SIXTEEN: ECONOMIC

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• CHAPTER
• SIXTEEN ECONOMIC
• POLICY

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Types of Economic Systems, I

• Capitalism an economy in which individuals and
  corporations own its capital goods or productive
  capacity
• Referred to as a free-market economy
• Popularized by Adam Smith in The Wealth of
  Nations (1776)
• As each person seeks to maximize his or her own
  well-being the collective well-being is enhanced.

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Socialism and Communism

• Socialism an economic system in which a
  countrys productive system is under the
  collective ownership and control of the people
• Communism a more advanced form of economic
  organization where collectively owned economic
  units would also become self-governing leading to
  the disappearance of the state

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Mixed Economies

• What most systems use today
• Government plays a large role in the economies of
  most systems
• Government intervenes in the economy through
  taxation and spending and extensive social
  welfare systems

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Government and the Economy

• An undeniable tension exists between capitalism
  and democracy
• The capitalist marketplace rewards and encourages
  inequities that threaten democratic beliefs about
  individual equality, if unchecked
• The potential for greater exercise of influence
  by the wealthy weakens the concept of one person,
  one vote

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Economic Problems

• Depression a period of prolonged high
  unemployment
• Inflation a condition of increasing prices
  during which wages and salaries do not keep pace
  with the price of goods
• Recession the failure of the economy as a whole
  to produce increasing amounts of goods and
  services for two or more consecutive quarters

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Economic Tools

• Fiscal policy government decisions on how much
  money it will spend and how much tax it will
  levy
• The president is assisted in making these kinds
  of decisions by
• The Secretary of the Treasury
• The head of the Office of Management and Budget
• The chair of the Council of Economic Advisers

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The Theory Behind Fiscal Policy

• John Maynard Keynes A General Theory of
  Employment, Interest and Money (1935)
• Argues that government could stimulate the
  economy by increasing spending in a time of high
  unemployment
• This would stimulate the economy and cause
  greater production and hiring
• The deficit could be justified as higher
  employment would increase tax revenue

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A Change in Fiscal Policy

• The Reagan administrations approach was
  supply-side economics
• As government taxes less, more money can be
  privately invested
• When the economy is sluggish, tax cuts are needed
  to stimulate growth
• This stimulates savings which can then be used by
  banks for loans for business expansion and
  modernization

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Monetary Policy

• Attempts to regulate the economy through control
  of short-term interest rates and the supply of
  money. Policy is made by
• the Federal Reserve Board and
• the Federal Open Market Committee
• Fed members are appointed by the president with
  Senate consent
• The chairman is appointed for 4 year terms

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Using Economic Policy to Achieve Political Goals

• Conservatives and Republicans are generally more
  tolerant of high unemployment than are liberals
  and Democrats
• Both sides play politics in congressional
  districts
• Democrats spend more in their favored districts
  when they are in power
• Republicans spend more in their favored districts
  when they are in power

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Current Issues, I

• Tax reform complexity in tax policy due to tax
  policy being used to achieve various social
  goals
• Clinton preferred fairness and deficit reduction
• Bush has preferred cutting taxes for the rich and
  some for other income groups

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Current Issues, II

• Tax fairness the difference focuses on how the
  tax burden is spread throughout society
• Progressive taxes require wealthy and
  middle-income households to pay higher
  percentages of their income in taxes than poorer
  households
• Regressive taxes require the poor to pay
  proportionately more than those in middle and
  upper-income brackets

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Other Tax Issues/Proposals

• Tax burdens what proportion of federal income
  taxes are paid by Americans?
• Tax simplification making the tax code more
  understandable and easier to deal with
• Flat taxes single rates that would affect all
  income groups
• A national sale tax to replace the income tax
  with a consumption tax

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Income Distribution

• Should government help those with the lowest
  income through progressive taxation, or through
  spending policies that provide heavily subsidized
  services to the poor?

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Deficit and Debt

• A budget deficit occurs when federal spending
  exceeds federal revenues
• The total of all budget deficits is called the
  national debt
• The reasons for a deficit or the debt are as much
  political as they are economic

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Are Deficits and Debts a Problem?

• Results of the deficit and debt
• Less money available for private investment
• A weaker dollar
• Foreign trade deficits increase
• Foreign investment falls off as the economy
  weakens
• The more interest paid on the debt, the less
  money available for other government programs

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What Can Be Done?

• Discretionary spending amounts in annual
  appropriation bills established by members of
  Congress in any year
• Mandatory spending mandated by permanent laws
  which Congress must spend by law and is therefore
  more difficult to control

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Economic Growth and Job Creation Issues

• The economy is affected to a large extent by the
  global economy
• Globalization the international dispersion of
  economic activity through the networking of
  companies across national borders
• Outsourcing of jobs jobs moved overseas in
  search of the best labor force for the cheapest
  wage

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Conclusion

• Government can help protect us from recession and
  depression, as well as create jobs, and guarantee
  minimum wages and safety conditions
• How we use fiscal and monetary policies depends
  on what we want to see and may not be in the best
  interests of Americans