.| | | icky Government and the Economy 11.1 Introduction When you woke up this morning, did you think to yourself, "What isthe goverament going to da for me today?” Probably no. Kyou are like most high School students, you probably didnot think about the government at al this morning. But the govern- _ment was there. The time log that follows wil give you an idea of just how involved the government nour everyday lives. 6:30... The clock adio comes on—too early as always. As you lowly wake up, a song ends and you hear the news begin. “The government has just sn nounced new regulations” the reporter rays, "o pro- ‘ect investors aginst phishing, a form of e mal rsd” {645 At By the time you are up and dresed, the newsis over and the radios back to msc, The mic comes through loud and clear, thanks lngely to a ‘government agency that assigns a separate frequency to each radio sation. Otherwise a competing broad ‘aster using the exact sume spot on th radio dil right drow out your sation, 6:50. Sul bleary eyed, you stumble into the ‘teen to fix breakfast. You pu water on to bol wile you scramble a couple of eggs. The government is "ight beside you as you cook. The water that laws {rom the tap has been analyzed by your local water department tobe sue itissafe to drink. Goverament Inspectors made sure the eggs were produced and Governments ivehodin many sepets our amie he, BS eso Regulation eaninvahe seting aces, stblsting product and workp ies Standards, aniniting entry ta an industry. mine domain The powerata governmentiatake aninviua’s property fo: ple use iftho owners ay compensate, regulatory agoncy A unitof government created ia set tnd enforce stanear fos patelar Industry or area of econec seit. merger The combining of two oF more: ‘ater owned fms toa single tm, erent ‘The process of removing goven- ent estricbns on fess narra Promote competion or encourage fcanomie acy, ‘Atesource tht everyone has aceass to andthatcan casi be overused or destroyed. Exanplosincudethe ‘government flare Inafclent allocation ofracources ‘eausod by goverment intervention ne economy poverty rate “The percentage othe population thathas fami income below a ‘sovernment-detinedtrasold, or poverty iapackaged in «way designed to minimize the presence ofharmful bacteria. 700 aa. Your grandmother joins yout the kitchen {able with the morning paper. She shows you an article announcing an increase in Socal Security benefits ‘ducto rising living costs. Her pension from the federal government wil go up starting nest month. 7206 ast As you wat forthe school bus, ou notice that some potholes inthe road have been fille. A paving company hired by the state government has ‘heen busy making street pairs. ‘7a0 a Your bus finally arvves. tis very quiel, nd itdoes not smell of disl Furnes. Your local school dis {rit has invested in several battery-powered school buses, and you are lucky enough oie in one 730 A. You reach your destination, a public high school funded by your national, state, and local gov ‘eenments, Governments support public education in part becouse an educated workforce is key toa productive economy. ‘Your morning has barely bogua, and yet govern ‘meat at every level has already provided you with 2 ‘multitude of services In this chapter, you will learn ‘more about the widely accepted roles that the gov ‘ernment pays in oar market based economy, You ‘will also explore how the government’ intervention ‘fete your life and the lives of all Americas, 11.2 How Does the Government Protect Property Rights? ‘Government clessy play big role in our ecosomic lives 1s this roe too big? Many Americans would say itis, But Charles Wheelan disagrees. Good government makes a market economy posible, Period. And bad goverment, or io ‘government, dashes capitals agunst he rocks, which ome reason that bilions of people ive in ne poverty around the globe Charles Whelan, Naked Economics: Undressing the Dismal Science, 2002 Without doubt, capitalism is aliveand well inthe United Sates. Bat i that because of government fnvolvement o inspite fit 200 i Banas of he abi Secar ‘The Constitutional Basis for Government {Involvement in the Economy “The power ofthe feeral government to Imervene in the economy comes straight out of Article Lofthe US. Constitution, Among the economic powers that thisartile grants to Congress are + tolayand collet taxes. to provide forthe general welfare, to borrow money to regulate interstate and foreign commerce to establish uniform bankruptcy ls tocoin money and regulate its vale. toric the standard of weightsand measures. to protect the writings ad discoveries of authors and inventors Exercsingits constitutional powers the federal government establishes laws and rules designed to influence economic behavior in desirable