Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
States and Markets Sociology 2, Class 3 Copyright © 2010 by Evan Schofer Do not copy or distribute without permission Announcements • Add cards: • Class remains pretty much full, but I can sign a few more. See me after class • Class schedule: • States and Markets • Next topic: Economic globalization • Today: • Wrap up Commanding Heights Part I – Apologies to those in Thursday section… it will be out of order… • Lecture: States & Markets – basic concepts & definitions. Airline Bankruptcies 2001-9 Airline Bankruptcies • A partial list of airlines that went bankrupt in the last decade: • • • • • • • Northwest Airlines US Airways Delta United TWA Aloha Sun Country – In 2004 there was a period where 4 of the 7 largest airlines were all operating under “Chapter 11” bankruptcy protection. Airline Bankruptcies • What does “Chapter 11” mean? • Is it really that bad? After all, the planes keep flying… • In short: Happens when a company can’t pay the bills… is losing money badly • Owes a lot of money to “creditors” (banks, etc) • Option #1: “Liquidate” – Close the company, fire all the workers, sell all the planes • The “proceeds” of the sale go to the creditors • Like when a car is “repossessed” • Downsides: Destroys the company; but usually doesn’t raise enough money to pay off debts; workers feel “pain”. Airline Bankruptcies • Option #2: “Restructure” – Filing Chapter 11 protects a company from creditors • Under court supervision, the company negotiates with creditors • OK… I can’t pay you 500 million in September… how about if I pay you 300 million in October? – There is the potential for “win/win” • Creditors get paid back more $$ compared to liquidation • Company keeps operating – BUT: the company has to radically cut costs & increase profits to please creditors • Union contracts are re-negotiated, workers are fired,etc. Airline Bankruptcies • Issues to reflect on: – Why did deregulation/competition led to bankruptcies? – Was deregulation worth it? • It produced 30 years of cheap flights – improved competition; better “service” – stockholders & executives made millions • But, now we have a “bust”… – Workers feel pain – lost jobs and reduced wages – Government bailed out airlines after 9/11 – Government bailed out many airline pension plans; etc. – Would slightly more regulation have helped? Commanding Heights Video • Background – Total dominance of Keynesian ideas from 1950-70 • State ownership of many industries – Ex: Coal in Britain • Strong regulation of industries – Ex: Airlines – Strong economic growth in 50s/60s, but severe recession in 1970s • Some blamed Keynesian policies • Revival of Hayek’s ideas: free markets, increased competition, less regulation – Video: Airline deregulation & the Reagan/Thatcher revolution… Commanding Heights Video • Chapter 14 (Airline deregulation) – to end… Econ Basics: Definitions • Gross Domestic Product (GDP) • “gross” means “total” – Definition: The total economic value of goods & services produced within a country • Note: GDP is often measured “per capita,” which gives a sense of wealth per person • GDP in 2008 (CIA World Factbook): – United States: $14,400,000,000,000 – trillions! • $46,800 per capita – Brazil: $2 trillion, $10,200 per cap – Liberia: $1.5 billion, $500 per capita. Econ Basics: Definitions • Economic Growth: An increase in GDP – Growth means: more production, more profits, more wealth, more jobs, more income, more consumption, more everything! – Growth is generally considered a good thing • But, environmentalists foresee ecological limits • Recession: A period of decline in GDP • Fewer jobs, less consumption, etc… • Depression: A period of severe and protracted decline in GDP • Massive unemployment, poverty, hunger; political unrest. Econ Basics: Growth • Why do economies grow? • Long term growth comes from: – New technologies • Ex: Machines allow people to produce more goods – Increased skills and efficiency of labor force • Ex: Highly educated workers can get more done – Investment • Ex: Money spent to build more factories • Short term growth can be sped up by: – Greater consumption by people, firms, states • Spending $$ creates demand, speeds up economy. GDP = Prosperity? • Question: What is the relationship between GDP growth and prosperity? – Answer: It depends on who you ask – Political conservatives argue that growth is the best route to prosperity • In the long run, the poor are better off in a fast growing economy, even if the rich get most of the reward • Imagery: Rather than divide the “pie” evenly, the pie needs to grow so everyone’s piece gets bigger… – Political liberals have generally stressed the importance of social equality • Plus, other concerns like the environment. Econ Basics: Business Cycles • Issue: Economic growth isn’t always smooth • Capitalist economies are prone to cycles of “boom” and “bust” – the “business cycle” – In good times, everyone gets