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ECONOMICS What’s an economy & what can it do for you? What IS an economy? WHY DO SOCIETIES EVEN HAVE ECONOMIES? • In any society, people have to make decisions about how to use the resources to produce goods & services to satisfy their wants. • Several factors to consider: Wants 2. Resources 3. Production of Goods & Services 4. Choices 1. WANTS • BASIC Needs – what you need to survive – Food, Clothing, Shelter • Those typically don’t satisfy us, so we also have WANTS – Entertainment, Education, Healthcare, etc. • Your wants are going to be dependent on where you live and who you are • Environment • • If you live in Miami, you’re going to want a good cooling system and know your hurricane evacuation route; if you live in Anchorage, you’re going to want a good heating system and snow equipment Societies & cultures • Americans – typically live in houses or apartments; Mongolia – yurts and live a more nomadic lifestyle WANTS…CONTINUED YURT WANTS…CONTINUED • Preferences Some people prefer to vacation in the mountains, others prefer the beach • Some people want a white T-Shirt, others want a black T-Shirt • • Change • • What did you want when you were younger? What did you want to be when you grew-up? What do you want to do now? Where did you go to college or major in? What about now? Time Most of these wants can be satisfied only for a short time • Clothes from last year – do they still fit or do you want a new pair? • *Many wants occur over and over – key to understanding what an economy is* RESOURCES • Factors of Production – the resources people have for producing goods and services to satisfy their wants. • Economists have listed three basic factors of production in any economy: 1. 2. 3. Labor Land Capital RESOURCES…CONTINUED • Labor • Includes BOTH time and energy • • Land • The natural resources that produce goods & services • • EX – you get a job at Heine Bros, you will be using his time and energy to make and sell coffee. Your labor also includes the knowledge and skills gained to do your job EX – soil, minerals, water, timber, wildlife, energy sources Capital – anything produced in an economy that is used to produce other goods & services Tools, machines, buildings • Money • Refereed to as Financial Capital, or money that is available for investing or spending • PRODUCTION • In order to PRODUCE these goods & services, you have to combine labor, land and capital. • After you have PRODUCED the goods & services, you have to DISTRIBUTE the produced goods & services to your consumers • Consumers CONSUME these goods & services through a process called CONSUMPTION – act of buying or using goods & services LET’S SAY YOU WANT A LATTÉ… • Farmers have to combine the soil, water, coffee bean seeds, and labor to produce the coffee beans • The coffee distributer combines labor and machinery to process the coffee and package it sending it to the coffee house Production Distribution • Once the coffee is made, it is then sold and delivered to the coffee house • After the coffee has been delivered, you buy it, roast it and consume it • May only be satisfied for a short time – what if you want a latté another time… Consumption CHOICES • There are never enough resources to produce all the goods & services people want, so people have to make choices and these choices are economic choices • So how do people decided between their wants? • BENEFITS • • If you take a job, it provides you with a paycheck and experience COSTS • If you take a job, you give up our time that could be spent hanging out with friends or family *Depending on what you pick, you’re making a cost/benefit analysis* SCARCITY • SCARCITY – resources are always limited compared with the number and variety of the wants people have • Scarcity exists for BOTH rich and poor societies • Scarcity is NOT based on the relationship between wants and resources available to satisfy those wants • Every decision to use resources to produce one type of good or service is, at the same time, making a decision to NOT use those same resources to produce something else people want WHO MAKES THE DECISIONS? In a large economy, choices are made by business AND individuals The Gap only has a certain number of factories and workers; therefore, they have to make decisions about how best to use their resources when making products Governments also play a role Governments have to consider how much of their resources should be allocated to defense spending? How much to school improvement? How much to environmental protection? Etc. Although the choices that individuals, businesses and governments make are different in a lot of ways, they all have one thing in common… ALL must consider how to use resources to produce goods & services to satisfy wants Basics of the U.S. Economy WHAT ROLES DO BUISNESSES PLAY? • Yes we have supply and demand, but in a market economy, most production is carried out by privately owned businesses – ANY organization that combines labor, land and capital to produce goods/services • This would not be possible without entrepreneurs – a person who starts a business • • • An entrepreneur is going to come up with a new idea for a product, a new way of producing a product or a better way of providing a service The entrepreneur is also going to have to raise money for their new idea and are taking a huge risk because if