The American Economy - Final Terms

welfare capitalism

capitalism that includes market regulation and social insurance; capitalism: economic and political system in which a country’s trade and industry are controlled by private owners for profit; examples of market regulation: price ceilings/floors, antitrust laws; examples of social insurance: food stamps, pensions, free education, employment insurance, healthcare

normative theory

statement that affirms how things should be, value statements or theories of fairness, indicate something is right or wrong

positive theory

statements that attempt to describe reality, not a value judgment, testable theories

Congressional Budget Office (CBO)

in charge of reviewing the budget and evaluating policy proposals; provides Congress with objective, non partisan, and timely information, analyses, and estimates related to federal economic and budgetary decisions; relevance: controls money and important for the oversight of the bureaucracy

Office of Management and Budget (OMB)

assists the president in overseeing the preparation of the Federal budget and evaluates the effectiveness of agency programs, policies, and procedures; works to make sure that agency reports, rules, testimony, and proposed legislation are consistent with the president’s budget and administration policies

Pareto efficiency

allocation such that no one can be made better off without making someone worse off; economic growth is maximized; all resources are going to their highest value use; everyone doing what is in their best interest creates a system that makes the society the best off it can be; not all equilibria are Pareto efficient

conditions of PE markets

perfect competition, perfect information, complete markets

perfect competition

all players are price-takers; no monopolies, oligopolies, or monopsonies

perfect information

no asymmetric info between buyers and sellers, complete info about price and quality

complete markets

no externalities, no public goods, complete futures market

role of the state (PE)

set and enforce the rules of the market, especially define and enforce property rights; set standards/uniformity, bankruptcy laws, antitrust laws; define property rights: title to property, intellectual property rights, LLCs; enforce property rights: police, FBI, court system

when the market is PE or that is the goal, the state ____

makes efficiency-equity trade-offs, other efficiency trade-offs

when the market is not PE or that is the goal, the state ____

fix market failures

setting up property rights

title of property leads to more economic development, registering property: big corps will because they have money whereas small to mid size businesses won’t

example of enforcement of property rights

Ebay uses institutions of the state behind them, incentive to back up transactions in case of fraud

examples of the state setting and enforcing rules of the market

antitrust laws, uniform accounting standard, trustworthy uniform currency

efficiency-equity trade off

when we assume the market is PE, government intervention shrinks the market; example: no child labor shrinks the labor market but is done for moral reasons

Rawls

philosophical foundation of the welfare state, supporter of capitalism, gives reason we should have social insurance, free persons who have no authority over one another are going to engage in joint action and will feel a duty to comply if you think they are fair (rules are unbiased), maximizes relative liberty

Veil of Ignorance (Rawls)

people divorce themselves from any personal attributes that might bias them, relevant for the process of rule-making

primary goods (Rawls)

range of goods that allow you to pursue the good life; examples: power, opportunity, civil rights, etc; minimum you need to have dignity in a society; differs from country to country

inequalities are okay as long as the following hold (Rawls):

inequalities favor the most vulnerable in society, offices have to be open to merit-based considerations, must adhere to maxi-min principle

maxi-min principle

maximizing the minimum

Nozick

defends the minimalist state, believes in natural rights, the state will be restricted, purely focused on the process of redistribution (if it is just, then we live with the end result), maximizing absolute liberty

measures of inequality

income (labor income + capital income); consumption (measures after-tax redistribution); wealth (homes, cars, personal valuables, capital)

how to measure inequality

Mean-Median Divergence, Gini Coefficient, percentages (quintiles and deciles)

Mean-Median Divergence

if the mean does not equal the median, there is inequality, larger gap = more inequality

Gini coefficient

perfect inequality: Gini = 1, perfect equality: Gini = 0

quintiles

a way to measure the distribution of income among five groups of people, each representing 20% of the population

