Open Classroom Policy Series Economic Growth with Equity

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Open Classroom Policy SeriesEconomic Growth
with Equity

• Week 14
• Final Session of the Semester
• Barry Bluestone
• Cathy Minehan
• April 15, 2009

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We began this Open Classroom at a tumultuous time
for the Global economy

• Not since the 1930s have we faced such
  inauspicious economic times
• The U.S. and global economies are in decline
• Unemployment and economic insecurity are rising

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March 2009 8.5
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What Now?

• What do we want government to do?
• Get us out of this mess
• The Obama effect
• What should our economy look like in the long
  run?
• Highly market-oriented (last 30 years)?
• Highly regulated European Model?
• Trade-offs in each
• How we deal with these tradeoffs along a wide
  range of issues financial regulation, legal and
  political institutions, government policy,
  immigration, education, trade is what this
  course was all about.

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Perspective of Course

• This Open Classroom stepped back from the
  current economic situation to ask fundamental
  questions about how an economy operates -- what
  makes its prosperous and what can make it more
  equitable
• Economic Growth with Equity

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Critical Issues of the Course

• What makes for a Good Society?
• What statistics and indicators can we use to
  assess whether we are making progress toward an
  improved society?
• What public policies can we pursue for an
  improved society?

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Two Big Tradeoffs in Achieving our Economic Goals

• 1 Maximize Economic Output vs.
• Equal Distribution
• 2 Free Market vs. Regulation

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Tradeoff 1 Equality and Efficiency (Arthur
Okun, 1975)

• Efficiency vs. Equity
• Rights vs. Market Goods
• Features of Rights
• Features of Market Goods

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The Big Tradeoff

• Equal Rights and Unequal Incomes generate
  tensions between the political principles of
  democracy and the economic principles of
  capitalism
• This constitutes an uneasy compromise rather
  than a fundamental inconsistency

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Rights-Market Goods Spectrum
Perfect Rights
Perfect Market Goods
Freedom of Speech
Diamond Pinky Rings
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Rights-Market Goods Spectrum
Perfect Rights
Perfect Market Goods
Freedom of Speech
Diamond Pinky Rings
Where would you place the following on the
Spectrum?
K-12 Education
Employment
Higher Education
Food
Health Care
Personal Security
Housing
Transportation
Cultural Amenities
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SummaryThe Big Tradeoff 1

• How much economic output are we willing to
  sacrifice for more equality?
• How much equality are we willing to sacrifice to
  increase economic output?
• Where on the Rights/Market Goods spectrum should
  we be?

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The 2nd Big Tradeoff

• When are there free market excesses?
• When are there regulatory excesses?
• Finding the right balance

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Free Market-Regulation Spectrum
Regulation
Free Market
Government Regulation of Industry, Financial
Markets, Labor Markets
Laissez Faire Markets
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Now for a look at the U.S. Economy in Numbers
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Gross Domestic Product

• Tracking the Total Output of the
• U.S. Economy

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GDP (Y) CIGX-M

• Gross Domestic Product (Y)
• Consumption (Households)
• Investment (Business)
• Govt Spending(FedStateLocal)
• EXports
• - Imports
• Excludes Government Transfers

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1960-1970
1970-1982
1982-2000
2000-2008
3.1 Growth Rate
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1960-1970
1970-1982
1982-2000
2000-2008
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2008 Poverty Threshold 21,200 4-Person Family
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Top 10 of Households own 78.8 of Stock Market
Holdings
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Murder on the Inequality Express

• Suspect 1 Technology
• Suspect 2 Deindustrialization
• Suspect 3 Deregulation
• Suspect 4 Declining Unionization
• Suspect 5 Downsizing
• Suspect 6 Winner-Take-All Labor Markets
• Suspect 7 Free Trade
• Suspect 8 Capital Mobility
• Suspect 9 Immigration
• Suspect 10 Trade Deficits

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Debt Outstanding

• Mortgage
• Consumer Credit
• Federal Debt

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13.5 Trillion
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2.5 Trillion
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10.6 Trillion
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WHAT DO YOU WANT GOVERNMENT TO DO? AND HOW MUCH
DO YOU WANT TO PAY FOR IT?
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U.S. Government Spending Over Time

• Glory Days
• 1950s 1960s
• Budget Outlays as a
• Percentage of GDP
• lt18 - 20
• Deficits - Negligible

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U.S. Government Spending Over Time

• Guns and Butter Spending
• 1970s 1980s
• 20-23 of GDP
• Other Problems
• Budget Deficit
• Inflation Current
• Account Deficit

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U.S. Government Spending Over Time

• Reagan Revolution
• Smaller government
• Cut taxes
• Concept of the Laffer Curve lower tax rate will
  lead to higher production, high tax revenue
  Supply Side

