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Chapter 3
Section 1
America
The Land of Opportunity
• For centuries, people have
considered America to be a place
where anyone from any
background could achieve
success through hard work
• Why?
• Because of the American tradition
of FREE ENTERPRISE - the social
and political commitment to giving
people the freedom and flexibility
to try out their business ideas and
compete in the marketplace
Constitutional Protections
• Bill of Rights protects
individual freedoms.
• Constitution also
guarantees important
rights that allow people
to engage in business
activities.
–Property Rights
–Taxation
–Contracts
Property Rights
– Protected in 5th &
14th Amendments
– Due process
clauses prevent
the government
from taking
property away
from individuals
except when there
is a public reason
(eminent domain)
– Gov must pay the
person the fair
market value of the
property that has
been taken
Taxation
• Basic rules for taxation of
individuals and
businesses provided in
Article I and 16th
Amendment
– Direct taxes
apportioned by
population
– Graduated income tax
– Protects us from
unreasonable taxation
Contracts
• Article I
– Guarantees people and business the right to make
binding contracts
– Cannot use political process to get excused from
contracts
– No legislature can pass a law changing the terms of
someone’s business agreement
Benefits of Free Enterprise
• What are the basic principles of the U.S. free enterprise
system?
• What role does the consumer play in the system of free
enterprise?
• What is the role of the government in the free
enterprise system?
The Basic Principles of Free Enterprise
Several key characteristics make up the basic
principles of free enterprise.
1. Profit Motive
The drive for the improvement of
material well-being.
2. Open opportunity
The ability for anyone to
compete in the marketplace.
3. Legal equality
Equal rights to all.
4. Private property rights
The right to control your
possessions as you wish.
5. Free contract
The right to decide what
agreements in which you
want to take part.
6. Voluntary exchange
The right to decide what
and when you want to buy
and sell a product.
7. Competition
The rivalry among sellers
to attract consumers.
Profit Motive
• The force that encourages people and organizations to
improve their material well-being
• Business owners and managers decide what
companies will be formed and how they will be run,
operating in ways they believe will maximize their
profits
• Forces management to exercise financial discipline
because they are responsible for their own success
• Rewards innovation
• Improves productivity
Open opportunity
• Concept that everyone can compete in the marketplace
• Different people and different companies will have different
economic outcome
• Allows economic mobility up or down no matter how much money
you start out with
Legal equality
• Everyone has same legal rights
• Allows everyone to compete in the economic
marketplace
• Maximizes country’s use of human capital
Private property rights
• Essential component
• Concept that people have the right to control their possessions as
they wish
• Allows people to make their own decisions about their own
property
Free contract
• allows people to decide
what agreements they want
to enter into
Voluntary exchange
• Allows people to decide what and when they want to
buy and sell, rather than forcing them to do so at
particular times or specific prices
Because of all these rights we have extensive
Competition
• The rivalry among sellers to attract customers while
lowering costs
• Provides consumers with the choice of a larger variety
of goods, most of which are sold at a reasonable price
The Consumer’s Role
A fundamental purpose of the free enterprise system is
to give consumers the freedom to make their own
economic choices.
Through their economic
dealings with producers,
consumers make their desires
known. When buying products,
they indicate to producers what
to produce and how much to
make.
Consumers can also make their
desires known by joining interest
groups, which are private
organizations that try to persuade
public officials to vote according
to the interests of the groups’
members.
The Government’s Role
Americans expect the government to protect them from
potential problems that arise from the production of
various products or the products themselves.
Public Disclosure Laws
Laws that require companies to provide consumers with
important information about their products, such as fuel
efficiency of automobiles, side-effects of medication.
Public Interest
Both state and federal governments’ involvement in concerns
of the public as a whole, such as environmental protection,
sanitary food production.
Negative Effects of Regulation
Popular demand for government protection of
consumers and of the environment resulted in the
creation of new government agencies and regulations.
•Rules can be costly to implement and cut into profits, slowing
growth and forcing businesses to charge unnecessarily high
prices.
•Highly regulated industries (airlines & telephone) pointed out
that government rules & regulations stifled competition
resulting in prices that were arbitrarily high
•Growth in government oversight also raised government
spending
Section 1 Assessment
1. Americans generally favor
(a) strong government control of the economy.
(b) limited government intervention in the economy.
(c) no government intervention in the economy.
(d) government control of manufacturing only.
2. The basic principles of free enterprise do NOT include
(a) competition.
(b) legal equality.
(c) profit motive.
(d) checks and balances.
Section 1 Assessment
1. Americans generally favor
(a) strong government control of the economy.
