Politics of Economics Final Exam

What does it mean to liberalize? What is Economic and Social liberalization?

• “To make free”

• Economic Liberalization: free market policies associated with conservatives.

• Social Liberalization: Liberal social policies (abortion, LGBT_- get government out of it.

What terms are associated with the free market approach? (6)

1. Libertarian- free market oriented 

2. Neoliberal- “The Free Market Approach” - generally supported by conservative parties. 

3. Fiscal Conservative- Free market approach. 

4. Laissez-faire economics 

5. Supply-side economics

6. Free enterprise

What is Classical economic liberalism?

• Original free market approach.

• Decentralized economic decision-making by firms and consumers.

• More efficient than centralized command economies (communism.)

Who is the Father of classical economic liberalism?

• Adam Smith

• 1776 wrote The Wealth of Nations- theory of the “invisible hand” of market forces would automatically coordinate decentralized decisions.

What are Price Signals?

• Supply and demand are what determine prices. 

• These prices send signals to producers and consumers. 

• This is the invisible hand because they automatically coordinate the behavior of millions.  

What is the relationship between Free Markets and Government Policy?

• “Nightwatchman State” or “Minimal State”

• Economic interventions at absolute minimum.

• Let invisible hand work.

What are the Benefits of a Free Market Economy? 

1. Automatically coordinates supply and demand

2. Stimulates innovation- Competition

3. Automatically self-corrects problems

4. Decentralization of power

Explain Free Market Economy: Automatically Self-Corrects Problems.

• Example: Reduce-to-clear, lowering the price until consumers are willing to buy.

  • Belief that reduce-to-clear applies to unemployment as well: Workers will reduce-to-clear by lowering wage demands to the point where employers will hire them- government intervention prevents unemployment from self-correcting (minimum wage)

What is neoliberalism/libertarianism?

• Contemporary branch of the free market approach. 

• Liberalism was dominant before the Great Depression. After the Depression government intervention became more dominant. 

• Neoliberalism- an attempt to bring back the free market approach. 

Who was Friedrich Von Hayek?

• Austrian economist, Father of neoliberalism.

• Nobel Prize in economics.

• “Austrian School” of Economics.

Who was Milton Friedman? 

• Another father of neoliberalism.

• Nobel Prize in economics.

• “Chicago School” of economics.

What are the three differences between classical economic liberalism and neoliberalism?

1. Neoliberalism is willing to sacrifice some efficiency to preserve freedom. (e.g. don’t regulate monopolies)

2. More orthodox in desire to limit government intervention- less taxes, social spending, regulation, unions.

3. Lock-in free market policies through constitutional provisions- putting economic provisions into the constitution. - ex. Property rights in Charter or Bill of Rights

What are Supply Side Economics?

• Less academic version of neoliberalism that focuses on tax cuts for firms and the wealthy.

• Associated with Wall Street Journal and free market think tanks.

• Policy that benefits supply side (business) rather than demand.

• “Trickle-down economics”- tax rates rise past a certain point, revenues decline as people decide not to spend. - - → tax cuts = more revenue.

What are the origins of the interventionist approach? (AKA Keynesian-welfare approach)

• Believes in market systems BUT advocates some intervention to correct ‘market failure’ and reduce inequality. 

• Efficiency (Classical liberalism/ neo-liberalism) + Social Justice

What are Market failures? 

• When free markets don’t work the way they’re supposed to. 

• A problem that the free market can’t fix on its own - - → Rationale for government intervention. 

What is the Keynesian-Welfare Approach?

• In addition to correcting markets. Wants to make markets more fair by:

  • Reducing inequality.

  • Dealing with social problems.

What are the Branches of Economics?

• Microeconomics: Focus on producers and consumers and individual products.

• Macroeconomics: Focus on the economy as a whole.

What is Welfare Economics?

• Based on Arthur Pigou’s 1920 The Economics of Welfare

• About the Welfare of society, not welfare programs.

