TOPIC 1: PUBLIC POLICY IN ECONOMICS
Random discussions about the insolvency of the Social Security System, what year it becomes insolvent circa 2017, then in 2042 will run out. Note: you only pay social security on the first $100,000 you make, Ray’s solution: increase the social security to includes earnings up to $125,000 dollars.
Random discussions about the Medicare program, Medicare is powerful force when bartering with doctors and medical facilities, if they are unable to do that due to changes in the health system they may not have that negotiating power, adversely the power of negotiating may increase even further, reducing pay rates thus reducing healthcare costs (insert: not to mention quality).
Random discussions about malpractice insurance and lawsuit caps and attorney fees.
Random discussions about deficits…the relationship is the key not the amount, today 2009 deficits in excess of $1 trillion, World War II debt accumulation as a relationship to production was even much higher than this amount. Jimmy Carter (soapbox) administration saw the lowest debt to productivity ration since World War II.
“Franklin Roosevelt never spent enough money to get the US out of the Great Depression.”
Random discussions about distribution of wealth, poor are getting poorer, the rich are getting richer percentage wise a lot faster than average people. This increase disparity is relative to the income. Today most families have multiple breadwinners, the cost of living hasn’t increased (over inflation) so families have more disposable income then they did 20 years ago.
Again provided questions for the Final, write 2 or 3 lines at most on each question, not open notes:
- Define economics
- What role does economics play in your personal decisions
- Define Supply
- Define Demand
- What is the difference between movement along and shift of the demand curve
- What is the difference between movement along and shift of the supply curve
- What is the price elasticity of demand
- How does price elasticity of demand affect a firms pricing decisions<<if price elasticity was missing the price would rise>>
- What is the main difference between market(capitalism) and demand economies(socialism)
- What does the word utility mean to an economist
- Example of fixed costs of business
- Example of variable costs
- Describe a perfectly competitive business
- Describe market conditions that create a monopoly in a business
- List some oligopolies
- What are the purposes of anti-trust laws
- How does taxation influence businesses
- Describe the role of technology and innovation in today’s economy
- How does international trade influence today’s economy
The Role of Government in Our Economy
ECO/365
Week 4
August 17, 2009
Kelly Hewitt
Introduction
Government plays a significant role in our economy. Factors that relate to money supply, control of the value of money, employment and regulation all substantially impact the day to day of our economy. “The primary factor in the U.S. finding its way out of recession is the confidence in the consumer that the situation will improve (Kartchner, 2009).” In this paper we’ll explore these topics including the advantages and disadvantages of government involvement in the economy.
Money Supply
First and foremost in the role of government in our economy is the printing and management of the money supply. These two factors are controlled by the U.S. Federal Reserve and the U.S. Treasury. Money is a common exchange, or an indicator of stored value. The exchange of money affects all economic activities, the supply of money works via the process of interest rates and investment. Money is supplied to financial institutions, consumers and investors to sustain activities of real estate purchase, development, funding for capital improvements, exports and imports and sustain debt previously borrowed.
The Federal Reserve allows banks and financial institutions to lend funds as a ratio of cash deposits held in the banks vaults and deposits at the Federal Reserve Bank. This process allows the Federal Reserve to control the amount of cash reserves at all financial institutions and lend funds to the institutions covering transactions. “To increase reserves, the Federal Reserve buys U.S. Treasury securities by writing a check drawn on itself. The seller of the treasury security deposits the check in a bank, increasing the seller’s deposit. The bank, in turn, deposits the Federal Reserve check at its district Federal Reserve bank, thus increasing its reserves. The opposite sequence occurs when the Federal Reserve sells treasury securities: the purchaser’s deposits fall, and, in turn, the bank’s reserves fall (econlib.org).”
Control of the amount of cash reserves available for financial transactions is maintained by the Federal Reserve Bank, the Federal Reserve Bank orders the U.S. Treasury to print money, printing of money (not the replacement of current funds) reduces the value of the money that is currently on the market.
Inflation and Deflation
Inflation is the increase in the level of prices in comparison to the price of the same goods at an earlier time. Government has a hand in inflation and deflation by the control of the money supply. “Inflation is caused by the amount of dollars rising relative to the amount of goods and services, and deflation is caused by the amount of dollars falling relative to the amount of goods and services (economics.about.com).” The government not only affects the supply but inflation and deflation as well:
- Increasing the money supply – directly affected by the US Federal Reserve
- Supply of other goods goes down – this can be affected by government regulation on trade, exports imports and US based production and development
- Demand for money goes down – consumers, both commercial and individuals decrease spending, the Cash for Clunkers program by the US government is an example attempt to artificially create a demand for money
- Demand for other goods goes up – this can also be affected by government spending in construction, civil services, defense products and other government consumables
As the largest single financier in the U.S., and financial controller of the money supply, the U.S. government exercises a great deal of power over inflation and deflation.
Government Spending
There is some controversy over the role that U.S. government spending plays in the current financial recovery. Notwithstanding the stimulus offered to support the banking system, Daniel J. Mitchell, PhD., at the conservative Heritage foundation (2009) indicates that the government role in fueling economic changes is different depending on the unique circumstances: “Economic theory does not automatically generate strong conclusions about the impact of government outlays on economic performance. Indeed, almost every economist would agree that there are circumstances in which lower levels of government spending would enhance economic growth and other circumstances in which higher levels of government spending would be desirable.”
