Monday Test & Quiz
Keynesian Economics Article:
John Maynard Keynes challenged classical economic theory, arguing that uncertainty causes individuals and businesses to stop spending and investing, and that the government must step in to stimulate the economy during depressions. Keynes believed the government should increase public spending, even if it means borrowing and running a deficit, to boost "effective demand"—the actual amount of consumer and investor spending in an economy. His theory focused on using fiscal policy (government spending and tax policies) over monetary policy (central bank control of the money supply and interest rates), especially during deep economic slumps like the Great Depression.
Keynes’ ideas diverged from the free-market belief that economies would naturally correct themselves. He introduced concepts like the "paradox of thrift," where saving too much during a downturn worsens economic conditions. Keynes advocated that during depressions, the government should engage in deficit spending to create jobs, which would stimulate further economic activity through a multiplier effect. He believed that once prosperity returned, deficits could be reduced through increased taxes.
Keynesian economics revolutionized thought by prioritizing short-term economic relief to avoid prolonged suffering and prevent extreme political outcomes like fascism or communism. Despite initial resistance, Keynes’ ideas gained prominence, influencing policies during the New Deal and World War II. After his death in 1946, Keynesianism became dominant until the 1970s, when it was challenged by free-market proponents like Milton Friedman. However, Keynesian principles resurfaced during the 2008 financial crisis, as governments enacted stimulus programs to counter economic collapse.
Wealth of Nations Article:
- Industry is limited by capital: The amount of work in a society is constrained by the available capital, which dictates how many people can be employed. No trade regulations can increase the total amount of work beyond what the society's capital can sustain, though they may divert labor to less natural or beneficial industries.
- Individuals act for personal gain: Each person seeks to use their capital in the most advantageous way for themselves, but this often aligns with what is beneficial for society. Even when they prioritize their own gain, they support domestic industry and aim to maximize the value of its output.
- Capital allocation benefits society: When individuals invest in industries that produce the highest value, they inadvertently increase the wealth of society. This increase occurs without the individual's conscious intent to benefit the public, as their actions are guided by an "invisible hand."
- Local knowledge over central planning: Individuals are best positioned to determine how to use their capital because they understand local conditions better than a central authority. Government interference in private capital decisions is seen as inefficient or harmful.
- Trade is mutually beneficial: Domestic industries should focus on their strengths and buy cheaper goods from abroad when it is less costly than producing them locally. This mirrors prudent household management, where individuals specialize in what they do best and trade for other needs.
- Government restrictions (monopolies) are unnecessary or harmful: If domestic goods are as cheap as foreign goods, no protectionist measures are needed. If foreign goods are cheaper, protectionist measures harm society by forcing resources into less efficient uses.
Chapter 12:
12.1:
Party Ideology vs. Party Identification: Party ideology is a party’s philosophy about government’s role and its stance on major issues. Party identification refers to an individual's attachment to a political party.
Republican Party: Associated with conservatism, favoring more control over social behavior, fewer business regulations, and less government interference in the economy.
Democratic Party: Associated with liberalism, supporting less control over social behavior, more regulation of businesses, and more government intervention in the economy.
Libertarianism: An ideology favoring minimal government regulation and intervention, focused on protecting private property and individual liberty.
Ideological Differences in Public Policy:
Liberty and Order: Republicans emphasize economic liberty and stricter immigration control, while Democrats emphasize personal privacy and gun regulation.
Social Issues: Republicans favor order in terms of crime control and are pro-life, supporting abortion bans. Democrats emphasize civil liberties, are pro-choice, and support abortion rights as a matter of privacy.
Economic Issues:
Republicans: Favor tax cuts for businesses, less regulation, and property rights.
Democrats: Support tax increases on the wealthy, more business regulation, and rules to prevent harm to the community.
Fracking: Divided along party lines, with Democratic-led states banning it due to environmental concerns, and Republican-led states promoting it for economic benefits.