(b) limited government intervention in the economy.
(c) no government intervention in the economy.
(d) government control of manufacturing only.
2. The basic principles of free enterprise do NOT include
(a) competition.
(b) legal equality.
(c) profit motive.
(d) checks and balances.
•America
•108 million households
•288 million people
•137 million jobs
•Earn $8 trillion a year
•$28 billion a year in savings deposits
•71,000 banks
•6.5 million homes per year purchased
•17 million automobiles purchased per year
*All data is approximate and based on 2005
copyright of textbook.
Section 2
Promoting Growth and Stability
• How does the government track and seek to influence
business cycles?
• How does the government try to promote economic
strength?
• Why and how does the government encourage
innovation?
Macro vs. Micro
• Macroeconomics
– the study of the behavior and decision making of entire
economies
– Examines major trends for the economy as a whole.
– Macro means “large”
• Microeconomics
– The study of the economic behavior and decision
making of small units
• individuals
• families
• households
• businesses
– Micro means “small”
Tracking Business Cycles
• A business cycle is a period of a macroeconomic
expansion followed by a period of contraction.
– Major fluctuations in economy
– May last less than a year or may continue for many
years (ex – recessions, depressions)
• One measure of a nation’s macroeconomy is gross
domestic product (GDP). GDP is the total value of all
final goods and services produced in a particular
economy.
– Economists follow GDP and other key statistics to
predict business cycles
Business Cycle in Free Enterprise System
• Systems are subject to business cycles because
economic decisions are made by individuals &
businesses acting in their OWN self-interest
– Prices
– Production
– consumption
• Government plays a role in attempting to prevent wild
swings in economic behavior.
How does this impact YOUR life???
• Where we are in the business cycle impacts our day to
day lives
• Lack of jobs?
– High school graduate has trouble finding work
• Prices rise? Incomes don’t?
• Our ability to buy what we need goes down.
– Ex: gas prices jumped from under $2 per gallon to
almost $5 per gallon in a few short weeks. Wages
did not go up to match this increase. Gas became
less affordable as did “gas-guzzling” vehicles.
Promoting Economic Strength
•Policymakers pursue three main outcomes as they
seek to stabilize the economy.
• High employment
• Steady growth
• Stable prices
Employment
• One aim of federal economic policy is to provide jobs
for everyone who is able to work.
• Unemployment rate of 4-6% is considered acceptable
• Last half of 20th century jobless rate ranges 3-11%
• Current unemployment rate
– Nationwide 9.7% Dec 2009
– Mississippi 10.6% Dec 2009
• It was 7.2% in September 2009
Growth
• For each generation of Americans to do better than
previous ones, the economy must grow to provide
additional goods and services.
– This is part of the American Dream!
– For the most part, parents hope and dream their
children will be more economically successful than
they were.
•GDP is a measure of
such growth
Stability
• Macroeconomic task of government
– Keeping economy stable and secure
• Stability gives consumers, producers, and investors
confidence in the economy and in our financial
institutions, promoting economic freedom and growth.
Signs of Economic Stability
• General price levels – government aim is to help
prevent sudden, drastic shift in prices
– Surge in prices puts strain on consumers
– Drop in prices puts strain on both producers and
consumers
• Ex: milk: increase $ - hurts families with children;
decrease $ - hurts dairy farmers,
– Major fluctuation in price levels can cause
macroeconomic chain reaction policymakers seek to
avoid
Signs of Economic Stability
• Health of nation’s financial institutions
– BANKS – we want to know that our deposits and
investments are protected from fraud,
mismanagement, shielded from sudden economic
downturns
• Federal government monitors American banks and
other financial institutions with hundreds of regulations
and the power to enforce them.
Economic Citizenship
• Why is this important to you?
• Achieving stability and growth is not easy
• Government helps to compensate for typical swings of business
cycle by
– Adjusting interest rates
• Rates go up – more money OUT of YOUR pocket
• Rates go down – more money IN YOUR pocket
– Spends money
• Spends less - LESS money reaching YOUR pocket
• Spends more - MORE money reaching YOUR pocket
• As a voter, it is more important than ever that you understand
the macroeconomic process so you can make the best elective
choice to help guide government economic policy.
American Standard of Living
• Far higher, in terms of GDP, than most of the world
• Preserved by increasing productivity
• How?
– Work ethic
• A commitment to value of work and purposeful
activity
– Improved technology through progress
Encouraging Innovation
•The government encourages the development of new
technologies in several ways. Technology is the process
used to produce a good or service.
•Improvements allow an economy to produce more output from
the same or smaller quantity of inputs.