Piketty

in low growth economies, returns to capital will likely be higher than returns to labor; rise of inequality is attributed to slower economic growth, technological changes, and reduced progressive taxation; inequality depends heavily on institutions and policies; key recommendations: addressing educational disparities, reforming tax policies, and regulating capital-labor relationships to mitigate inequality

imperfect competition

competition can be limited by an insufficient numbers of firms or by market differentiation, firms with market power earn higher than “normal” rates of return on their capital, actors are no longer price takers

monopoly

an industry with a single firm, produces products for which there are no close substitutes, significant barriers to entry

natural monopoly

having a few number of firms is PE; very large economies of scale: cost advantage from larger firm size are great; very high initial costs, very low marginal costs

solutions to natural monopolies

government provision, heavy regulation

solutions to artificial monopolies

antitrust legislation, implemented by the Antitrust Division of the DOJ and FTC

Institutional features that insulated the Fed from politics

membership is NOT elected, long office timers, source of funding is NOT Congress

why the Fed cannot fully insulate from the president

appointment power, prestige of the presidency, especially if administration is in power a long time, can take a long time to affect all the relevant membership

market failure

systematic misallocation of resources (too much or too little produced, too much or too little factors of production); not PE

externality

uncompensated effect of trade on third parties, examples: tobacco, garden

solutions to market failures

financial incentives/disincentives (taxes and subsidies); authority-based solutions (government regulations); info-based campaigns; organization-based tools (respecification of property rights); do nothing

Cap and Trade

the government sets an emissions cap and issues a quantity of emission allowances consistent with that cap; companies may buy and sell allowances and this market establishes an emissions price; process: set cap, divide into permits, auction off permits, cap market created

issues with government intervention in markets

knowing what is PE is hard, monitoring and enforcement costs, rent-seeking, relevant median voter

factors that affect policies

rent-seeking, voting

nonrival goods

supply does not diminish with use

excludable

not everyone can have it

solutions to public goods

direct provision, respecification of property rights (set up monopoly rights), market redesign

how to measure market concentration

HHI index, abnormal profits, how much of the money is going to X% of the firms, prices being higher than prices in other countries

Progressive Era

late 1800s, Sherman Antitrust Act, Federal Trade Act, Interstate Commerce Commission (first regulatory agency), a lot of monopolies

New Deal

FDR, after Great Depression, government tried to decrease economic shocks, social security, SEC, FDIC

Great Society

1960s, LBJ, fixing externalities (EPA, environmental regulations), more equity-focused, social insurance

goals of government intervention

fairness, ethics, market growth, national security, liberty

adverse selection

assume a good comes in different qualities and only one of the parties knows the true quality of the product, a market is created in the inferior product without the requisite price adjustment, leads to small market for the good compared to what is Pareto efficient

solutions to adverse selection

signaling and price discrimination, examples: medical check ups, initial gap in coverage, different premiums based on relevant sub-population variables; forcing participation of the superior good, examples: ACA, individual mandate, mandatory driver’s insurance

moral hazard

not protecting against risk because one is protected from the consequences; lack of incentive to take care; quality of the good changes once the product is provided without the requisite price adjustment

solutions to moral hazard

structuring incentives to discourage risky behavior, examples: deductibles, copays, monitoring, reward good behavior/punishing bad behavior

Medicare

single-payer system for Americans 65+ and for those with disabilities

Medicaid

joint federal and state program to provide insurance for low-income individuals

features of ACA

guaranteed issue: no one can be denied based on pre-existing conditions; no price discrimination among most vectors; subsidies for low-income individuals

important provisions of ACA

parental coverage up to age 26, individual mandate (solves adverse selection and lowers premiums), established essential benefits insurance companies must provide, employers with more than 50 employees were required to provide it

public vs. private prisons

private prisons provide no clear benefit or detriment, cost savings from privatizing prisons are not guaranteed and appear minimal, quality of confinement is similar across private and public prisons, public prisons deliver slightly better skills training and have slightly fewer inmate grievances

deregulation

1970s and 1980s, too much rent-seeking happening, did not trust the government over privately owned companies, deregulation as a result: banking and finance, transportation, telecom

Treasury

economic, international economic, and fiscal policy; government accounting, cash, and debt management; promulgation and enforcement of tax and tariff laws; assessment and collection of internal revenue; production of coin and currency; supervision of national banks and thrifts