optimistic, builds a lot of factories… economy and jobs boom • Unemployment is very low, wages and prices go up – Eventually economic capacity becomes too great • More is produced than people are willing to buy • Firms have layoffs or go bankrupt, unemployment goes up, prices go down. Econ Basics: Business Cycles • Issue: If unemployment goes too high then consumption drops • Without consumer spending, economy can go into a deflationary spiral… • Ex: The Great Depression… • In general, governments use policies to avoid extreme cycles • Example: Unemployment insurance – Provides money to the unemployed to avoid a downward spiral • Example: Setting interest rates – We’ll discuss this later. US GDP Growth 1970-2010 States and Markets • Issue: How is the state related to markets? • Marx was right about some things: • We all depend on the economy for our well being! • States cannot exist and function without resources from the economy • Historically, states have tried to generate economic growth • Either for the collective good, or in order to wage war. States and Markets • Question: Can markets exist without states? • What do you think? What does capitalism require? • Answer: No! (at least not on a large scale) • Capitalism requires: • • • • • Private property – protected by laws, police, courts Legal systems – to enforce private property, contracts Infrastructure – roads, ports, etc… National defense Regulation of markets – People disagree about how much… but most favor some degree of regulation to prevent huge disasters, fraud, etc… States and Markets • Question: Why do states try to affect markets? • 1. To improve the economy • Encourage growth • To “smooth out” the business cycle • 2. To affect society more broadly – E.g., via incentives or government spending • Change distribution of wealth • Reduce environmental degradation, reduce discrimination, improve medical care, etc… • In short: To achieve things that markets don’t always do by themselves: “Collective goods”. States and Markets • Question: How can states affect markets? – 1. Fiscal policy – taxes and spending – 2. Monetary (money) policy – printing & lending money – 3. Laws and Regulations – 4. Direct ownership of production • I’ll discuss examples of each… Fiscal Policy: Taxes • Fiscal Policy: Government policy regarding taxation, public revenues, or public debt • Taxes generate revenue for the state • What does the government tax? • • • • • Individual income Corporate income Transactions (sales tax, taxes on trade) Property owners Activities that require fees (e.g., driving, fishing, etc) – By taxing some things more than others, states can affect social and economic behavior. Fiscal Policy: Taxes • 1. Government can adjust economy by setting the overall tax rate – Highest federal income tax rate in US is around 35% • Actual taxes paid are lower due to loopholes, etc. – Low taxes can create short term growth • By increasing spending, consumption – Low taxes also can increase investment, increasing long term growth – Higher taxes support more government services • And allow greater redistribution of wealth in society. Fiscal Policy: Taxes • 2. Government can use taxes as incentives • High taxes on cigarettes may reduce consumption • Tax breaks for “clean energy” may increase usage • High taxes on imported goods reduce trade • 3. Government can tax to redistribute wealth • Government can target groups: – Wealthy vs. poor, old vs. young, people vs. companies • “Progressive” tax system = shifts $ toward poor • “Regressive” tax system = shifts $ toward rich – Ex: Sales taxes & flat taxes tend to be regressive. Examples: Bush Tax Cuts • 2001: Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) – Reduced income tax rates (percentage people must pay) – Dividend tax rate reduction • Dividends = profits given to investors – Goals: Encourage people to spend, invest: speed up the economy… – Reaction from economists: Mixed. • Cuts mostly benefits the rich, who may not spend the extra $$ (which stimulates the economy) • Very costly (government already had budget deficit). Fiscal Policy: Spending • Government can also affect economy by adjusting how it spends money • Budget deficits occur when the government spends more than it earns in taxes in a year • The government can do this by borrowing money… • Result: the national debt increases • Budget surpluses occur when the government spends less than it earns • Current national debt: 12,300,000,000,000 • Over 40,000 per person • Large government debt can harm the economy. Fiscal Policy: Spending • Government spending can “jump-start” the economy • State may spend directly, or give money to people – Keynes: “Government should spent against the wind” • Example: “New Deal” spending, war spending helped create jobs and economic growth • But, consistent high government spending can harm economic growth • High deficits, debt can lead to inflation • Example: “stagflation” in 1970s. Example: The “Stimulus Bill” • The “stimulus bill” is an example of fiscal policy • Provides tax cuts and spending with the goal of speeding up the economy during a recession • “American Recovery and Reinvestment Act of 2009” – States goals: • Reduce unemployment • Increase economic growth – Main Provisions: • 288 billion in tax cuts to individuals and businesses • 224 billion in additional funding for education, health care & entitlement programs – Extending unemployment benefits, aid to schools, etc • 275 billion for federal contracts, grants, loans – Build roads, renewable energy, weatherizing homes, etc. Effects of Stimulus: Multipliers • How much does each dollar of stimulus increase the GDP? • Answer: It depends on where the money goes • Stimulus has no effect if the recipient doesn’t spend it • Stimulus can have a large effect if the recipient spends it in a way that starts a “chain reaction” – Ex: An infrastructure project: Gov’t gives it to a road building company, company gives it to a worker, worker buys food, grocery store owner expands business… etc • The size of the effect is called a “multiplier” – Ex: A multiplier of 1.5 means that each dollar of stimulus generates 1.5 dollars of GDP. Effects of Stimulus: Multipliers • Multiplier estimates from the Congressional Budget Office (CBO), March 2009 Type of Spending Estimated Multiplier Infrastructure projects 1 - 2.5 Transfers to people (ex: unemployment insurance) Tax cuts for wealthy .8 - 2.2 .1 - .5 Impact of US Fiscal Policy on GDP US fiscal policy has large positive impact on GDP from mid-2009 to mid-2010. US spending peters out after that… Source: Goldman Sachs, via Krugman NYT Blog The Stimulus Bill: Debates • Current debate: – Democrats / Keynesians: Stimulus bill is a good idea… increases growth & employment • Benefits outweight the debt that is incurred • In fact, some economists argue that we need a second round of stimulus… – Republicans / conservative economists: Stimulus bill is a bad idea: causes too much debt – Could cause inflation and inhibit long term growth • Some conservative economists actually reject the idea that spending has a stimulative effect • Conservatives more concerned about debt and inflation that unemployment & short term growth. Monetary Policy • The government also acts as a bank: • The “Federal Reserve Bank” was set up by the government to store a reserve of money – Operates independently of political control • Called “The Fed” – Other countries have them, too • General term: “central bank” – The Fed lends money to other banks • Who in turn, lend to people and companies Monetary Policy • The “Fed” uses its stores a pool of money to: – 1. Prevent financial disasters • Example: The “run” on banks in the Great Depression – Banks collapsed and government didn’t help out • Example: In 2008 banks collapsed and the government aggressively stepped in – Including TARP – 2. To adjust the economy • Prevent boom/bust cycles, keep inflation low • It does this by setting interest rates – And, recently, by intervening directly (buying or selling things). The Fed and Interest Rates • What are “interest rates”; why do they matter? • Interest rates are like rates on a credit card, car loan, or student loan • If rates are high, you will buy or spend less – Because you’ll have to pay a LOT of interest later… • If rates are low, you can buy more now • Critical issue: The Fed chooses the interest rate it will charge to lend money – The Fed is so big that other banks follow its rates • Thus, the Fed effectively sets rates for the whole economy. Monetary Policy • The impact of the “Fed’s” rate policies: • Low rates stimulate the economy • Also called “expansionary” or “loose” monetary policy • Encourages people to spend, companies to invest • Downside: higher inflation • High rates slow the economy • “Tight”, “contractionary,” or “conservative” monetary policy • High interest payments mean that businesses and people are less likely to borrow, spend, invest. US Interest Rates 2000-2009 Rates lowered during recession following dot-com crash and 9/11 Rates drop to zero in current recession The “Lower Bound” Problem • Issue: What if you want to speed up the economy more, but you’ve already lowered interest rates to zero? – Answer: You’re stuck (mostly) • Traditional monetary policy loses effectiveness in extreme economic conditions » See Krugman book: “The Return of Depression Economics” • Japan in the 1990s – the “lost decade” • But, the Fed tries ‘non-traditional’ strategies – Ex: Buying non-treasure assets – Implication: Fiscal stimulus is the main strategy to deal with the current recession. Laws and Regulations • States affect markets by imposing laws and regulations of many kinds – Competitiveness laws: prevent monopolies or limit what monopolies can charge • Ex: Prevent price gouging – Consumer protection laws • Ex: FDA prevents sale of tainted meat – Laws regulating markets • Protect against fraud, volatility – Regulating