Partisan Behavior: Both parties engage in partisanship, often critiquing each other's ideologies rather than fostering cooperation.
Conservatism: More control of social behavior, fewer regulations on business, less government interference in the economy.
Liberalism: Less control over social behavior, more regulation of business, and greater government intervention in the economy.
Ideological Impact on Government: Ideological differences affect government scope, with conservatives generally favoring a smaller government and liberals advocating for a more active government role in regulation and social services.
12.2:
Laissez-faire economy: A system in which governments intervene as little as possible in economic transactions between citizens and businesses.
Command-and-control economy: The government dictates much of a nation's economic activity, including production amounts and prices. Used by the Soviet Union and China before shifting to a mixed market system.
Mixed economy: The U.S. follows this model, allowing individuals and businesses to make most economic decisions while federal and state governments regulate economic activity.
Economic indicators: The government monitors the economy using these:
Gross domestic product (GDP): The total value of goods and services produced by the economy.
Economic recession: Two consecutive quarters of negative GDP growth indicate a recession.
Unemployment rate: The percentage of people actively looking for work but unable to find jobs.
Inflation: The rise in prices of goods and services. The consumer price index (CPI) measures the cost of a fixed basket of goods over time to track inflation.
Trade-off between inflation and unemployment: Republicans often accept higher unemployment to lower inflation, while Democrats are more willing to tolerate inflation to reduce unemployment.
Economic Theories:
Keynesianism: John Maynard Keynes' theory, which argues that during economic contractions, the government should spend money to inject more money into the economy. This can prevent depressions by countering excessive gloominess in individual spending decisions. Example: The New Deal and Obama's public works projects.
Supply-Side Theory: Emphasizes lowering taxes to stimulate economic growth by encouraging investment and business expansion. Known as "Reaganomics" or "trickle-down economics," this theory posits that cutting taxes benefits businesses and individuals, driving growth. Critics argue that it mostly benefits the wealthy. Trump’s 2017 tax cuts were based on this theory.
Fiscal Policy: The government uses taxation and spending to influence the economy. Republicans prefer military spending increases and tax cuts (e.g., Bush and Trump tax cuts). Democrats favor tax increases for the wealthy and spending on social programs (e.g., Obama).
Managing Economic Cycles: Theories on handling economic cycles include:
Monetary theory: Match money supply growth with economic productivity.
Keynesianism: Government spending to stimulate the economy.
Supply-Side Theory: Tax cuts to encourage business growth and consumer spending.
12.3:
Monetary Theory
Primary Driver of Business Cycles: Supply of money in an economy, including available credit.
Policy Implications: Increasing money supply leads to inflation (too much money chasing too few goods).
Monetarist Beliefs: Oppose government fine-tuning through Keynesian or supply-side policies. Argue for matching money supply to economic productivity growth.
Risks of Monetary Policy
Consequences of Mismanagement: Countries facing bankruptcy may print excessive money, leading to hyperinflation.
Historical Examples: Hyperinflation in Germany, Austria, and Hungary in the 1920s contributed to political extremism and the rise of the Nazi Party.
The Federal Reserve System
Structure: Consists of a seven-member board of governors, twelve regional Federal Reserve banks, and six thousand member banks. Governors are appointed by the president and confirmed by the Senate, serving fourteen-year, nonrenewable terms (except the chair, who serves four years).
Functions: Responsible for setting monetary policy, regulating money supply, and influencing the economy through three main tools:
Buying and Selling Treasury Securities: Buying Treasury bills means the Fed loans money to the government.
Setting Reserve Rates: Determines how much banks must keep in reserve; higher rates mean less money for loans.
Influencing Interest Rates: Lowering federal funds rate encourages borrowing by businesses.
Goals of Monetary Policy
Encourage Economic Growth: Aim to foster healthy economic growth while avoiding damaging inflation.
Crisis Response: Fed lowered interest rates during the 2008 economic crisis to avoid a depression.
Challenges and Criticisms of Monetary Policy
Political Independence: Critics question the Fed's independence, especially under political pressure.