the business fails, they’re usually all out of their money as well as their investors Entrepreneurs are often driven by “the profit motive” – the hope of earning a profit supersedes the risks involved HOW BUSINESSES ARE OWNED PARTNERSHIP SOLE PROPRIETORSHIP Type of business in which two or more Business is owned by an individual people share ownership Most common form of businesses – 70% Many law firms, medical groups and Small businesses – restaurants, repair shops, accounting businesses small stores, etc. PROS – same as a sole proprietor, PROS – owner has the freedom to decide except you have at least one other how to run the business, profits belong to additional person to share the risks and the owner alone, owner has the personal satisfaction of seeing their business succeed benefits CONS – owner bears the responsibility for all CONS – same as a sole proprietor, debts, can be difficult for the owner to except that you run the risk of serious borrow enough money, as the business differences arising between the grows, can be difficult for the owner to partners which could damage or even handle all the responsibilities ruin the business CORPORATION A business that is separate from the people who own it and legally acts as a single person More than one person shares in ownership – the shares of ownership in a corporation are called STOCK and the people who buy stock are called STOCKHOLDERS Many sell stock to the public to help offset the costs of starting, running or expanding the corporation PROS – raise large quantities of money to grow, stock holders are not responsible for the corporations debts CONS – more difficult and expensive to run, more limited by government regulation THE RISE OF BIG BUSINESS & LABOR • Today, large businesses and corporations make up nearly 90% of our economy, but that was not always the case • 1700s • Most businesses were small proprietorships • • Most families were self-sufficient, producing what they needed for themselves OR the small, tightknit communities worked and depended on each other to provide for themselves only 1800s • New inventions and manufacturing methods spur growth and industrialization • • • Factories sprang up, producing more goods at lower prices People settled in cities, attracting new jobs in new industries People who lived in the cities depended on businesses for goods and services so businesses did well • Successful sole proprietors turned their businesses into corporations in order to grow and by the end of the 1800s, large corporations dominated the railroads and key manufacturing industries, not to mention the natural resources needed for production THE RISE OF BIG BUSINESS & LABOR…CONTINUED • 1900s • • • Large corporations continued to grow and have become a major force in almost every industry from supermarkets, fast food to computers and the auto industry Large corporations even own many of the U.S. farms Why have they grown in importance? They can produce goods and provide services more efficiently than a smaller firm can • Large firms can better afford the machinery needed to produce more goods in less time • Large firms have the resources to do scientific resources to develop new productions and new means of production • THE RISE OF BIG BUSINESS & LABOR…CONTINUED • 1700s Many Americans were farmers, so most of what they needed they produced themselves and could do so because they owned a big factor of production – land • Other Americans were skilled craftsmen (i.e. blacksmith) and either worked for themselves or someone they knew and owned a big factor of production – capital • • 1800s • Early 1800s the industrial revolution kicks off in England and with it, mass changes and improvements in machinery including farm machinery • Machines could produce more goods more cheaply than people making goods by hand former craftspeople, farmhands and new immigrants began to turn to wage labor in order to make a living • • Owned neither the land or tools; instead they exchanged their LABOR for payments (wages) Mid – Late 1800s, these new wage laborers had to accept whatever work they could find, often times being taken advantage of by business owners • Employers paid little, they were unsafe, worked you 6 days a week, 12-16 hours a day THE RISE OF BIG BUSINESS & LABOR…CONTINUED • Workers start to try and form labor unions – organizations of workers that seeks to improve wages and working conditions and to protect members’ rights • You had a few unions before this, but they weren’t very successful First one was in 1790 • Trade unions – workers in one particular trade (i.e. carpentry, cigar making, etc.) • • • These were SKILLED workers, so they were a little more successful The Knights of Labor Reached their height in 1886 • Tried to bring together BOTH skilled labor and unskilled labor, but the groups disagreed and eventually the Knights of Labor crumble • THE RISE OF BIG BUSINESS & LABOR…CONTINUED • American Federation of Labor (AFL) United smaller trades unions, made up of ONLY skilled workers • Goal? Force employers to agree to participate in collective bargaining – the process in which representatives of the unions and business try to reach agreement about wages and working conditions • • In the years to follow, it was an intense back and forth with unions pushing for things like an 8-hour work day, no child labor, required breaks and a minimum wage, just