ways. This process called regulation, All modern government regulation ie witimatey based onthe powers granted in the Constitution, ‘Government's Role in Protecting Property Rights “The Constitation as the foundation for egal system that protsct property rights. We often think ‘€ property as lan, personal possessions and other physical asets. Hut property can also refer to inven: tons and various forms of expression, also known as ingelletual property, No matter what frm property takes, property rights entitle the owner to determine how itis usd, ‘Economist argue that protecting property rights is essen for our free enterprise system to flourish. ‘Wh? Because incentives matter. Ownership of prop- erty ctetes a number of incentives that promote = ‘nomic progress including the thre sted here. Private ownership encourages people to take care ‘oftheir property. I privat owners fall o maintain their property, they are the people who suffer For ‘example, if you own a house, you havea strong in- centive to fix the eoof fit leaks. Otherwise the valve ‘of your house will decrease. Private ownership encourages people to make the ‘most productive use oftheir property kis inthe best interest f owners to use their property in the * mnost productive ways possible. The owner ofa fmb for example, has every incentive to plant crops that make the best use of local sil and climate conditions. Private ownership encourages people to develop their ‘property in ways tha benefit others. Under the lav, ‘owners can do whatever they want with thet property. But they have the potential to gain by making what {hey wa uneol wo others, Consider the owners of ‘heath lab, Personally they may have no interest in anything but weight taining Nonetheless, they night decd to offer childcare nutrition counseling and spa services to attract more members. By enhancing thet Property Rights jms rate property Lend Trade yan st test inpariot Own tele hte oe x Seat propaty. ‘hevahta ea rotation spin tapaeersor Sere her propery, fd lta gh sal {ito propery. Those Fabs aie propery ovnere A wide range of etons again th eae suse afta propery pritileroninds ope Semetvatodte actineays thatpamet ther waldo Tis omen has one ineenveto hep het aren toma tien may beer mart io asset denen in baronnoo wl ita been health club in ways that benefit others, the owners stand to benefit by increasing the property's value. Property rights are so asc to our fre enterprise system thatthe government is empowered by the Constitution to protect them. One institution that protects property rghis isthe court system, sometimes {sisted by police forces. Another isthe US. Patent and ‘Trademark Office (USPTO). This federal government agency protects intellectual property, or property in ‘the form of ideas that have commercial valu. It does soby issuing patents, copyrights, and trademarks, Chapter 1 vere adie Economy 209inn reais the govern Property for pbc ure. In 205 he Supreme Court led tat bre vor ould bai an ough aminert domain ‘long ethsirradovlgment projected pu anes. Butea soot poets any ae pubee we? Ho cearsing © ‘An Exception to Property Rights: Eminent Domain (Our nations founders tok property rights serous Daing the Constitutional Convention in 1787, Genvernenr Mors of Neve York echoed the seti- ‘ments of most delegates when he described property 5th main objet of Socoty” Stil the delegates recognized that t times, the government mst ake private property for a pubic us, suchas the build ingofa oad or courthouse, The government does this through the power of eminent domain Eminent domain isthe power to force the transfer ‘oF property from private owner tothe govern ‘ent for «public purpose, This power existed long before the Unitd States was founded. But the Fifth ‘Amendment to the Constitution added anew ee _ment—paying the private owner for property taken ‘under eminent domain. The Takings Clause of the Fifth Amendment states, No person shall be. deprived of We, Uber, ‘or property without due proces of law nor ‘shall private property be taken for public use, without jst compensation ‘In-2005 the meaning of public use was called {nto question by a controversial Supreme Court dest= soa, The case before the Court was Kel . City of [New London, which pitted residents of «run-down * 2N0 es Economies of th abe ete section of New London, Connecticut against the Cty government. The city wanted tous its power ‘of eminent domain to take the residents’ property including land, homes, and businesses, for economic redevelopment ‘New Londons taking of private property for redevelopment was not unprecedented. In earlier ecisons, the Supreme Court had decided thatthe redevelopment of depressed areas had public benefits that justified a governments use of eminent domain. However, New