economics and society

THE ECONOMY, GOVERNMENT, AND ECONOMIC CHALLENGES FACING THE UNITED STATES CHAPTER 18

GOVERNMENT’S ROLE IN THE ECONOMY

 Indirect  Setting the rules

 Regulating the economy

 Direct  Spending

 Taxing (to pay for spending)

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WHOSE DESIRE DOES THE GOVERNMENT REFLECT?

 Society’s will  Collective will of individuals within society

 The political power of various groups:  Desires of those with political power are met

 Desires of those without political power are not met

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COSTS AND BENEFITS OF REGULATION

Costs

 Restricts actions

 May prevent activities that benefit others

 Costly

Benefits

 Protects public

 Limits potentially harmful activities

 Ensures fairness

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FIGURE 18.1: (A) FEDERAL OUTLAYS BY USE, 2015 (B) STATE OUTLAYS BY USE, 2013

GOVERNMENT’S DIRECT ROLE IN THE ECONOMY

 Collects and spends trillions of dollars a year

 Is natural institution in our society to carry collective action

 Public goods are more efficient supplied by government than individuals

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FIGURE 18.2: (A) FEDERAL REVENUE BY SOURCE, 2015 (B) APPROXIMATE STATE AND LOCAL TAX REVENUE BY SOURCE, 2013

CONTROVERSIAL ROLES OF GOVERNMENT

 Income redistribution  Examples: long term patents and copyrights, broadcast rights, licensing

 Taxing and spending policies

 Social Security System

 Macroeconomic role (consideration of good of society as a group)  Overseen by executive branch

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FIGURE 18.3: IDEALIZED BUSINESS CYCLE

SOCIAL SECURITY SYSTEM

 First government social insurance system appears in Germany (1889)  U.S. Social Security Act of 1935  Response to Great Depression  Federal Insurance Contributions Act  Benefits paid by current contributions  Led to current problems when benefits are increasing faster than contributions  Not originally established as a retirement system but rather as income supplement

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MONETARY AND FISCAL POLICY

 Monetary policy: the Central Bank (Federal Reserve Bank) varies the level of money/credit in economy to affect the level of income

 Fiscal policy: using the government budget surplus or deficit to influence level of spending and income

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ECONOMIC CHALLENGES FACING THE UNITED STATES

1. Fiscal crisis: an increase in deficits and debt that threatens financial stability of the government

 Must cut spending or raise taxes to solve

2. Globalization: natural process of economic integration  Causes shifting, including means and areas of production, away

from the U.S.  Law of one price  Increase in competition

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ECONOMIC CHALLENGES FACING THE UNITED STATES (CONTINUED)

3. Global warming: occurs due to overreliance on carbon-based fuels

 Costs must be considered by decision makers

 U.S. uses market-based approach

 Business worries about decrease in world market competitiveness if must pay for pollution

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GLOBALIZATION AND THE LAW OF ONE PRICE

 Globalization: an integration of world economies

 Law of one price: states that if a free flow of resources and technology exists, equally productive factors will tend to earn equal amounts, and tradable goods will tend to have the same price

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CLIMATE CHANGE

 Humans are affecting the environment

 Too much productions is using carbon-based fuels:  Economists’ answer is to tax the use of carbon, discouraging its use

 Taxes are politically unpopular

 Climate change is a global problem, and we don’t have a global government, so enormous cooperation is needed

 Under President Trump, the U.S. has not been cooperative

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