•Allows economy to operate more efficiently & productively
Government’s Role
• Inventions are the engine of the free enterprise system
• Help us build “more, better, faster”
• Recognizing the need to maintain America’s technological advantage,
the government provides incentives for innovation
• Federal agencies fund many
research and development
projects. Also, new
technology often evolves out
of government research.
• Grants patents and copyrights to
inventors of new products,
offering possibilities of huge
profits in free market
• A patent gives the inventor of a
new product the exclusive right to
produce and sell it for 20 years.
• Article I, Section 8 of Constitution
Section 2 Assessment
1. Policymakers encourage all of the following EXCEPT
(a) stable productivity.
(b) high employment.
(c) stable prices.
(d) steady growth.
2. The government encourages advances in technology and improvements in
productivity by
(a) maintaining steady price controls.
(b) funding research and development projects at many levels.
(c) hiring more workers to reduce unemployment.
(d) regulating banks and other financial institutions.
Section 2 Assessment
1. Policymakers encourage all of the following EXCEPT
(a) stable productivity.
(b) high employment.
(c) stable prices.
(d) steady growth.
2. The government encourages advances in technology and improvements in
productivity by
(a) maintaining steady price controls.
(b) funding research and development projects at many levels.
(c) hiring more workers to reduce unemployment.
(d) regulating banks and other financial institutions.
Section 3
Providing Public Goods
• What are public goods?
• What is a market failure?
• How does government manage externalities?
Public Goods
• A public good is a shared good or service for which it
would be inefficient or impractical to make consumers
pay individually and to exclude non-payers.
– Example: roads, dams, space shuttle launch
– Making consumers pay: how would you like to receive a bill for
your share of building a new interchange of I-10?
Launch of the space shuttle?
– Exclude non-payers: how do we keep those
who FAIL to pay the bill off the newly built road?
• To simplify this funding of government
projects in the public interest, taxes are collected
Characteristics of Public Goods
• Most are public simply because a private provider could not
charge those who benefit or exclude non-payers
• Any number of consumers can use the goods without
reducing the benefits to any single user
– Examples: going to a national or state park, driving on
the highway
Costs & Benefits
• The federal government steps in to act in the public
interest whenever it is determined that the benefits of a
policy outweigh the drawbacks.
• Cost is critical in determining whether something gets
produced as a public good.
• When a good or service is public
– The benefit to each individual is less than the cost
that each would have to pay of it were provided
privately
– The total benefits to society are greater than the
total cost
Public vs. Private Sector
– Public goods are funded by the public sector.
– The private sector would have little incentive to
produce public goods.
– Public Sector: the part of the economy that
involves transactions of the government
– Private Sector: the part of the economy that
involves transactions of individuals and
businesses
Free Rider Problem
– Associated with public sector
– someone who would not choose to pay for a certain
good or service, but who would get the benefits of it
anyway if it is provided as a public good.
– Consume what they do not pay for
– Suggests that if the government stopped collecting
taxes and relied on voluntary contributions, many public
services would have to be eliminated
– Examples: Fire Protection, new roads
Market Failures
• Would the free market ensure that roads are built everywhere they
are needed?
• It’s doubtful. Neither could individuals afford to pay for a freeway.
• What is missing? Profit Incentive. What profit exists for an
individual to build a freeway?
A market failure is a situation in which the market, on its
own, does not distribute resources efficiently.
Externalities
• An externality is an economic side effect of a good or
service that generates benefits or costs to someone
other than the person deciding how much to produce
or consume.
– Positive Externalities
• Public goods generate benefits to many people and
not just those who pay for the good
• Beneficial side effects
– Negative Externalities
• Some decisions to produce goods and services have
unintended costs
• Cause part of the cost of producing a good or service
to be paid for by someone other than the producer
Examples of Externalities
– The building of a new dam and creation of a lake generates:
• Positive Externalities
– A possible source of hydroelectric power
– Swimming
– Boating
– Fishing
– Lakefront views
• Negative Externalities
– Loss of wildlife habitat due to flooding
– Disruption of fish migration along the river
– Overcrowding due to tourism
– Noise from racing boats and other watercraft
Government’s Goals
• When externalities are present
we have a
market failure because the costs
or benefits of a
good or service are not assigned properly. So how
does the government function in the American
economy?
• The government encourages the creation of positive
externalities
– Example: Students benefit from education but society
as a whole benefits from an educated population
• The government aims to limit negative externalities.
– Example: acid rain is part of the cost of producing power
and driving cars but it damages trees, lakes, and wildlife.