particular industries • Prices, access to markets, etc. Laws and Regulations • States affect markets by imposing laws and regulations of many kinds • Example: Airlines – 1. States impose safety regulations on airlines • Ex: Federal Aviation Administration (FAA) inspects planes, requires airlines to do regular maintenance • Why bother? Companies have a market incentive to avoid crashes, which are costly… – Planes destroyed, reputation damaged… which harms future sales • Are market incentives enough to make you trust airlines? Laws and Regulations • Example: Airlines – 2. States regulated airline prices to reduce competition • Created industry stability, at the cost of competition • But, those regulations were ended in the 1970s – Note the trade-off: stability vs. efficiency • Ex: Regulation stabilized airlines, but reduced competition; deregulation had the opposite effect. Laws and Regulations • States affect markets by imposing laws and regulations of many kinds • Example: Subsidies to agriculture • US gives tens of billions a year to farmers – Keeps industry stable – fewer bankruptcies • US farmers don’t have to be as efficient – Issue for future discussion: This harms farmers in poor countries… Laws and Regulations • Governments regulate banks to protect consumers – Generally, limiting the risks banks can take with your money… • Ex: FDIC – government guaranty that your money is safe in a savings account (up to 250K per bank) – Banks are forced to pay money for such insurance; they’d rather not • Ex: Reserve requirements – Banks must keep some money on hand, just in case of crisis – They’d rather not do this… because they could make more $ otherwise • Ex: Limits on “leverage” – risky investments – Banks can make more profits if they take more risks… but they might go bankrupt! Regulating Wages and Prices • Example: The federal gov’t minimum wage – The Fair Labor Standards Act (FLSA) of 1938 established minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in Federal, State, and local governments. • Covered workers are entitled to a minimum wage of not less than $7.25 an hour. – Source: http://www.dol.gov/esa/whd/flsa/ • Note: California has another minimum wage law, raising the minimum to $8.00. Regulating Wages and Prices • The minimum wage also reflects a trade off • Minimum wage laws are a big benefit to workers • But, the US economy would be more “competitive” if corporations could pay workers less • The fact that wages in China are under $1 / hour means that US companies are less competitive • Question: What might happen of wages were “deregulated”? • Question: What if the minimum wage was increased to $20/hr? State Ownership • Governments can own factories, railroads, electric power plants, etc. – or anything else. • Nationalized or “state-run” industry: a business or industry that is run by the state – Definition: “Nationalization” is when the government takes over formerly private companies or industries • Example: airport security screeners after 9/11 – Definition: Privatization: when a governmentrun business is sold to private owners • Examples: many prisons, even some schools • Heavy industries in Britain & Russia (historically). State Ownership • Advantages of state-run industries: – Highly stable – no bankruptcies • Tax money can keep them afloat in hard times – Works in collective interests (usually) • Not driven by greed; nicer to workers (usually) • Won’t try to co-opt the state: Bribes/lobbying… – Greater accountability (sometimes) • Government organizations are often subject to greater scrutiny and accountability, compared to private firms – Ex: monitoring by government accounting offices; FOI Act • Private firms that do terrible things usually just go bankrupt and leave others to clean up the mess – Ex: Mining companies that damaged the environment. State Ownership • Disadvantages of state ownership – Little or no competition: • Less pressure to be efficient or innovate • Though, some are quite efficient – Ex: Social security vs. private savings funds – Ex: State-run health systems vs US system of private insurers • Also, even private firms are may avoid competition – E.g., by lobbying the state for subsidies; corporate welfare – Often, lobbying is cheaper than innovating! – Also, state firms can become corrupt or under influence of government elites… • Ex: Oil companies in Nigeria and Russia – Some have stolen the oil wealth of entire nations… Keynesianism vs. Free Markets • The Keynesian state: – Fiscal Policies: Higher taxes, higher spending • To support health care, welfare, keep full employment – Monetary policy: Expansionary (low interest rates) • Low interest rates keeps unemployment low – But, inflation & debt tends to be higher – Regulation: Expanded, elaborate • Industries and markets are stabilized, controlled – Ownership: Many industries are nationalized • “Private sector” is smaller. The Credit Crisis • Krugman article: “Partying Like its 