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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
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BASIC Needs – what you need to survive – Food, Clothing, Shelter
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Those typically don’t satisfy us, so we also have WANTS – Entertainment,
Education, Healthcare, etc.
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Your wants are going to be dependent on where you live and who you are
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Environment
•
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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
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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
•
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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?
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*Many wants occur over and over – key to understanding what an economy is*
RESOURCES
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Factors of Production – the resources people have for producing goods and
services to satisfy their wants.
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Economists have listed three basic factors of production in any economy:
1.
2.
3.
Labor
Land
Capital
RESOURCES…CONTINUED
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Labor
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Includes BOTH time and energy
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Land
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The natural resources that produce goods & services
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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
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In order to PRODUCE these goods & services, you have to combine labor,
land and capital.
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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
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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
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So how do people decided between their wants?
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BENEFITS
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If you take a job, it provides you with a paycheck and experience
COSTS
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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
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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
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This would not be possible without entrepreneurs – a person who starts a
business
•
•
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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
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Today, large businesses and corporations make up nearly 90% of our economy,
but that was not always the case
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1700s
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Most businesses were small proprietorships
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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
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New inventions and manufacturing methods spur growth and industrialization
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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
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1900s
•
•
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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
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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
•
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1800s
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Early 1800s the industrial revolution kicks off in England and with it, mass changes and
improvements in machinery including farm machinery
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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
•
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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
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Employers paid little, they were unsafe, worked you 6 days a week, 12-16 hours a day
THE RISE OF BIG BUSINESS & LABOR…CONTINUED
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Workers start to try and form labor unions – organizations of workers that
seeks to improve wages and working conditions and to protect members’
rights
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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.)
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•
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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
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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
•
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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
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There are a number of methods that unions use to force employers to meet
their demands
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Slow-down
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Sit-down
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Workers stop working, but refuse to leave the factory so that the employer couldn’t bring
in nonunion workers
Boycott
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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
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Workers refuse to work unless employers meet certain demands
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1886-1920, hundreds of strikes occurred nation-wide; most significant were in textile, steel and
railroads (Carnegie, Rockefeller, JP Morgan, etc.)
WEAPONS OF BUSINESS
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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
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Strikebreakers
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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
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Lockout
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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
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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
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Basic differences between Republicans and Democrats, ideological
differences between conservatives and liberals are great when economic
policy is concerned
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Republicans have been identified as being the party who favors the rich and big
business
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Democrats have been viewed as being sympathetic to labor and the poor
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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
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These differences in party and ideology translate into major political
themes in Presidential campaigns
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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
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1980: Carter vs. Reagan
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Reagan asks voters whether they
were better off then or before Jimmy
Carter had become President
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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
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Government plays a dual role in being linked to the nation’s economy
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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:
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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
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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
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Economic strategies revolve around three kinds of policies:
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Regulatory – results in government control over individuals and businesses
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Distributive – results in the government giving benefits directly to people, groups,
farmers, and businesses
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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
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i.e. Welfare, tax credits for business expenses, highway construction made possible through
a gasoline tax
Politics, Ideology and the Economy
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Economic policy of the…
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Mid-1800s
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Issus of slavery, tariffs and the rise of industrialization
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Post-Civil War
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Economic issues were directly tied to the rise of industrialization in the U.S.
•
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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
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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:
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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
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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
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Developed by John Maynard Keynes
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Advocated an increase in national income so
that consumers could spend more money
either through investments or purchases of
goods and services
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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
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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
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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
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The Crash of ‘29 and the Great Depression…
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Both laissez-faire (Hoover) and regulatory
(FDR) philosophies were in play
•
What is the best way to balance the tools
available to the government?
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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
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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.
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2.
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3.
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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.
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5.
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6.
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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
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How do governments deal with these problems? Local, state and federal
governments regularly take actions:
Governments regulate business
1.
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2.
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3.
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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
•
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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
•
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Change taxes to reward behavior (tax credit) or to punish others
Government Intervention
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Is there a downside to government intervention? Short answer? Yes
•
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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
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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
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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
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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?
•
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Excise taxes
Tariffs, fees, sales
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Government collects about 3% of its revenue from other various sources
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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
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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?
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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
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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
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49% - Federal taxes
•
33% - Social Security & payroll taxes
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•
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10% - Corporate taxes
4% - Customs and duties
3% - Excise taxes
WHERE MONEY GOES
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48% - Entitlements (i.e. Social Security,
Medicare, Medicaid)
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19% - Non-defense discretionary spending
•
16% - National defense
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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?