• Pigou developed the idea that, in addition to raising revenue with taxes, they could also be used to influence behavior. - - → Higher tax = higher price = less demand.

• Subsidies for “good” products.

• “Pigouvian taxes and subsidies” focus on influencing behavior.

What are Keynesian Economics?

• John Maynard Keynes’ 1936 General Theory of Employment Interest and Money.

• Focus on market failures at the macroeconomic level. Specifically the failure of high unemployment to self-correct.

• Said free market theory treated people like other products.- people won’t simply accept lower wages. 

• Unemployment not self-correcting fast enough was a market failure. 

What are Recessions?

• When stock or housing markets crash. 

• Creates viscous circle of: 

  • Falling confidence

  • Less spending

  • Bankruptcies, layoffs, unemployment

Why did the Great Depression happen? 

• Wages didn’t fall and unemployment didn’t self-correct as free market theory predicted. 

• Little government intervention or unions explain why. 

What are Keynesian Stimulus in Recession?

• Falling consumer and business confidence means less spending, which leads to bankruptcies, layoffs, unemployment.

• The government intervenes at “less spending” meaning…

• rising consumer business confidence leading to more spending and sales, leading to hiring and growth, meaning even More consumer business confidence.

What are Keynesian-Welfare Economics?

• Paul Samuelson’s merger of Keynsian macro economics and welfare micro economics. 

• The market was the best system but market failures need to be corrected by the government. → Rationales for government intervention. 

What are Negative Externalities?

• When the full cost of a product is not incorporated into its price.

• Externalizes the cost so that others have to pay for clean-up, health costs, etc. - this means that price signals fail.

• Market failure because there is no incentive to pay for prevention (self-correction).

• Rationale for government intervention- tax, higher price reduces demand forces innovation.

What are public goods?

• Goods and services that the government must provide because the market won’t/cant’ — there is no way to make a profit.

• To be a public good:

  • Non-rival: Consumption that doesn’t use up the good/service. e.g Streetlight

  • Non-excludable: No effective way to prevent people from using even of they haven’t paid.

• The “free rider” problem provides rationale for government intervention through taxes.

Explain Monopolies and Oligopolies

• Monopoly - 1 seller

• Oligopoly - few sellers 

• Monopsony - 1 buyer. 

• Market failure because they emerge naturally and limit competition. 

What are the problems caused by Monopolies and Oligopolies?

• Higher prices, poor service, less incentive to innovate, concentration of power.

• Economic power and political influence.

What are the Remedies to Monopolies?

• Government intervention.

  • Regulate prices and services

  • Break/Prevent mergers→ competition policy, anti-trust lawsuits, prevent or break-up monopolies.

What is Aggregate Demand?

• The total demand for all finished goods and services in the economy.

• Determined by:

  • The amount of money consumers and firms have to spend.

  • Consumer Confidence: Declining confidence leads to less spending

  • Business Confidence: Declining confidence means less growth.

What is Growth? What is Negative Growth?

Growth:

• Changes in the size of the national economy, measured through GDP- value of all goods and services produced in a year.

Negative Growth:

• When GDP shrinks,

• 2 Consecutive quarters of negative growth = Recession

Explain Aggregate Demand and Growth.

• If demand goes up, growth goes up.

• If demand goes down, growth goes down.

What is unemployment?

• “The percentage of the labor force that is seeking employment but is not employed” (Children, elderly, full time students - those that are not looking for work).

Explain aggregate demand and unemployment.

• If demand goes up, unemployment goes down.

• If demand goes down, unemployment goes up.

What is inflation, disinflation, and deflation?

• Inflation: An increase in the general level of prices measured through the CPI (survey of prices). Inflation rate is the percentage change in the price level over time.

• Disinflation: Inflation rate declines (price still goes up but less fast)

• Deflation: Prices themselves decline.

Explain Aggregate Demand and Inflation.