• Regulations may be put in place to transfer the cost of
pollution back to its producers
Section 3 Assessment
1. Which of the following is an example of the public sector of the economy?
(a) consumers purchasing goods from a private company
(b) laborers working for a private construction company
(c) government funding for a new national park
(d) individual donations to charity
2. What is government's role in controlling externalities in the American economy?
(a) government tries to encourage positive externalities and limit negative
externalities
(b) government tries to limit all externalities because they represent market failure
(c) government tries to limit positive externalities and encourage negative
externalities
(d) government tries to encourage all externalities so that the market will be
competitive
Section 3 Assessment
1. Which of the following is an example of the public sector of the economy?
(a) consumers purchasing goods from a private company
(b) laborers working for a private construction company
(c) government funding for a new national park
(d) individual donations to charity
2. What is government's role in controlling externalities in the American economy?
(a) government tries to encourage positive externalities and limit negative
externalities
(b) government tries to limit all externalities because they represent market failure
(c) government tries to limit positive externalities and encourage negative
externalities
(d) government tries to encourage all externalities so that the market will be
competitive
Section 4
Providing a Safety Net
• What role does the government play in fighting
poverty?
• What government programs attempt to aid those facing
poverty?
• The free market economy has proven better at generating wealth
than any other economic system, that wealth is spread unevenly
throughout society.
• This leaves some people below the poverty threshold.
• The data is used mainly for statistical purposes — for instance,
preparing estimates of the number of Americans in poverty each
year.
• Most recent data: 2009 Poverty Threshold for a family of four )2
adults and 2 children is $22,050
Source: U.S. Census Bureau, Housing and Household Economic Statistics Division
•Free Market opportunities can lift the working poor into the middle class.
MISSISSIPPI
• For 2009, the federal poverty level is $22,050 for a family of four.
Children living in families with incomes below the federal poverty level
are referred to as poor. But research suggests that, on average, families
need an income of about twice the federal poverty level to meet their
basic needs. The United States measures poverty by an outdated
standard developed in the 1960s.
•In Mississippi, there are
413,227 families, with
770,925 children.
•Poor Children: 28%
(218,660) of children live in
poor families (National:
19%), defined as income
below 100% of the federal
poverty level.
•Children in Mississippi, by income level, 2008
•FPL – Federal Poverty Level
•Source: National Center for Children in Poverty, Columbia University
MISSISSIPPI
• For 2009, the federal poverty level is $22,050 for a family of four.
Children living in families with incomes below the federal poverty level
are referred to as poor. But research suggests that, on average, families
need an income of about twice the federal poverty level to meet their
basic needs. The United States measures poverty by an outdated
standard developed in the 1960s.
•In Mississippi, there are
413,227 families, with
770,925 children.
•Poor Children: 28%
(218,660) of children live in
poor families (National:
19%), defined as income
below 100% of the federal
poverty level.
•Children in Mississippi, by income level, 2008
•FPL – Federal Poverty Level
•Source: National Center for Children in Poverty, Columbia University
•
29% (64,396) of children in poor families have at least one parent who is
employed full-time, year-round.
•
31% (68,005) of children in poor families have at least one parent who is
employed either part-year or part-time.
•
39% (86,258) of children in poor families do not have an employed
parent.
•
51% (49,555) of children whose parents do not have a high school degree
live in poor families.
•
43% (90,834) of children whose parents have a high school degree, but
no college education live in poor families.
•
17% (78,272) of children whose parents have some college or more live
in poor families.
•
29% (64,396) of children in poor families have at least one parent who is
employed full-time, year-round.
•
31% (68,005) of children in poor families have at least one parent who is
employed either part-year or part-time.
•
39% (86,258) of children in poor families do not have an employed
parent.
•
51% (49,555) of children whose parents do not have a high school degree
live in poor families.
•
43% (90,834) of children whose parents have a high school degree, but
no college education live in poor families.
•
17% (78,272) of children whose parents have some college or more live
in poor families.
The Poverty Problem
The poverty threshold is an income level below that
which is needed to support families or households.
• The poverty threshold is determined by the federal
government and is adjusted periodically.
• Welfare is a general term that refers to government aid
to the poor.
The Welfare System – the history of it
• Began in 1930sn under FDR - Great
Depression
• Main government effort to ease poverty
• Taxes are collected from individuals and
redistributed as aid to the poor
• Increased in1960s by LBJ “War on
Poverty” effort
• Payments soared in 70s & 80s
• In 90s critics voiced increasing concern
about people becoming dependent on it
and being unable or unwilling to get off it.
• Sweeping changes resulted in 1996.
Redistribution Programs
Cash transfers are direct payments of money
to eligible people – typically poor, disabled, and retired.
