Unit 2: Government's role in economy

Lesson 1: Public vs. Private Sectors

• Providing a safety net for citizens, businesses, and companies

• Market failure- When the market cannot distribute resources efficiently, the government (Public Sector) steps in

  • dust bowl

  • standard oil

  • American system

  • Market crash

• Public Goods- a shared good or service that would be inefficient or impractical to make consumers pay for

  • Law enforcement

  • National parks

  • Libraries

  • Education

  • Traffic control

• Public Sector- part of the economy that is funded by the government

  • teacher, politicians, police/fire departments

• Private Sector- part of the economy that is funded by individual businesses

  

Lesson 2: Government Agencies

• The Federal Reserve Bank is the US central bank. It sets “monetary policy”

• What tools does the Fed use to influence the economy?

  • Reserve requirement, the amount of actual cash a bank is required to have in its vault at any one time

  • Discount rate/fed funds rate:- The interest rate the Fed charges banks to borrow money on a short-term basis

  • Open market operations, the Fed constantly buys back and sells government debt (US Treasuries)

• SEC- Securities and Exchange Commission- Federal Government agency that regulates the purchase and sale of securities (any financial investment)

  • Administers Security Broker’s licensing exams (series 7 etc)

  • Requires risk horizon analysis for investors to ensure their safety in the marketplace

  • Files federal corruption charges for fraud etc.

• FDIC- federal deposit insurance corporation

  • Federal government agency that insures deposits up to 250,000

• Financial crisis of 2008

  • Glass-steagall regulations removed in 1999 by clinton and congress

    • Investment and commercial banks become combines (JPMorgan, chase, citigroup, bank of America)

    • Allowed banks to become “too big to fail” (their failure would have massive economic implications)

  • Many investment banks took on very risky investments including subprime (high risk) mortgages”

  • Lehman bros. And other big banks failed (went bankrupt), Citi, JPMorgan etc. and AIG accepted a $700 Billion Govt. bailout (Troubled asset relief program or TARP)

• The treasury: Manages government revenue, prints currency, and oversees the IRS

• CBO: provids economic data and budgetary analysis to congress

• IRS: collects federal taxes and enforce tax laws

• Fredie Mac/Fannie Mae- government sponsored enterprises that provide stability and affordability in the housing market by backing mortgages

Lesson 3: Government’s role combating poverty

• our government play a limited but integral role in combating poverty

• federal welfare programs are designed to redistribute money and services to those in need

  • TANF (Temporary Assistance for Needy Families)- federal government gives money to the states to design their own welfare programs

  • social security: collects payroll taxes from current workers and redistributes that money to retired people or people unable to work

  • Unemployment Insurance: Compensation checks are given to workers who have lost their jobs as long as they show proof they have made efforts to get work

  • Worker’s compensation: insurance program for workers injured or disabled on their job

• In kind benefit- when the government provides goods and services for free or at greatly reduced prices

  • food stamps, subsidized housing, legal aid

• Free Rides- when some individuals either consume more than their fair share for a common resource or pay less than their fair share of the cost of a common resource

  • communters/ubers

• Free lunch- a situation in which a good or service is received at no cost

  • our definition of this term as it applies to economics means that a truly free lunch does not and cannot exist

• externalities- economic side effects of the purchase or sale of any good/service

  • a positive or negative cost to someone the good/service was not intended to effect

• Subsidy- The government makes a direct or indirect payment to an individual or institution to reduce the price of a good or a service because the government deems that good/service “in the national interest”

• Child tax credit subsidy- incentivising people to have a family

• student loans

  • subsidized- a loan for which a borrower is not responsible for the interest while in an in school, grace or deferment status

  • Unsubsidized- a loan for which the borrower is fully responsible for paying the interest regardless of the loan status. Interest on unsubsidized loans accrues from the data of disbursement

Lesson 4: Minimum vs. Living Wage

Poverty threshold

• Some americans are considered too poor to support a family or household

• Poverty threshold- income level below which one cannot support a family/household without govt assistance

Minivans at the Food Pantry

• The coronavirus pandemic and ensuing quarantine led to an increase of the US unemployment rate from %3.8 to around %15 within weeks

  • Many middle class working families found themselves struggling to put food on the table

Welfare

• General term that refers to all government aid for the poor

• FDR’s new deal: the basis for many of the welfare programs we have today

  • Ie social security

• All working americans pay this tax, the money is invested and given back to individuals in retirement

A combination approach

• AFDC: Aid to families with dependent children 1935

  • First welfare system, relied heavily on the “give a fish” approach

• TANF: Temporary Assistance for Needy Families 1997

  • From welfare to workfare. More accountability and incentives

Living Wage vs. Minimum Wage

• Living wage- the minimum amount a person in a particular region must make in order to live without direct government assistance

• Minimum wage- a price floor that prohibits employers from paying a rate lower than… $15.00/hour in NY

What is a living wage

• A living wage is the minimum hourly wage income necessary for a worker to meet basic needs (for an extended period of time or for a lifetime)

• Having enough money to pay for food, shelter, clothing, utilities, healthcare, transportation, child care, basic personal items

Poverty threshold/ poverty line

• When an individual does not have the resources to meet their basic needs for healthy living

• Their income is insufficient to provide the food, shelter and clothing needed to preserve health

• Majority of countries facing high poverty levels were colonized throughout history

Lesson 5: Corporate Tax Rates

Purchasing power- The value of a currency expressed in terms of the number of goods or services that one unit of money can buy.

Corporate Tax Rates and Economic Performance (1950-1979)

• Corporate tax rate: 52-71%

• GDP growth 4.4% annually

• Unemployment: below 5% for most of the period

• middle class: strong wage growth increased home ownership

• corporate profits: grow steadily despite high tax rates

• Wages vs. Inflation: wages keep pace with inflation, maintaining purchasing power

Effect of Tax Cuts

• Tax reform act of 1986: cut corporate tax rate to 34%

• GDP growth- 3.2% annually

• Unemployment:fluctuated reaching 7.5% in 1992

• middle class: slower growth compared to the 1950s-70s

• Wealth concentration: top 10% owned 65% of total US wealth by 2000

• Wages vs. Inflation: wage growth falls behind inflation, reducing buying power

Corporate Tax cuts since 2017

• Tax cuts and jobs act lowered rate to 21%

• GDP growth: 2.5% annually (pre pandemic)

• Unemployment rate hit a historic low of 3.5% in 2019

• Who benefited the most

• Stockholders and executives: corporate=e profits hit record highs

• Workers: wage growth remained slow despite low unemployment

• Federal revenue: corporate tax revenue fell from 2% to 1% of GDP of 20 billion

• Wages vs. Inflation: real wages stagnated, inflation outpaced wage growth
  

Corporate Stock Buybacks and Impact

• Definition: when corporates use profits to buy their own stock, rising share prices

• Buybacks post 2017 tax cuts: reach $1 trillion in 2018

• Investors and executives: stock prices surges

• Workers: few saw wage increases or job investors

• Government: less corporate tax revenue, less funding for public services

• Wages vs. inflation: no significant impact on worker wages despite economic expansion

Economic Inequality and tax policy

Ceo to worker pay ratio

• 50s- 20:1

• 2020s-350:1

Millionaire wealth increase (2017-2023): up 50%

Corporate power: wealth concentrated among top earners, fewer tax contributions