• Demand goes up, inflation goes up (Companies realize they can raise the price and people will still buy it)

• Demand goes down, inflation goes down (Need incentive for people to buy)

Demand- Signals

• Demand Goes UP: Growth Goes UP, Unemployment DOWN, Inflation UP

• Demand Goes DOWN: Growth DOWN, Unemployment UP, Inflation DOWN

What is Philips Curve?

• Economic concept by A.W. Philips stating that inflation and unemployment have a stable and inverse relationship.

Government and Interest Rates

• Government controls interest rates through the central bank and use rates to regulate demand and maintain balance between inflation and unemployment.

• Lower interest = cheaper loans → People have more money, demand increases and stimulates economy.

Interest Rates and Recession and Inflation

• Recession: Central bank lowers interest rates to stimulate demand, growth rate, unemployment → Inflation goes up.

• Inflation (Goes up): Central bank will raise interest rates, people and firms of less money → Demand, Growth, Unemployment (up), Inflation.

What is the business cycle?

• Recession: Slow growth/high inflation

• Trough: Bank of Canada lowers interest rates

• Recovery: Higher growth and eventually inflation

• Peak: Bank of Canada raises interest rates to cool economy

  • Cycle repeats roughly every 10 years (recession, BoC, 6 month to 1 year lag time for interest, keep it around 2%).

What is International Finance?

• Either free or restricted.

• Free Finance: Capital Mobility- Investment money can move across borders

• Governments can prevent this through “Capital Controls” - regulations that bar you from taking money out of the country.

Capital flows and exchange rates and interest rates and the exchange rate

• Capital Flows: Money flows in, currency goes up, Money flows out, currency goes down.

• Interest Rates: Investors like higher interest rates, which attract money and cause currency to rise.

What is a floating exchange rate?

• AKA Flexible exchange rate.

• The value of the currency is determined by market forces as money goes in and out.

• Canada has a floating exchange rate

What is a fixed exchange rate?

• AKA Pegged exchange rate

• The government uses interest rates to keep the value of the currency within a set range.

What is the Mundell-Fleming Thesis?

• AKA. The Impossible Trinity or Policy Trilemma

• Governments can only pursue 2/3 of these Goals:

1. Capital Mobility

2. Fixed Exchange Rate

3. Discretion in Monetary policy/monetary autonomy (ability to stimulate your way out of a recession

What are the 3 Economic Eras

1. Globalization 1.0 and the Great Depression

2. The Era of Economic Intervention and the Stagflation Crisis

3. Globalization 2.0 and Current Challenges

Explain Globalization 1.0

• 1840s to 1929

• Capital Mobility

• Fixed Exchange Rate

  • Didn’t know that you could stimulate your way out.

  • Euro is fixed exchange rate and European Central Bank policy does not help all countries all the time- ex. Italy, Greece, Spain.

Explain the Era of Economic Intervention and the Stagflation Crisis

• 1930s-1970s: Intervention

• Fixed exchange rate

• Monetary autonomy

• No free Capital Mobility

Explain Globalization 2.0

• Capital Mobility

• Discretion in monetary policy

• Do not have fixed exchange rate

What are the reasons for taxation?

1. Raise revenue for government spending

2. Affect the macro-economy through aggregate demand (Spend money as the government)

3. Change incentives at the micro level (Pigouvian tax)

What are Personal Income Taxes? What are the models?

• Tax on an indiviudal’s income.

• What is paid in an annual tax return.

• Models:

1. Progressive Income Tax System

2. Marginal Tax Brackets

What is the Progressive Income Tax System?

• The more money you make, the higher a percentage of your income you pay in taxes.

• Based on income tax brackets

• Most countries have progressive tax systems.

What are Marginal Tax Brackets?

• Instead of your total income falling in one bracket, and being taxed at an overall rate- income is divided over different brackets.

What is the difference between Income vs. Taxable Income?

• Income: How much you earn

• Taxable Income: how much gets taxed after subtracting all your deductions- e.g. donations, Retirement contributions.