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U.S. Government Spending Over Time

• By how much/when
• Economic Recovery Tax Act (ERTA) of 1981
• 25 percent across-the-board cut in personal
  marginal tax rates
• Tax Reform Act of 1986
• Lowered maximum marginal tax rates from 50 to
  28 beginning in 1988
• Lowered the top corporate tax rate to 34 from
  46 and lowered the number of corporate tax
  brackets from five to three

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U.S. Government Spending Over Time

• Reagan Revolution
• Size of Government Spending
• 1989 21.2 of GDP
• Deficit

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U.S. Government Spending Over Time

• George H.W. Bush/Clinton
• Enacted Pay/Go
• Enduring bias
• Markets are king
• Smaller government/balanced budget better
• 1989-1992 21.9 of GDP
• 1992-2000 22 - 19 of GDP
• Rising Deficit in George W. Bush term/surplus in
  Clintons

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U.S. Government Spending Over Time

• George W. Bush
• A. 2001-2008 Government spending
• average 20 GDP (rose from 19 to
  22)
• B. Deficit grows from 0.3 in 2001 to 4.5
• C. Current Account Deficit
• 1992 2008 rises from 56 Billion to
  
• 592.6 Billion
• D. No inflation/lots of debt

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U.S. Government Spending Over Time

• Obama Revolution
• A. Rhetoric says government will do more
• 1. Get us out of this mess (economic
  stimulus)
• 2. Solve
• Financial regulation
• Health care
• Education
• War in Iraq/Afghanistan
• Energy
• Income inequity
• 3. Government the answer not the problem

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U.S. Government Spending Over Time

• 4. Projected Obama spending/deficits
• - CBO 2009 2012
• Spending 28.5, 25.5 23.6 22.7 of GDP
• Deficits 13.1 9.6 6.4 4.2 of GDP
• 5. Both spending and deficits diminish as
  economy
• starts to grow at solid pace, but
  relative to last 40
• years, spending and deficit in 2012
  are high (40
• years average for Deficit is 2.4)

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U.S. Government Spending Over Time

• International Comparisons
• A. Measurement Government Current
  Expenditures (All Levels of Government) as a
  Percent
• of 2001 2007 (Averages)
• U.K. 37.04
• Germany 46.84
• Japan 43.50
• China 18.34
• U.S. 31

United Kingdom
United States
Japan
Germany
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U.S. Government Spending Over Time

• Key question What do you want government to do
  and how do you want to pay for it?
• Regulate Markets
• Professor Friedman suggested eliminate too big to
  fail
• Pro Banks need better regulation this should
  never happen again
• Con Expensive How do we encourage positive
  impact of financial innovation. Can we have
  world class businesses without world class
  finance?

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U.S. Government Spending Over Time

• Improve Education
• Larry Katz and Claudia Goldin suggest education
  is key to growth and reduction in income
  inequality
• Pro Clearly better education is necessary to
  create workers for jobs of the future
• Con May need complete restructuring of K-12
  education system. This has been suggested hard
  politically and expensive

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U.S. Government Spending Over Time

• Keep American Jobs for Americans
• Professor Mann/Andrew Tilton showed the impact of
  trade and immigration Should trade and
  immigration be capped?
• Pro Some believe that might create more jobs
  for Americans and reduce our debts to the rest of
  the world
• Con Without immigration our labor force doesnt
  grow and gets older. Without skilled worker
  immigration we lose talent. Preventing
  immigration/completely stopping illegals is
  expensive

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U.S. Government Spending Over Time

• Keep Trade Unions Healthy
• Professors Bluestone, Lynch, Vallas, and Kochan
  emphasized the role unions played in Americas
  Post WWII Glory Days of growth
• Pro Unions create better jobs, better working
  conditions. When they were more prevalent,
  income inequality was not an issue
• Con Union wages/benefits are part of the
  problem for big U.S. businesses. Can unions be
  reconstituted?

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U.S. Government Spending Over Time

• Run Fiscal and Monetary Policy to Promote Growth
• - Necessary now to get out of crises, but what
  then?
• Reduce Deficits
• Pro Creates less burden for future generations,
  supports the dollar, provides more room for
  private borrowing
• Con Need to pay for social security, health
  care, education, etc.

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U.S. Government Spending Over Time

• Ignore inflation a real risk once economy starts
  to recover
• Pro Lower interest rates create faster, higher
  levels of growth, ceteris Paribas
• Con Inflation creates economic inefficiency
  and hampers growth in productivity

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U.S. Government Spending Over Time

• In Sum
• Optimal role of government is a balancing act
  neither big government nor small government
  is inherently good or bad if that government does
  what its constituents want at a price they are
  willing to pay.