Political Economy and the US Economic System

Definition and Scope of Political Economy

• Definition of Political Economy: It is defined as the relationship between political and economic institutions within a specific context (such as a country), alongside the policies and outcomes these institutions create.

• Academic Perspectives:     * Political Science: Firmly believes that economic institutions affect politics and vice versa. It emphasizes that human decision-making cannot be removed from the equation.     * Economics: Tends to focus on quantitative models, charts, and graphs. It often operates on a "ones and zeros" basis, where changing one curve affects another through specific formulas to achieve an outcome.

• The Voting Connection: Economic factors such as the price of gas and inflation levels (e.g., $\text{current inflation rates}$) directly impact how individuals vote.

The Spectrum of Economic Systems

• Fundamental Question: Every economy must decide if it is a means of achieving individual freedom or collective equality.

• The Spectrum:     * Pole 1: Pure individual freedom.     * Pole 2: Pure collective equality (utopian, where everyone is exactly the same).

• U.S. Positioning: The United States is located closer to the individual freedom pole than any other country in the world, though no country exists exactly on a pole.

• Institutions: Economic systems are sets of institutions, rules, and norms that govern behavior. Changing these is difficult because they are intricate webs set on a specific historical path.

• Varieties of Capitalism:     * Most world countries are capitalist, including the United Kingdom, Canada, Germany, Japan, and China.     * China serves as an example that a country does not have to be a democracy to be capitalist.     * Different versions of capitalism exist; for example, some countries have stronger labor unions or national healthcare systems.

Key Economic Terms and Concepts

• The Market: The exchange of goods or services occurs here.     * Historically, this was a physical marketplace (e.g., ancient Greece or Persia) involving bartering (e.g., $6$ chickens for $2$ goats).     * Modern markets can be physical (farmer's market, Wall Street) or digital (Robin Hood app on a smartphone).

• Property: Something owned by an individual is private property.     * Types: Land, physical goods, and intellectual property (e.g., copyrighted lecture materials and study guides).

• Public Goods: Goods provided by the government that are available to everyone; one person's consumption does not hinder another's.     * Examples: Freeways/highways (maintained by federal, state, or city governments), national defense, clean air, and clean water.

• Social Expenditures: Government spending funded via taxes to redistribute wealth into public good programs.     * Includes: Food benefits, job retraining, unemployment, workers' compensation, public education, and national parks.

• Free Trade: The ability to trade goods and services without barriers that make the process more expensive or difficult.

• Gross Domestic Product (GDP): The total value of all goods and services produced in a country in $1$ year.     * Gross: Means "total."     * GDP per capita: Calculated by taking the GDP and dividing it by the population (Average GDP = $\frac{\text{Total GDP}}{\text{Population}}$). This allows for easier comparison between different-sized nations, though it assumes equal contribution.

Barriers to Trade

• Tariffs: A "fancy word" for taxes on foreign products. When a foreign product is taxed, the company typically raises the price for consumers, making domestic products more attractive.

• Non-Tariff Barriers:     * Quotas: A limit on the number of specific products that can be sold in a country per year. Once reached, no more can be imported.     * Embargoes: A total ban or forbidding of products from a specific country (e.g., the U.S. embargo on Cuba) to punish behavior or protect domestic industry.     * Standards: Barriers based on specific criteria.         * Health Standards: Example: Banning toys from China painted with lead because children put them in their mouths.         * Trade Standards: Concerns regarding labor (child labor or slave labor).         * Environmental Standards: Concerns regarding decomposition, recycling, composting, or pollution caused during production.

The Evolution of Free Trade and the U.S. Economy

• Historical Protectionism: Wealthy developed countries, including the U.S., were historically anti-free trade until they had well-developed industrialized economies. Barriers allowed domestic industries space to grow before facing international competition.

• Post-WWII Shift: The U.S. embraced free trade after World War II when it became beneficial to its established industries.

• The 19th Century: The U.S. experienced approximately $20\%$ annual economic growth as an "early industrializer." This period was highly extractive regarding natural resources and human labor (e.g., $60$, $70$, or $80$ hour work weeks, no child labor laws, and slavery).

Capitalism and the Liberal Market Economy

• Pure Capitalism Theory: The market sets prices via supply and demand with limited state involvement. The state's primary role is to protect private property.

• Liberal Market Economy (U.S. Model):     * Characterized by a weak state government with little autonomy or capacity.     * Relies almost entirely on the market to determine prices for everything, including healthcare (unlike other capitalist countries where the state sets prices for procedures like an appendectomy).     * Votech/Education: Generally lacks state support for specialized training (Vocational-Technical education), leaving the market to decide labor needs.     * Labor: Characterized by weak trade unions; unionization peaked in the $1950$s but is now essentially outlawed in some states like Wisconsin.

Historical Milestones in the U.S. Political Economy

• Central Banking: The Federal Reserve (The Fed) was a late development in the U.S. to prevent "bank runs."     * FDIC: Federal Deposit Insurance Corporation protects deposits up to a certain amount to ensure trust in banks.

• Bretton Woods System: Established after WWII ($1944$ into the $1970$s).     * Fixed Exchange Rate: The U.S. dollar was pegged to gold at a rate of $\$22$ for $1$ ounce of gold.

• The 1970s and Reagan Era:     * The U.S. abandoned the gold standard for a Floating Exchange Rate (currency value determined by what it buys in other currencies).     * Under Reagan, the U.S. shifted from being the world's largest lender to a "debtor nation."     * Privatization of industries (e.g., airlines, which were previously public/government-owned) increased competition.     * Financial deregulation began, peaking with Clinton in the $1990$s.

• The 2008 Financial Crisis:     * Caused by the housing market "pop" and deregulated banks bundling "bad loans" for profit (e.g., Goldman Sachs bankruptcy/insolvency).     * Banking was deemed "too big to fail."     * Stimulus: Obama passed two stimulus packages, but they were hindered by extreme partisanship in Congress.     * The Fed's Role: Acted as the "Lender of Last Resort," providing banks with loans at $0\%$ interest to be paid back in roughly $3$ months.

Current Economic Data and Comparisons

• Social Expenditure Rankings:     * Luxembourg spends $44\%$ of its budget on social expenditures.     * The U.S. is the second-lowest among industrialized nations shown, spending just under $21\%$. Only South Korea spends less.

• Currency Values (Hypothetical Day-to-Day Examples):     * $\$1.00\, \text{USD} \approx \text{€}0.90$     * \$1.00\, \text{USD} \approx 0.77     * $\$1.00\, \text{USD} \approx \text{CAD } 1.30$     * $\$1.00\, \text{USD} \approx 19.5\, \text{Pesos}$

The Federal Reserve's Three Main Jobs

1. Print Money: It is the only institution authorized to do so.

2. Determine Interest Rates: Sets the cost of borrowing money for banks. When the Fed raises rates (e.g., from $0.25$ to $0.75$), consumer rates on credit cards and loans also rise.

3. Lender of Last Resort: Bails out the economy or specific industries during absolute devastation to prevent total collapse.

Questions & Discussion

• Household vs. Government Spending: The lecturer clarifies a personal "pet peeve": government spending is not the same as household spending. Governments with their own currency have many more options in a crisis than a private household (e.g., adjusting interest rates to combat inflation), and comparing the two is misleading.