What is a Flat Income Tax System?

• Everyone pays the same percentage of their income in taxes.

• Only one tax bracket.

• What is a Consumption Tax?

• AKA Sales Tax.

• Tax on consumer goods and services.

  • e.g. Ontario’s Harmonized Sales Tax (HST)- combines (harmonizes) federal and provincial sales tax. (Conservatives push- b.c. flat tax)

What are the types of Personal Asset Taxes?

• Wealth Tax: Tax on total value of a person’s assets (property, investment)

• Inheritance Tax: Tax paid by those who receive an inheritance.

• Capital Gains Tax: Tax paid by an investor when they sell and asset such as stock or investment property (based on amount asset increased)

*Progressive Taxes- they generally only apply above a certain amount.

What are the Types of Business Taxes?

• Corporate Income Tax: On Profits

• Windfall Tax: (Unexpected Money)- temporary extra tac on corporate profits, targeted at specific industries when they make large “windfall profits” (e.g. Oil companies when oil prices spike)

*Progressive Tax on employers.

Taxes and Demand

• Taxes: Down, Demand: Up

• Taxes: Up, Demand: Down

What are the types of Government Spending?

1. Public Goods: Goods the market can’t/won’t provide.

2. Affect the macro-economy: Influence Macroeconomic demand. Ex. Provide stimulus in recession

3. Programs: Promote societal goals, redistribute income.

What are the types of spending to Influence Demand?

1. Automatic Stabilizers:

• Programs that automatically increases spending when unemployment rises (and vice versa)

1. Discretionary Spending:

• Specific decision to borrow money to increase spending - form of a “stimulus package'“

What are Budget Deficits?

• Spending is greater than revenue forcing the government to borrow money.

• Borrows by issuing bonds.

• Deficits are almost inevitable during recessions:

  • Tax revenues go down

  • Spending on automatic stabilizers goes up.

• Deficits outside Recessions:

  • Major new spending without tax increase

  • Major tax cuts without spending cuts

What is Government in Debt? What is a Budget Surplus?

• GD: Is total accumulated deficits, KEY: Debt-GDP ration (how much can be borrowed compared to national income)

• BS: Revenues greater than spending.

  • Debt and Surplus at the Same time: Debt is accumulated, surplus is one year.

The Politics of Taxes: Neoliberals/Libertarians

• Want Tax cuts and less redistribution- With flatter, less progressive tax systems.

• Support cutting income, asset, corporate tax and replacing them with sales tax.

• Support tax competition created by free trade. - i.e. countries compete for jobs with lower taxes.

The Politics of Taxes: Progressives

• Want more redistribution and more progressive taxes.

• Generally oppose flat tax and prefer progressive income and asset taxes over sales taxes.

• Oppose tax competition and wants a Global Minimum Corporate Tax

What are the Politics of Deficits?

• Neoliberals/Libertarians oppose deficits if it is beings used by a progressive government for social programs.

• Progressives oppose deficits if a free market government is using them to pay for tax cuts.

• Free Market and Keynesian: Both against deficits in normal times.

What are Corporations?

• Business that is legally a separate entity from owners/shareholders.

• Limits liability, pays corporate taxes, perpetual lifetime and Ownership is based on share.

What is a Private Corporation?

• Small number of people owning shares.

• Shares do not trade publicly on the stock exchange.

• Financial info is not made public.

What is a Public Corporation?

• Large number own shares/stock

• Shares do trade publicly on a stock exchange

• Financial information is made public

What are Crown Corporations?

• AKA Public Enterprise

• Majority of shares are owned by the government.

What is Nationalization vs Privatization?

• Nationalization: When a private sector company is bought/taken over by the government.

• Privatization: When a crown corporation is sold to the public:

  • Features: Initial Public Offering- Used to: Privatize a CC and raise funds for a firm to get bigger.

What is Corporate Governance?

