U.S. Economy

Someone who does not pay does not get the hamburger.

Because many people can benefit from the same pubic goods and share in

their consumption, and because those who do not pay for these goods still

get to use them, it is usually impossible to produce these goods in

private markets. Or at least it is impossible to produce enough in

private markets to reach the efficient level of output. That happens

because some people will try to consume the goods without paying for

them, and get a free ride from those who do pay. As a result, the

government must usually take over the decision about how much of these

products to produce. In some cases, the government actually produces the

good; in other cases it pays private firms to make these products.

The classic example of a public good is national defense. It is not a

rival consumption product, since protecting one person from an invading

army or missile attack does not reduce the amount of protection provided

to others in the country. The nonexclusion principle also applies to

national defense. It is not possible to protect only the people who pay

for national defense while letting bombs or bullets hit those who do not

pay. Instead, the government imposes broad-based taxes to pay for

national defense and other public goods.

Adjusting for External Costs or Benefits

There are some private markets in which goods and services are produced,

but too much or too little is produced. Whether too much or too little is

produced depends on whether the problem is one of external costs or

external benefits. In either case, the government can try to correct

these market failures, to get the right amount of the good or service

produced.

External costs occur when not all of the costs involved in the production

or consumption of a product are paid by the producers and consumers of

that product. Instead, some of the costs shift to others. One example is

drunken driving. The consumption of too much alcohol can result in

traffic accidents that hurt or kill people who are neither producers nor

consumers of alcoholic products. Another example is pollution. If a

factory dumps some of its wastes in a river, then people and businesses

downstream will have to pay to clean up the water or they may become ill

from using the water.

When people other than producers and consumers pay some of the costs of

producing or consuming a product, those external costs have no effect on

the product’s market price or production level. As a result, too much of

the product is produced considering the overall social costs. To correct

this situation, the government may tax or fine the producers or consumers

of such products to force them to cover these external costs. If that can

be done correctly, less of the product will be produced and consumed.

An external benefit occurs when people other than producers and consumers

enjoy some of the benefits of the production and consumption of the

product. One example of this situation is vaccinations against contagious

diseases. The company that sells the vaccine and the individuals who

receive the vaccine are better off, but so are other people who are less

likely to be infected by those who have received the vaccine. Many people

also argue that education provides external benefits to the nation as a

whole, in the form of lower unemployment, poverty, and crime rates, and

by providing more equality of opportunity to all families.

When people other than the producers and consumers receive some of the

benefits of producing or consuming a product, those external benefits are

not reflected in the market price and production cost of the product.

Because producers do not receive higher sales or profits based on these

external benefits, their production and price levels will be too

low–based only on those who buy and consume their product. To correct

this, the government may subsidize producers or consumers of these

products and thus encourage more production.

Maintaining Competition

Competitive markets are efficient ways to allocate goods and services

while maintaining freedom of choice for consumers, workers, and

entrepreneurs. If markets are not competitive, however, much of that

freedom and efficiency can be lost. One threat to competition in the

market is a firm with monopoly power. Monopoly power occurs when one

producer, or a small group of producers, controls a large part of the

production of some product. If there are no competitors in the market, a

monopoly can artificially drive up the price for its products, which

means that consumers will pay more for these products and buy less of

them. One of the most famous cases of monopoly power in U.S. history was

the Standard Oil Company, owned by U.S. industrialist John D.

Rockefeller. Rockefeller bought out most of his business rivals and by

1878 controlled 90 percent of the petroleum refineries in the United

States.

Largely in reaction to the business practices of Standard Oil and other

trusts or monopolistic firms, the United States passed laws limiting

monopolies. Since 1890, when the Sherman Antitrust Act was passed, the

federal government has attempted to prevent firms from acquiring monopoly

power or from working together to set prices and limit competition in

other ways. A number of later antitrust laws were passed to extend the

government’s power to promote and maintain competition in the U.S.

economy. Some states have passed their own versions of some of these

laws.

The government does allow what economists call natural monopolies.

However, the government then regulates those businesses to protect

consumers from high prices and poor service, and often limits the profits

these firms can earn. The classic examples of natural monopolies are

local services provided by public utilities. Economies of scale make it

inefficient to have even two companies distributing electricity, gas,

water, or local telephone service to consumers. It would be very

expensive to have even two sets of electric and telephone wires, and two

sets of water, gas, and sewer pipes going to every house. That is why

firms that provide these services are called natural monopolies.

There have been some famous antitrust cases in which large companies were

broken up into smaller firms. One such example is the breakup of American

Telephone and Telegraph (AT&T) in 1982, which led to the formation of a

number of long-distance and regional telephone companies. Other examples

include a ruling in 1911 by the Supreme Court of the United States, which

broke the Standard Oil Trust into a number of smaller oil companies and

ordered a similar breakup of the American Tobacco Company.