These theories indicate that at some point government spending converts from a beneficial act to a burdensome act, depending on how the money is spent, what economic drivers the spending targets and if proper control over the spending is maintained and managed.
Employment
Government impact on employment or unemployment is substantial because of the programs that are in place to maintain an employed workforce in the United States. Although the U.S. government is an employer its decisions make economic impacts related to regulation of companies that increases unemployment rates, reducing and increasing the ability for some U.S. companies to compete in global markets. More often the government markets U.S. goods through envoys to foreign markets which increases the demand for U.S. workers.
Minimum wage laws set by the government are a double edged sword, on the one hand employees are insured that they will make a higher living wage, on the other hand employers may not be able to afford U.S. workers and the outsource manufacturing to markets where labor is significantly less expensive.
Labor Unions are allowed to operate by the U.S. government, for the most part these institutions are the organization of labor to increase wages, improve safety conditions in the workplace and secure jobs from fickle firings and layoffs by creating standards for employment in the workplace.
The U.S. Department of Labor monitors employment rates carefully. Unemployment is paid to U.S. employees that are temporarily displaced to sustain families during interim of joblessness in order to reduce the critical burden on the U.S. and State economies from other catastrophic events related to the unemployment event. Legislation introduced during the last 60 years has enabled job transitions to less crisis-like. Sparknotes.com (2009) explains unemployment is “…in reality much more complex than the average consumer appreciates. For this reason, most people do not understand that some unemployment in the economy is not a problem. In fact, unemployment of certain low levels indicates that the economy is functioning neither above nor below its potential output level, at a sustainable level.” The U.S. governments’ recent emphasis on extending unemployment benefits to 18 months is an attempt to improve the possibility that workers may not become a burden on the government from the financial affects of joblessness on the family, loss of insurance, housing and transportation.
Competition
Government plays a critical role in maintaining the competitive markets of U.S. firms in the global economy. The nature of taxation, safety, anti-trust and various other business regulations have been formulated to exercise control in the form of consumer protections, work-place safety, and anti-trust oversight to U.S. firms. These regulations sometimes benefit U.S. firms, more often the impact of over-reaching government regulations hinder industry, stifle competition and reduce the incentive for companies to operate manufacturing and production facilities within the United States.
A paper published 1979 reviews the impact of government regulation and taxation on the Chrysler automotive group: “The study concludes that Chrysler, in order to have a chance for survival as a full-line domestically based auto manufacturer, at the very least must have removed the regressive, regulatory bias it now faces in competition with Ford and, especially, General Motors. Any shift along the tax spectrum away from lump sum levies toward proportionality would bring some relief to Chrysler, putting it back on more equal competitive footing. The magnitudes of adjustment required for Chrysler’s survival as a full-line auto maker are sizeable, however. Merely to return to zero profitability from a negative position, Chrysler’s operating profit margin (sales minus current expenses) must grow at 15 percent per year in real, non-inflated terms between 1977 and 1985. Without weighing the political practicality of possible solutions, the study points to several that would ease the total regulatory burden on the entire auto industry, and others that would help correct the bias against Chrysler and Ford relative to General Motors. The suggested alternatives focus on emission standards and fuel efficiency standards, which comprise between 90 and 95 percent of the total costs of the regulatory burden (Laffler Associates, 1979).”
Today the United States, via the taxpayers is bailing out these same companies that have been heavily regulated and over taxed for the last 35 years. The resulting lesson from this is that the excessive restrictions on U.S. manufacturing can directly result in the failure and subsequent bailout of an industry.
Conclusion
The role of government in the economy is a permanent and necessary construction, alongside of business and consumer. Supply and demand does much to control the production and distribution of goods, yet does little and in many cases incentivizes corruption in business. When companies are mismanaged and corrupt leaders are willing to practice business without ethics (MCI, Enron, etc.) government must provide regulation to reduce the potential of large businesses distressing the larger economy by the disingenuous behaviors of a few.
References
Kartchner, Raymond C. “Government Involvement in The Economy.” University of Phoenix, Principles of Microeconomics. Salt Lake City, UT. August 10, 2009.
Measuring the Economy 2: Unemployment. (2009). Retrieved August 10, 2009, from sparknotes.com: http://www.sparknotes.com/economics/macro/measuring2/section2.rhtml
Money Supply. (2008). Retrieved August 10, 2009, from econlib.org: http://www.econlib.org/library/Enc/MoneySupply.html
The Impact of Government Regulations on Competition in the U.S. Automobile Industry. (1979). Retrieved August 10, 2009, from arduinlaffermore.com: http://www.arduinlaffermoore.com/PDF/The%20impact%20of%20government%20regulations%20on%20competition%20in%20the%20U.S.%20auto%20industry%20–%20Summary.pdf
The Impact of Government Spending on Economic Growth. (2009). Retrieved August 10, 2009, from heritage.org: http://www.heritage.org/research/budget/bg1831.cfm
What is Inflation. (2009). Retrieved August 10, 2009, from economics.about.com: http://economics.about.com/od/helpforeconomicsstudents/f/inflation.htm
