Some of you might be interested in this Civics Quiz.
Supply, supply, supply: We'll look at the competing theory to the previous lesson's "grand explanation" of the economy.
For quite a while, the ideas we learned about last time were almost completely accepted in economic circles. Keynes' analysis, even though it focused almost completely on demand, was accepted as economic "gospel".
By the early 1970s, serious questions emerged about relying solely on this explanation:
- Supply "shocks", such as the OPEC oil embargo of 1973, hit the economy, but the Keynsian model alone could not offer advice for dealing with these crises.
- For the first time, America was facing rising unemployment and rising inflation. The Keynsian approach alone couldn't explain these type of departures from the "business cycle" model.
- This approach tended to be short-term in its focus, and that diverted attention from longer term issues like economic growth and standard of living.
It was out of these concerns that a new approach, supply-side economics, emerged. It had its strongest impact during the Reagan years. (Many called it "Reaganomics".) Although the overall approach doesn't find as many supporters among economists today, looking at its approach still helps fully understand macroeconomic theory.
Here it is; a brief tour of the "supply side"...
The first key idea was found in the early 1800s when a French economist named J.B. Say got a law named after him...
Say's Law: "Supply creates its own demand..." This idea held that overproduction and underproduction would never be problems since production itself generated enough income to purchase what is produced. "Gluts" or shortages would lead to price adjustments until the glut or shortage disappeared. According to the theory, full employment would soon reappear.
The experience of the Great Depression, and its sustained, high unemployment, led to an acceptance of the ideas of Keynes and discredited "Say's Law".
The key to understanding this approach is the idea of incentives. Keynes assumed that an increase in demand automatically meant an increase in supply unless the economy was at "full capacity". Supply-siders disagree, saying that the production won't happen if the costs are too high.
What could make the costs too high? Things like taxes and interest rates.
The "solution"? Incentives- particularly in the form of lower taxes.
- They argued that reducing costs will lead to more production by business.
- Also, lower taxes would encourage household savings, creating more funds for investment.
- Further, some claimed that decreasing tax rates would lead laborers to work more, furthering the cycle.
The second key difference is the effect of government deficits, or the theory of crowding-out.
Here's the argument: When spending exceeds taxes, the government borrows money in financial markets. (States and locals also sell revenue bonds to finance projects.) The federal government also sells treasury bonds.
Supply-siders say these actions pull money (capital) out of the private markets and raise interest rates. These actions "crowd out" private investment, lowering output and employment.
You may have noted a potential contradiction here. How can you hope to both cut taxes to stimulate the economy and avoid budget deficits that might crowd out investment? What do you think?
Remember, although relatively few economists still hold these ideas, the concepts of "supply-side" economics still influence public policy decisions today.
The Debate over Government: What do you think? An introductory discussion...
- Is the US government responsible for ensuring that all its citizens have an adequate standard of living? If so, how should they go about doing that? If not, why not?
- To what degree should the US government pursue policies of "income redistribution?" How?
- What "transfer payments" (welfare, social security, unemployment, etc.) do you support? Why? Are their changes that you would make?
- Should recipients of welfare be required to work in order to receive benefits?
- What would be the fairest system of taxation in this country?
The Government and Its Role: Today, we'll focus on the numbers. These numbers, of course, will vary from year to year...
Where does the federal government get its revenue from?
44% from individual income taxes
36% from Social Security payroll taxes
11% from corporate income taxes
4% from excise taxes
2% from customs duties
Where does the federal government spend its money?
22% is spent on Social Security
20% is spent on defense
9% is for other "direct" spending
10% on Medicare
6% on Medicaid
15% on interest on the national debt
other areas are smaller
about 2% is spent on welfare
less than 1% is spent on foreign aid
The largest single source of revenue for state governments is the sales tax. Local governments depend most heavily upon property taxes.
The Fiscal Year 2009 Budget: These links are from the Federal Government's Office of Management and Budget, and they deal with the most recent budget proposal.
Office of Management and Budget: Fiscal Outlook: DO THIS: Look through this overview and find three budget priorities that you support and three that you disagree with. Make note of these for discussion in class.
The National Debt: This is simply the sum of all outstanding government deficits.
Here's an example of a Debt Clock that we mentioned earlier. See what your share is today...
Grandfather Economic Report: Michael Hodges had put together this large site concerned with presenting information on the national debt. You're directed to the portion of the site concerning economic issues, but you may want to look around further.
DO THIS: Browse through this report. The pictures and graphs are very user-friendly. Find five things (statistics, graphs, comparisons) that are of interest to you, and make note of them to share in class. Then, make at least two "policy recommendations" for the US government based on what you have learned.
Homework for next session - Monday, December 1st