Some government policies intentionally reduce competition, at least for

some period of time. For example, patents on new products and copyrights

on books and movies give one producer the exclusive right to sell or

license the distribution of a product for 17 or more years. These

exclusive rights provide the incentive for firms and individuals to spend

the time and money required to develop new products. They know that no

one else will copy and sell their product when it is introduced into the

marketplace, so it pays to devote more resources to developing these new

products.

The benefits of certain other government policies that reduce competition

are not always this clear, however. More controversial examples include

policies that restrict the number of taxicabs in a large city or that

limit the number of companies providing cable television services in a

community. It is much less expensive for cable companies to install and

operate a cable television system than it is for large utilities, such as

the electric and telephone companies, to install the infrastructure they

need to provide services. Therefore, it is often more feasible to have

two or more cable companies in reasonably large cities. There are also

more substitutes for cable television, such as satellite dish systems and

broadcast television. But despite these differences, many cities auction

off cable television rights to a single company because the city receives

more revenue that way. Such a policy results in local monopolies for

cable television, even in areas where more competition might well be

possible and more efficient.

Establishing government policies that efficiently regulate markets is

difficult to do. Policies must often balance the benefits of having more

firms competing in an industry against the possible gains from allowing a

smaller number of firms to compete when those firms can achieve economies

of scale. The government must try to weigh the benefits of such

regulations against the advantages offered by more competitive, less

regulated markets.

Promoting Full Employment and Price Stability

In addition to the monetary policies of the Federal Reserve System, the

federal government can also use its taxing and spending policies, or

fiscal policies, to counteract inflation or the cyclical unemployment

that results from too much or too little total spending in the economy.

Specifically, if inflation is too high because consumers, businesses, and

the government are trying to buy more goods and services than it is

possible to produce at that time, the government can reduce total

spending in the economy by reducing its own spending. Or the government

can raise taxes on households and businesses to reduce the amount of

money the private sector spends. Either of these fiscal policies will

help reduce inflation. Conversely, if inflation is low but unemployment

rates are too high, the government can increase its spending or reduce

taxes on households and businesses. These policies increase total

spending in the economy, encouraging more production and employment.

Some government spending and tax policies work in ways that automatically

stabilize the economy. For example, if the economy is moving into a

recession, with falling prices and higher unemployment, income taxes paid

by individuals and businesses will automatically fall, while spending for

unemployment compensation and other kinds of assistance programs to low-

income families will automatically rise. Just the opposite happens as the

economy recovers and unemployment falls—income taxes rise and government

spending for unemployment benefits falls. In both cases, tax programs and

government-spending programs change automatically and help offset changes

in nongovernment employment and spending.

In some cases, the federal government uses discretionary fiscal policies

in addition to automatic stabilization policies. Discretionary fiscal

policies encompass those changes in government spending and taxation that

are made as a result of deliberations by the legislative and executive

branches of government. Like the automatic stabilization policies,

discretionary fiscal policy can reduce unemployment by increasing

government spending or reducing taxes to encourage the creation of new

jobs. Conversely, it can reduce inflation by decreasing government

spending and raising taxes. .

In general, the federal government tries to consider the condition of the

national economy in its annual budgeting deliberations. However,

discretionary spending is difficult to put into practice unless the

nation is in a particularly severe episode of unemployment or inflation.

In such periods, the severity of the situation builds more consensus

about what should be done, and makes it more likely that the problem will

still be there to deal with by the time the changes in government

spending or tax programs take effect. But in general, it takes time for

discretionary fiscal policy to work effectively, because the economic

problem to be addressed must first be recognized, then agreement must be

reached about how to change spending and tax levels. After that, it takes

more time for the changes in spending or taxes to have an effect on the

economy.

When there is only moderate inflation or unemployment, it becomes harder

to reach agreement about the need for the government to change spending

or taxes. Part of the problem is this: In order to increase or decrease

the overall level of government spending or taxes, specific expenditures

or taxes have to be increased or decreased, meaning that specific

programs and voters are directly affected. Choosing which programs and

voters to help or hurt often becomes a highly controversial political

issue.

Because discretionary fiscal policies affect the government’s annual

deficit or surplus, as well as the national debt, they can often be

controversial and politically sensitive. For these reasons, at the close

of the 20th century, which experienced years with normal levels of

unemployment and inflation, there was more reliance on monetary policies,

rather than on discretionary fiscal policies to try to stabilize the

national economy. There have been, however, some famous episodes of

changing federal spending and tax policies to reduce unemployment and

fight inflation in the U.S. economy during the past 40 years. In the

early 1980s, the administration of U.S. president Ronald Reagan cut

taxes. Other notable tax cuts occurred during the administrations of U.S.

presidents John Kennedy and Lyndon Johnson in 1963 and 1964.