1929” • Regulation and the financial crisis – Banks were heavily regulated since 1930s, but didn’t like it • Banks began to circumvent regulation by creating new organizations & services (e.g., Hedge funds) – a “shadow” banking system • Result: Banks took greater and greater risks… and made billions of dollars of profits for years – Many risky investments were in real estate – Decline of real estate market in 2007-8 caused risky investments to lose tremendous amounts of money • Banks began to go bankrupt; bank runs began – Entire economy was threatened… Credit Crisis Video • The Credit Crisis Visualized • Jonathan Jarvis • Direct video link: http://crisisofcredit.com/ • Local link: Responses to the Credit Crisis • What could the government do? • Many big banks owed lots more than they could pay • 1. Do nothing… • Banks were reckless, let them fail – Benefit: cheap, easy – Problem: This would make the economy worse • The entire economy needs functioning banks • Businesses depend heavily on loans to operate… without access to cash, MANY would go bankrupt • A major collapse would almost certainly cause a depression: mass bankruptcy and unemployment. Responses to the Credit Crisis • What could the government do? • 2. Nationalize the banks – take them over • Run them for a while and then re-sell to private owners • Sweden did that in the 1990s… – Benefits: • Quickly restores banking system • Allows government to fire the bankers that caused the problems – Problems: • Politically unpopular – Seen as “socialist” or “communist”. Responses to the Credit Crisis • What could the government do? • 3. “Recapitalize” the banks • Give them a ton of money to weather the crisis – Benefits: • Keeps the banks going, averts disaster – Costs: • Rewards people who caused the crisis – Lets them pay themselves big bonuses • No control: banks may choose to not loan money • Can lead to “zombie banks” (Japan in 1990s) – Banks are kept alive, but not really functioning. Keynesianism vs. Free Markets • The “Free Market” state: – Fiscal Policies: Low taxes, low spending • Minimal government; Money controlled by people, firms – Monetary policy: Conservative (higher interest rates) • Inflation is kept low. Less effort made to keep unemployment low. (Workers experience more “pain”) – Regulation: Minimal • Industries are free to do as they wish – Ownership: Industries are “privatized” • Government keeps out of business. Democrats, Republicans, Markets • Democrats have been historically more “Keynesian” and republicans more “free market” • But, they don’t match perfectly – – – – Ex: Nixon (R) instituted wage and price controls Ex: Carter (D) oversaw substantial privatization Clinton signed NAFTA (a free-market trade treaty) Reagan & Bush 1 & 2 created huge budget deficits and greatly increased the national debt – Obama has not (yet) done much to increase regulation of banking system • Despite obvious failures in 2008-9. Republican Fiscal Policy Cartoon (1) Republican Fiscal Policy Cartoon (2) States, Markets, Globalization • Since around 1980 governments have shifted • Away from Keynesian / Welfare-state systems • Toward free market capitalism • This has implications for globalization – State-run industries limit global trade • And limit the expansion of multi-national corporations – High taxes (including on trade) limit global trade – High regulation limits trade & foreign investment – Many regulations limited trade, foreign investment • Etc. etc. etc. • In sum: Shift toward free markets removed obstacles to economic globalization… Economic Globalization • Important economic changes: • 1. Growth of international trade • 2. Increase of Foreign Direct Investment • Ex: building factories in another country • 3. Increased international capital mobility • Movement of money across national borders • 4. Growth of multi-national corporations • Each has an effect on the ability of states to control their economies. States, Markets, Globalization • Issue: Economic globalization puts further pressure on governments... To be pro-market • Globalization reinforces pressures away from Keynesian policies and toward even freer markets… – Where do companies build new factories? • In a high-tax country with lots of regulations? • Or in a free-market country with low taxes? • If states want to attract investment, they are compelled to move toward free-market policies – Ex: Thomas Friedman: The Golden Straitjacket • The “electronic herd” – Global investors that look around the world for places to invest money • They force countries to “tighten the straightjacket” of free market policies… Economic Globalization • Globalization has strong implications for the ability of states to control markets • • • • For instance: Globalization reduces states options for fiscal policy Globalization reduces effectiveness of monetary policy Globalization harms economies that try to regulate or nationalize industry – We’ll discuss this more in coming weeks…