain about the same, or decrease?

a) Increase

b) Remain about the same

c) Decrease

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 do you believe most accurately describes the tax system in the United States?

a) Progressive tax system (upper tax brackets pay more)

b) Flat tax system (all income brackets pay the same)

c) Regressive tax system (upper tax brackets pay less)

Public Opinion Poll

Which of the following tax systems do you believe is best for the United States?

a) Progressive tax system (upper tax brackets pay more)

b) Flat tax system (all income brackets pay the same)

c) Regressive tax system (upper tax brackets pay less)

Public Opinion Poll

Do you believe the federal government’s economic policy should include as one of its goals the redistribution of wealth to reduce the disparities of wealth between the lowest and the highest income brackets?

a) Yes

b) No

Chapter 16: Government and the Economy

• Quizzes

• Flashcards

• Outlines

• Exercises

wwnorton.com/wtp8e

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

The United States and GlobalClimate Change

Coca-Cola and the Middle East:Brands as American Icons

Politics and the Great Recession of 2008

Your Money and Politics

The Goals of Economic Policy