Limitations of Government Programs

Government economic programs are not always successful in correcting

market failures. Just as markets fail to produce the right amount of

certain kinds of goods and services, the government will often spend too

much on some programs and too little on others for a number of reasons.

One is simply that the government is expected to deal with some of the

most difficult problems facing the economy, taking over where markets

fail because consumers or producers are not providing clear signals about

what they want. This lack of clear signals also makes it difficult for

the government to determine a policy that will correct the problem.

Political influences, rather than purely economic factors, often play a

major role in inefficient government policies. Elected officials

generally try to respond to the wishes of the voting public when making

decisions that affect the economy. However, many citizens choose not to

vote at all, so it is not clear how good the political signals are that

elected officials have to work with. In addition, most voters are not

well informed on complicated matters of economic policy.

For example, the federal government’s budget director David Stockman and

other officials in the administration of President Reagan proposed cuts

in income tax rates. Congress adopted the cuts in 1981 and 1984 as a way

to reduce unemployment and make the economy grow so much that tax

revenues would actually end up rising, not falling. Most economists and

many politicians did not believe that would happen, but the tax cuts were

politically popular.

In fact, the tax cuts resulted in very large budget deficits because the

government did not collect enough taxes to cover its expenditures. The

government had to borrow money, and the national debt grew very rapidly

for many years. As the government borrowed large sums of money, the

increased demand caused interest rates to rise. The higher interest rates

made it more expensive for U.S. firms to invest in capital goods, and

increased the demand for dollars on foreign exchange markets as

foreigners bought U.S. bonds paying higher interest rates. That caused

the value of the dollar to rise, compared with other nations’ currencies,

and as a result U.S. exports became more expensive for foreigners to buy.

When that happened in the mid-1980s, most U.S. companies that exported

goods and services faced very difficult times.

In addition, whenever resources are allocated through the political

process, the problem of special interest groups looms large. Many

policies, such as tariffs or quotas on imported goods, create very large

benefits for a small group of people and firms, while the costs are

spread out across a large number of people. That gives those who receive

the benefits strong reasons to lobby for the policy, while those who each

pay a small part of the cost are unlikely to oppose it actively. This

situation can occur even if the overall costs of the program greatly

exceed its overall benefits.

For instance, the United States limits sugar imports. The resulting

higher U.S. price for sugar greatly benefits farmers who grow sugarcane

and sugar beets in the United States. U.S. corn farmers also benefit

because the higher price for sugar increases demand for corn-based

sweeteners that substitute for sugar. Companies in the United States that

refine sugar and corn sweeteners also benefit. But candy and beverage

companies that use sweeteners pay higher prices, which they pass on to

millions of consumers who buy their products. However, these higher

prices are spread across so many consumers that the increased cost for

any one is very small. It therefore does not pay a consumer to spend much

time, money, or effort to oppose the import barriers.

For sugar growers and refiners, of course, the higher price of sugar and

the greater quantity of sugar they can produce and sell makes the import

barriers something they value greatly. It is clearly in their interest to

hire lobbyists and write letters to elected officials supporting these

programs. When these officials hear from the people who benefit from the

policies, but not from those who bear the costs, they may well decide to

vote for the import restrictions. This can happen despite the fact that

many studies indicate the total costs to consumers and the U.S. economy

for these programs are much higher than the benefits received by sugar

producers.

Special interest groups and issues are facts of life in the political

arena. One striking way to see that is to drive around the U.S. national

capital, Washington D.C., or a state capital and notice the number of

lobbying groups that have large offices near the capitol building. Or

simply look at the list of trade and professional associations in the

yellow pages for those cities. These lobbying groups are important and

useful to the political process in many ways. They provide information on

issues and legislation affecting their interests. But these special

interest groups also favor legislation that often benefits their members

at the expense of the overall public welfare.

E The Scope of Government in the U.S. Economy

The size of the government sector in the U.S. economy increased

dramatically during the 20th century. Federal revenues totaled less than

5 percent of total GDP in the early 1930s. In 1995 they made up 22

percent. State, county, and local government revenues represent an

additional 15 percent of GDP.

Although overall government revenues and spending are somewhat lower in

the United States than they are in many other industrialized market

economies, it is still important to consider why the size of government

has increased so rapidly during the 20th century. The general answer is

that the citizens of the United States have elected representatives who

have voted to increase government spending on a variety of programs and

to approve the taxes required to pay for these programs.

Actually, government spending has increased since the 1930s for a number

of specific reasons. First, the different branches of government began to

provide services that improved the economic security of individuals and

families. These services include Social Security and Medicare for the

elderly, as well as health care, food stamps, and subsidized housing

programs for low-income families. In addition, new technology increased

the cost of some government services; for example, sophisticated new

weapons boosted the cost of national defense. As the economy grew, so did

Страницы: 1, 2, 3, 4, 5, 6, 7, 8, 9, 10, 11, 12