Moderate Inflation Target: Aiming for 2% inflation can reduce Americans' spending power if wages don’t increase.
Historical Context of Monetary Policy
“Helicopter Ben”: Reference to Ben Bernanke’s suggestion that in extreme crises, the Fed could print money to finance stimulus, drawing from Milton Friedman’s concept of fiscal stimulus via money drops.
Key Terms
Federal Reserve System: Board and member banks responsible for monetary policy.
Monetary Policy: Tools regulating the money supply to influence the economy.
Review Points
Monetary Policy Tools: Selling Treasury bills, setting interest rates, and reserve requirements.
Differences with Fiscal Policy: Monetary policy controls money supply; fiscal policy involves taxation and spending.
12.4:
The Federal Government and Health Care
Medicare:
Established by President Lyndon Johnson’s Great Society program in the 1960s.
Provides health insurance to senior citizens (age 65 or older) and was extended to the disabled in 1972.
Covers hospitalization and physicians’ services.
In 2003, President George W. Bush added a prescription drug benefit.
Medicaid:
Established in 1965 during President Johnson’s administration.
Covers health services for low-income Americans.
Jointly funded and administered by states and the federal government.
Total spending on Medicaid for fiscal year 2016 was approximately $553.5 billion.
Health Care Costs:
In 2012, the U.S. had the highest medical care costs globally, spending $8,233 per person.
The Patient Protection and Affordable Care Act (ACA)
Signed into law by President Barack Obama on March 23, 2010.
Key provisions include:
Employers with over 50 full-time employees must provide health insurance or pay a penalty.
Individuals are required to obtain health insurance or pay a penalty (individual mandate).
Expansion of Medicaid benefits for low-income Americans.
Creation of state health-care exchanges with federal subsidies.
Requirement for insurers to cover young adults up to age 26 under their parents' plans.
Prohibition against excluding individuals with preexisting conditions.
Implementation Challenges:
Issues with enrollment and rising premiums for exchange policies.
By 2015 and 2016, over 16 million Americans obtained health-care coverage due to the ACA.
Supreme Court Cases:
National Federation of Independent Businesses v. Sebelius (2012): Upheld the constitutionality of the individual mandate.
King v. Burwell (2015): Upheld tax credits in the ACA for federal exchanges.
Ideological Perspectives on Health Care
Democrats:
Support the ACA, arguing health care should be widely available.
Believe the ACA lowers overall costs as more people obtain insurance.
Republicans:
Oppose the ACA, particularly the individual mandate, viewing it as government overreach.
Claim it redistributes wealth and interferes with the free market.
President Donald Trump eliminated the individual mandate.
School Choice and Competition
School-choice Reforms:
Allow parents to choose schools, fostering competition.
Support for vouchers to pay for tuition in private and religious schools.
Proponents:
Argue that vouchers create competition, improving all schools.
Opponents:
Fear that vouchers drain funds from traditional public schools and violate the First Amendment by funding religious schools.
Fannie M. Lewis:
A Democratic councilwoman who advocated for school vouchers in Cleveland despite opposition from her constituents.
Section Review
Key Points:
Democrats support the ACA, which includes an individual mandate.
Republicans oppose the ACA due to beliefs about wealth redistribution and market interference.
School-choice programs are favored by Republicans but opposed by Democrats due to concerns about funding for public schools.
Constitutional Context in Education
Zelman v. Simmons-Harris:
Involved a school voucher program in Ohio.
Supreme Court ruled that the program provided educational assistance for poor children and was neutral regarding religion.
Engel v. Vitale:
Related to the establishment clause, leading to different rulings than Zelman.
Review Questions
Constitutional Provision:
Both cases deal with the First Amendment's establishment clause.
Differing Rulings:
Engel v. Vitale was based on government-sponsored prayer in schools, while Zelman was about providing options for educational assistance.
Public Action:
Those disagreeing with Zelman could seek to limit its impact through legislative action or public campaigns.