to name a few WEAPONS OF LABOR • There are a number of methods that unions use to force employers to meet their demands • Slow-down • • Sit-down • • Workers stop working, but refuse to leave the factory so that the employer couldn’t bring in nonunion workers Boycott • • Workers stay on the job, but do their job slowly, thus producing less for the company Union members encourage other members and/or the public to refuse to buy an employer’s products Strike • Workers refuse to work unless employers meet certain demands • 1886-1920, hundreds of strikes occurred nation-wide; most significant were in textile, steel and railroads (Carnegie, Rockefeller, JP Morgan, etc.) WEAPONS OF BUSINESS • Just because unions implemented these tactics didn’t mean that businesses gave him; often times, they had their own ways to combat the unions’ demands • Strikebreakers • • Nonunion workers hired to cross a picket line to replace the striking workers and keep a business going If a union member tried to keep the strikebreakers from entering, business owners would hire private police to stop them • • Lockout • • • Private police would also break up union meetings, harassed union members, etc. Management refused to let union members enter the factory, replacing them with strikebreakers Management forced workers to sign “yellow-dog contracts” – workers promised never to join the union Blacklists • Employers circulated a list of the names of union members and supporters to other employers so that they would not hire these union members or supporters – kept union membership low Economic Differences Politics, Ideology and the Economy • Basic differences between Republicans and Democrats, ideological differences between conservatives and liberals are great when economic policy is concerned • Republicans have been identified as being the party who favors the rich and big business • • Democrats have been viewed as being sympathetic to labor and the poor • • • Republicans accuse the Democratic presidents of following ‘tax and spend, regulatory programs’ causing runaway inflation Democrats accuse Republican presidents of having unsuccessful ‘trickle-down, supply-side’ economic policies resulting in a recessionary trend AND higher unemployment Conservatives tend to side with policies aimed at dramatically reducing the deficit Liberals believe government-sponsored economic stimulus programs (i.e. Social Security, Medicare, etc.) result in a strong economy Politics, Ideology and the Economy • These differences in party and ideology translate into major political themes in Presidential campaigns • • • • William Jennings Bryan runs on the silver base against McKinley in 1890s Herbert Hoover constantly argued for laissez-faire…and gets blamed for the crash and Great Depression Reagan and Baby Bear Bush and their dramatic tax reform proposals Surveys consistently show that voters point to the economy as the primary reason for choosing one candidate over another Politics, Ideology and the Economy • 1980: Carter vs. Reagan • Reagan asks voters whether they were better off then or before Jimmy Carter had become President • • Runaway inflation was rampant at the time and Carter was hard-pressed to counter Reagan’s argument Think about it like this, if your family is unemployed during a Republican administration, you will probably vote Democratic and vice versa Politics, Ideology and the Economy • Government plays a dual role in being linked to the nation’s economy • The Department of Labor, the Congressional Budget Office, the Executive Office of the Council of Economic Advisers all report to the country vital economic statistics such as: • • • Unemployment rate Gross National Product (GNP) – the total output of goods and services produced by labor and property located in the U.S. valued at market prices Gross Domestic Product (GDP) • Lately, the GDP has become the key economic measure analyzing an upward or downward economic trend, on a quarterly basis, of the monetary value of all the goods and services produced within a nation Politics, Ideology and the Economy • The government’s primary policy role is to develop a healthy economic policy • FDR’S New Deal’s ‘three Rs’ – Relief, Recovery, Reform – set in motion policies that have succeeded in preventing the country from experiencing a depression of the magnitude as we saw in the 1930s Relief (Social Security), Recovery (jobs programs,) Reform (Securities Exchange Commission) • We still see these as a part of our economic fabric in the U.S. today • Politics, Ideology and the Economy • Economic strategies revolve around three kinds of policies: • Regulatory – results in government control over individuals and businesses • • Distributive – results in the government giving benefits directly to people, groups, farmers, and businesses • • i.e. protection of the environment and consumer protection i.e. subsidies, research and development funds for corporations, direct government aid for highway construction and education Redistributive – results in the government taking money from one segment of the society through taxes and giving it back to groups in need • i.e. Welfare, tax credits for business expenses, highway construction made possible through a gasoline tax Politics, Ideology and the Economy • Economic policy of the… • Mid-1800s • Issus of slavery, tariffs and the rise of industrialization • • Post-Civil War • Economic issues were directly tied to the rise of industrialization in the U.S. • • Remember, slaves were considered property, so legislation enabling states to determine whether slavery would be allowed were economically important to voters Growth of railroads opened up new markets in the west, Populist movement called for more government regulation on the growth and expansion of big business; stock market crashed, unemployed skyrocketed, businesses failed – constant uncertainty 1900s • The Progressive Era ushers in reforms like the Pure Food and Drug Act and the 16th Amendment (income taxes) and the creation of the FEDERAL RESERVE The Federal Reserve The Fed • Monetary Policy – regulation of the money supply by the Federal Reserve System Policy that attempts to stabilize the economy by controlling interest rates and the supply of money • Created in 1913 consisting of a 7-member board of governors serving by appointment of the President for staggered 14-year terms • Federal Reserve Board is an independent agency, free of Presidential or congressional control • Regulates the money supply through: • • • • Reserve requirements – establishing legal limitations on money reserves that banks must keep against the amount of money they have deposited in the Federal Reserve Banks Open-market operations – buying and selling of government securities, which affects the money supply and cost of money Discount rates – determining the rate at which banks can borrow money from the Federal Reserve System The Fed • Fiscal Policy – government’s decisions about the amount of money it spends and the amount it collects in taxes • Policy that attempts to influence the direction of the economy through changes in government taxes or spending/borrowing (through Congress) • 2 different theories… Keynesian Economics • Developed by John Maynard Keynes • Advocated an increase in national income so that consumers could spend more money either through investments or purchases of goods and services • Argues that the best strategy to counter an economic recession is an increase in government spending • Consequence? Government would also adopt regulatory, distributive, and redistributive policies as tools to ensure consumer enterprise Supply-Side Economics • Developed by Ronald Reagan’s economic team, particularly David Stockman • Advocated that large tax cuts would result in increased consumer spending and investment, which would offset any loss of federal revenues because there would be an increase in taxes received from businesses benefiting from these increased purchases • Argues that business investments would increase, businesses would expand their operations, and this expansion would result in an increase in job opportunities Hoover vs. FDR • The Crash of ‘29 and the Great Depression… • Both laissez-faire (Hoover) and regulatory (FDR) philosophies were in play • What is the best way to balance the tools available to the government? • • • • Should it raise or lower taxes? Should it increase or decrease spending levels? How much regulation is really necessary? These are still questions and issues that have perplexed economists AND presidents since the Great Depression Government Intervention • Our founders believed in economic freedom – freedom to own property, make a profit, make choices about what to produce, buy or sell • So if our founders believed in economic freedom, why does the government get involved? Businesses sometimes earn profits unfairly 1. • 2. • 3. • Some businesses have driven competitors out of business or made secret deals with competitors to fix prices at high levels Poor working conditions Child labor, long hours, unsafe working conditions (i.e. Upton Sinclair’s The Jungle exposé on the meat-packing plants in Chicago) Harm to consumers Bacteria in foods, lead paint in/on children’s toys, medicines working incorrectly, etc. Government Intervention 4. • 5. • • 6. • • Lack of economic security People who have lost their job or cannot work due to an illness, disease, injury or old age face everything from hunger to homelessness Unstable economy Periods of economic slowdown have put many people out of work Periods of inflation – prices rise faster than incomes – reduce the buying power of people’s money Environmental damage BOTH businesses and consumers have polluted the air, water and land Everything from air quality regulation to protecting threatened or endangered plants and animals Government Intervention • How do governments deal with these problems? Local, state and federal governments regularly take actions: Governments regulate business 1. • 2. • 3. • Pass laws that set rules for how business is conducted…as well as setting up a regulatory agency to enforce those rules Governments make direct payments Give money to individuals who need help paying for food, shelter, medical care, etc. Governments own resources and produce goods & services Own land (i.e. National Parks) and run businesses that promote the common good (i.e. hydroelectric power from a government-built dam) Government Intervention Governments help pay for important economic activities 4. Give money to a private business to help it provide an important product or service • • Federal government has given money to farmers, airlines and home builders Governments control the amount of money they spend and the amount received in taxes 5. Taxes