Four programs distribute direct cash transfers
Temporary Assistance for Needy Families (TANF)
Social Security
Stability
Workers’ Compensation
Temporary Assistance for Needy Families (TANF)
•
This program allows individual states
to decide how to best use federally
provided funds.
•
Grew out of 90s debate on how to ease
poverty while decreasing GOV
payments to poor, part of
comprehensive welfare reform of 1996
•
Replaced earlier program- Aid to
Families with Dependent Children
•
Money goes to states instead of
recipient
•
States must
– Adhere to federal rules
– Create work incentives
– Establish lifetime limit for benefits
•
Aims to move people from welfare
dependence to the workforce
Social Security
• Social Security
provides direct cash
transfers of
retirement income to
the nation’s elderly
and living expenses
to the disabled.
• Created in 1935 by
FDR during Great
Depression
• Program collects
payroll taxes from
current workers and
the redistributes
them to current
recipients
Today earnings up to $87,900 a year get taxed at 12.4 percent.
What does this mean to you?
• The Social Security tax withheld from employees during the year 2010
will be 6.2% of the first $106,800 of each employee’s taxable earnings.
The employee’s earnings in excess of $106,800 are not subject to the
Social Security tax. In addition to the Social Security tax, the entire
amount of each employees’ taxable earnings is subject to the Medicare
tax of 1.45%.
• Both the Social Security tax and the Medicare tax must be matched by
the employer. This means the employer must remit to the federal
government 12.4% of each employee’s first $106,800 of taxable
earnings plus 2.9% of each employee’s earnings regardless of amount.
• Self-employed individuals are responsible for paying both the employee
and the employer portions of the Social Security tax and the Medicare
tax.
• The FICA (Federal Insurance Contributions Act) tax is really two
taxes:
– The Social Security tax of 6.2% which applies only to the first
$106,800 of an employee’s taxable earnings (in year 2010 and in
year 2009), and
– The Medicare tax of 1.45% on every dollar of every employee’s
taxable earnings.
Stability
• Unemployment compensation provides money to
eligible workers who have lost their jobs.
• Funded jointly by federal and state governments
• Workers must show that they have made efforts to get
work during each week they receive benefits
Workers’ Compensation
Workers’ compensation
provides a cash transfer of
state funds to employees
injured while on the job.
• Most employers MUST pay
workers comp insurance
to cover any possible
future claims
• Workers comp insurance
has become more and
more expensive as
– Medical expenses
increase
– Number of reported onthe-job injuries have
increased
Other Redistribution Programs
• Besides cash transfers, other redistribution programs
include:
In-kind benefits
Medical benefits
Education benefits
In-kind benefits
• In-kind benefits are goods and services
provided by the government for free or at
greatly reduced prices.
• Includes food giveaways, food stamps,
subsidized housing, and legal aid
Medical benefits
• Health insurance is
provided by the
government for the
elderly (over age 65) and
disabled (Medicare) and
for poor people who are
unemployed or are not
covered by their
employer’s insurance
(Medicaid).
• Administered under
Social Security program
• Enormously expensive
Education benefits
• Federal, state, and local governments all provide educational
opportunities for the poor.
• Programs are FEDERALLY funded from pre-school to college.
• State & local funds aid students with learning disabilities
WHY?
• Education programs add to the nations human capital and
labor productivity
• Improved education and technology can make entire
economies more productive and shift production possibilities
frontier outward
Faith-Based Initiatives
•
Announce by “Dubbuyah” in 2001
•
Initiative to rely on non-governmental support for people in need
•
Believed that religious organizations have been among most successful
groups delivering social services
– They spend money to solve problems
– Provide special compassion
•
Part of welfare reform that allows faith-based groups compete for federal
funds
•
Office of Faith-Based and Community Initiatives est to help these groups
work more effectively with the federal government
Section 4 Assessment
1. Welfare includes all of the following EXCEPT
(a) Temporary Assistance to Needy Families
(b) Occupational Safety and Health Administration
(c) Social Security
(d) Medicaid
2. Education programs make the economy more productive by
(a) adding to human capital and labor productivity.
(b) reducing taxes.
(c) providing more jobs in manufacturing.
(d) reducing injuries on the job.
Section 4 Assessment
1. Welfare includes all of the following EXCEPT
(a) Temporary Assistance to Needy Families
(b) Occupational Safety and Health Administration
(c) Social Security
(d) Medicaid
2. Education programs make the economy more productive by
(a) adding to human capital and labor productivity.
(b) reducing taxes.
(c) providing more jobs in manufacturing.
(d) reducing injuries on the job.