• How corporations are governed

• Nature of the relationships between owners and managers

• AND technical issues such as board organization,, management pay, company policies, etc.

What were Corporations like before Depression?

• Industrial revolution → Emergence of big corporations.

• Many found and run by individual industrialists

• J.P. Morgan financed mergers, set off an M&A wave, private, specialized corporations led to monopolies during the “gilded age”

• Corporate Governance was characterized by:

  • Centralization of corporate ownership in one person/family

  • Owner-managers that had expertise in the company’s product

  • Integration of ownership and control.

What are the 4 Characteristics of the Berle-Means Model of Corporate Governance?

1. Decentralized Ownership: Industrialists retired and sold their shares, firms “went public”, owned by large number of shareholders.

2. Separation of Ownership and Control: Owners no longer run the company, run by CEO and management team.

3. Boards of Directors: ensure management ran the company in the interest of shareholders.

4. Managerial Autonomy: Reality- shareholder interest could often be ignored.

Why do shareholders have little influence over management?

• Hard for large number of small shareholders to organize proxy votes

• Most own shares in many companies so don’t pay attention or vote

• Boards just rubber-stamp CEO decisions.

What are institutional shareholders?

• Institutions which invest money on behalf of individuals (i.e. Pension funds and mutual funds)

• Invest heavily and replace individual shareholders

• Change nature of corporate governance.

Why does Managerial Autonomy End?

• Centralization of share ownership

• Firms now owned by a small number of large shareholders

• Fund managers pay attention and vote.

• Short Term Pressures:

  • Fund managers under pressure to boost fund in short-term due to: competition for customers, Q evaluations, short-term contracts.

  • Fund managers pressure CEO for short term boost in stock.

How do CEOs boost “shareholder value”?

• Cost Cutting:

  • Lay offs/downsizing

  • cut wages and benefits

  • squeeze suppliers

• Use savings for “share buy-backs”

What is ESG?

• Environmental, Social Governance

• Progressives activists pressure investors to promote ESG

• File shareholder proposal to change corporate policy on environment, diversity, etc.

• Lobby institutional investors to vote in favor

What is ESG Backlash in US?

• Conservative backlash against ESG and “woke capitalism”

• State-level legislation banning institutional investors who boycott oil, guns from contracts.

• MAGA fund, American Conservative Values Fund

Canada and monopolies and competition?

• Canada has more oligopolies due to:

  • Small market can only support small number of big companies with decent economies of scale

  • Allows firms to get big to compete internationally

  • Restrictive foreign ownership prevent US etc. firms

What is Competition/Anti-Trust Policy?

• Government policies designed to prevent monopolies and maintain competition

  • approve large mergers

  • break-up monopolies by forcing de-mergers

  • regulate/prosecute oligopolies to prevent negative effects on prices, service, etc.

What are the 3 types of Bias?

1. Explicit

2. Implicit

3. Systemic

What is Explicit Bias? What are some examples?

• Most direct, conscious and intentional form of bias.

• Past: Discrimination, racial segregation, bans.

• Explicit bias remains in policy and individual behavior- ex. Supremisist groups, 1994 US Combat Exclusion Policy (against women)

• Bias in Housing: Explicit and deliberate discrimination by landlords.

What is Implicit/Unconscious Bias? What are some types?

• Subconscious and unintentional form of bias.

  • Halo Effect Bias: Assuming positive qualities based on superficial traits

  • Horns Effect Bias: Assuming negative qualities based on superficial traits. (Profiling)

  • Affinity Bias: Showing preferences for people like yourself.

What is Systemic Bias?

• Often occurs due to the “path dependence” or legacy of a previously non-diverse organization. - e.g. Fighter pilot cockpits and uniforms were designed around the “average male”

What is Algorithmic Bias?

• When the path dependence of previous non-diversity can also become institutionalized through AI and machine learning.

• e.g. AI “learns” who makes a good CEO from existing non-diverse data → leads to bias in hiring algorithms that rank applicants.