take money FROM the economy and spending puts that money back; by controlling the flow of taxes and spending, governments can influence the economy • Governments make tax rules and collect special taxes 6. Governments can change the tax rates on people’s incomes • • Change taxes to reward behavior (tax credit) or to punish others Government Intervention • Is there a downside to government intervention? Short answer? Yes • • • Government regulations usually puts limits on individual freedoms (i.e. freedom to buy or sell goods, make a profit, do what you wish with property, etc.) Government intervention comes with a huge price tag Question is, how much should the government intervene? *When freedom comes into conflict with equality and justice, not to mention the health of the public and environment, people disagree about which values are more important to protect!* The Federal Budget The Budget • Congress is given the constitutional ‘power of the purse,’ but all of the following are involved in the process: 1. The President 2. Executive staff and executive agencies 3. Special Interest Groups 4. The media 5. The public • By law, the President must submit a budget proposal to Congress the first Monday after January 3rd • The fiscal year begins each October 1st The Budget • Federal budget – the government’s plan for how it will raise and spend money • Federal spending is planned out well in advance and with a great amount of detail • While the federal government has a great deal of money, they face the same problems as individuals or businesses – scarcity • People want more goods and services than the government is able to provide • As a citizen, when you go and vote, you help make decisions as to the quality and quantity of goods & services that the government will provide The Budget • How does the federal government raise the money it spends? • Income taxes Guaranteed in the 16th amendment • Two kinds: • 1. 2. • Most of the federal government’s revenue comes from personal income tax – based on a percentage that increases as your income increases Social Security Tax – based on your income, but it does NOT vary based on income Corporations (since they’re treated as an individual) also pay incomes taxes – make up about 12% of the federal revenue The Budget • How does the federal government raise the money it spends? • • Excise taxes Tariffs, fees, sales • Government collects about 3% of its revenue from other various sources • • • Tariff – tax on imported goods Fees – charges to users of certain services (i.e. National Park) Sales – resources the government may sell to make money • EVERYONE plays a role in the federal budget-making process from the branches of government to interest groups to the public themselves • For most of our history the government has spent more money than it took in… The Budget • The first federal budget deficit was in 1792! • To make up for a deficit – amount in a year by which government spending is greater than government income – the government borrows money by selling bonds…or selling our debt to China • Government can also have a surplus – amount in a year by which government is greater than government spending EX – 1990s – President Clinton and Congress worked to limit government spending with the goal of cutting the deficit. While this was happening, strong economic growth of the 1990s led to an increase in government’s tax revenue…SURPLUS of $236 BILLION in 2000 to be precise • EX – 2002 – Terrorist attacks on 9/11 led to the war on Terror and an increase in military spending, coupled with an economic recession as well tax cuts signaled the return of DEFICIT spending • The Budget • It begs the question, who does the federal government borrow money from? • • • • • • • Trust funds (i.e. Social Security) Foreign investors Federal Reserve Banks State and local governments Insurance companies Corporations Pension funds, brokers and other groups • The Constitution does not place limits on the extent or method of borrowing; Congress sets limits on the debt, but that limit has been inching upward • You also have to contend with the national debt – the total amount of money the government owes to lenders • The size of the national debt worries a lot of people and it can threaten the government’s ability to pay for programs and manage the economy Budget Reforms • Efforts to control the budget started with reforms of the actual process • The Congressional Budget and Impoundment Control Act of 1974 • Provided for a calendar with a series of built-in procedures • The creation of a budget committee in each house whose responsibility it was to recommend to the Congress a total budget by April 1st • Creation of the Congressional Budget Office, which acted as a check Budget Reforms WHERE MONEY COMES FROM • 49% - Federal taxes • 33% - Social Security & payroll taxes • • • 10% - Corporate taxes 4% - Customs and duties 3% - Excise taxes WHERE MONEY GOES • 48% - Entitlements (i.e. Social Security, Medicare, Medicaid) • 19% - Non-defense discretionary spending • 16% - National defense • 10% - Interest on debt • 7% - Other mandatory spending So This Begs the Question… JOURNAL #12 What has to happen to the economy in order for citizens to enjoy a higher standard of living? How could this transition to a higher standard of living for citizens affect the government? Are you more Keynesian or Supply-side?