What are some of the outcomes of bias?

• Racial profiling by police can be caused by: individual racists, implicit biases, systemic biases like “oversurveillance”

• “Gender Pay Gap” where women on average still make less than men caused by: explicit discrimination, implicit biases that affect pay, opportunities, promotion and systemic biases like “motherhood penalty”

What is the Free Market approach to Discrimination? (Libertarians)

• Governments shouldn’t intervene on diversity issues

• Oppose discriminatory laws like segregation as government intervention hurt choice efficiency, and freedom.

• Oppose DEI policies by government as well-intended policies that hurt efficiency, freedom, and do more harm than good.

  • Undermine merit, create dependence and stigma and create resentment and backlash → increase biases

What was Milton Friedman’s approach to Discrimination?

• Racism and sexism were “inefficient” and that the free market would self-correct them.

• Because firms have economic incentive to hire best workers and cater to all customers. Those that DONT will suffer and either change or go out of business.

• Libertarians, view CSR as undermining invisible hand.

Business leader approach to discrimination?

• Argue that there is a “business case” for voluntary CSR and DEI:

1. Builds brand equity

2. prevents more onerous government regulation.

3. attract best employees

4. helps reach new customers

5. promote innovation

What is the Interventionist Approach to Discrimination?

• Argues that some discrimination is a market failure that the free market won’t self correct.

• Occurs due to the impact of path dependence- e.g. white males hire white males. (Affinity Bias)

• Rationale for Government Intervention: mandatory training, pay equity laws, some diversity hiring and mentoring.

• Challenges Friedman- markets don’t self correct when discrimination is held by consumers instead of employers.

What is the Canadian Labor Congress?

• National umbrella organization for Canadian unions- they lobby, advocate, train union officials, and link with international counterparts:

  • American Federation of Labor and Congress of Industrial Organization

  • Trade Union Congress

  • International Trade Union Confederation

What are Provincial Federations, Local Labor Unions and, the difference between National and Local unions?

• They both lobby and advocate at the provincial and local levels ex. London District Labor Council.

• National Unions: Lobby, train, and provide legal & financial support

• Local Unions: Union subunit in a given workplace with the same employer- bargain, grievances, benefits assistances.

How is the Labor Movement in Canada structured?

• Public Sector Unions: CUPE, CFNU

• Private Sector Unions: UNIFOR, NHLPA

• International Affiliated Unions: Teamsters (Branch Plants)

• Union Membership has declined the most in the private sector- free trade and competition, shift away from manufacturing.

What is Certification?

• The process used to create a union.

• Is governed provincially under the Ontario Labor Relations Act

• Are highly political

What are the stages to Certification?

1. The Organizing Drive:

• Union tries to sign-up members in a new workplace, workers sign union cards which unions try to do secretly in order to avoid counter-campaign by the employer.

2. Application for Certification

• When a union has signed up a sufficient number of members, it applies to OLRB. Need 40% of a workplace.

3. Certification Vote

• Labor Board calls for a certification vote.- a Secret ballot, 50% of eligible workers must vote in favor.

What happens after certification?

• The Union becomes the exclusive bargaining agent for workers in that bargaining unit.

• All workers are required to pay union dues (the Rand Formula) to prevent “Free Riding”

  • Business prefers “right-to-work” instead of Rand formula.

What is Collective Bargaining? What is the Process?

• A set process that aims to (re)negotiate a “collective agreement”

• Starts with a Notice to Bargain: a proposal exchange and negotiations begin.

What are the stages reached in a negotiation impasse before a strike occurs?

1. Strike Vote: Held before a legal strike can occur, 50%.

2. Conciliation: Ministry of Labor provides a conciliation officer.

3. Final Offer Vote: Employer can force a vote on their final offer.

4. No Board Report: “not advisable to appoint a conciliation board”- either side can request and triggers a 17 business day cooling off period.

• Creates a legal strike/lock-out position.