London did not plan to use the land it had acquired for public projects, such as schools o civ center, Instead it intended to turn the land over to private developers who planned to build hotel, olfices, and condominiums on the st for prot, The ety argued that the economic growth that this private development would bring to New Lon: ‘don was public benefit, Some residents who faced the oss of thee property disagreed. They argued thatthe government taking oftheir homes and bbsinesses fr the benefit ofa priate developer was not a public ws. Init decison on Kela the Supreme Cour sided ‘wth the ety, 5-0-4 majority held thatthe benefits ‘of economic redevelopment do quality 2s public use ‘within the meaning ofthe Fifth Amendment, Justice Sandea Day O'Connor was one af he four justices wo did not agee with the majority. Ia her dissent ing opinion, she wrote thatthe effec of this decision ‘as “to wash out any distinction between private and public we of preperty—and thereby effectively to delete the words for public ws from the Takings (Cause ofthe Fifth Amendment” "The Supreme Court's decision in Kelo provoked «nationwide storm of protest. In response, many ‘states pased laws designe to protect property rights by limiting the use of eminent domain for economic development, 11.3 What Regulatory Roles Does Government Play in Our Economy? Securing property eights san important roe fr go™~ ‘ernment in our econon, but its not the only roe ‘The ederl government is involved ia many aspects ofthe economy by setting and enforcing standardsa“ te ee __ tT NN e for dozens of industries "Through this regulation, the government seeks to protect the interests ofall par ‘icipantsin the economy. One way government does ‘isis by ensuring that markets are competitive Government’ Role in Maintaining Competition Like property rights, competition is essential if mar kets are going to work the way they are supposed to work The pressures of competition force producers tous resources efficiently, to develop new or better products, and to keep products and services afford able. Because competition i vital ta the economy, the government acts to maintain competition when markets fil 1 do so ‘The government’ main guardian of competition {isthe Justice Department. This cabinet level depart- ‘ment, through its Antitrust Division, enforces the antitrust laws that Congress has enacted over the years. toften works closely with the Federal Trade Commission. The FTC i regulatory agency—a unit of government that makes and enforces stan ards for an industry or aes of economic tivity, ‘As modern-day trastbusters the Justice Depart- ‘ment andthe FTC prohibit practices that estret competition. When they uncover such practices, they take the offending companies to court. Sucess- fal prosecution can lead to fines and al sentences forthe guilty parties. These legal practices include thefellowing: Price fsing. The legal practice of price fixing occurs when competitors agre ona price fora good or service, Price fixing cam ake many forms, from adopting a formula for computing prices to seting minimum fee for services, Bid rigging, Parchasers— including federal, state, snd local governments—often acquire goods and services by seckng bids from competing firms. Bid rigging occurs when competitors agree in advance ino wil submit the winning bid. That bi, whichis the lowest bi, will still be higher than it would have heen ina competitive market. Firms that engagein bid rigging may take turns being the low bidder on series of contracts, ‘Market division, The tactic known as market division occurs when competitors agree to divide a ‘market among themselves. In one type af scheme, cach competitor sells to only certain customers, Inanother, each competitor sll in ony certain peographic areas ‘The lustice Department and the FIC also moni- tormergers, in which 1wo separately owned firms ‘combine into one frm. A merger illegal ii wil substantiolly lessen competition or tend to create a monopaly Te government doesallow some natural mono- polis to exist A natural monopoly arises when a single frm can supplya product more efficiently than multiple competing firms ean. The American tarinuch sy ba dst Dopuremarapprovedthe ewer oft Mand Sus Satara networks in Ss XM a, ne snared tee Depart etsy aca ttthe ‘doce dest tat ‘hayert1 Governent ont conony 211“Telephone and Telegraph Company, better known, as ATR, was once natural monopoly. Inthe mid 1900, controled the vast majority of the nation’s telephone services In the 1970s, however, the Justice Department took action to breakup ATST's monopoly. Alter 2 lengthy laws, dhe company agreed to spin off seven separate regional phone companies, which became known as Haby Bells, AT&T continued to provide Tong-distance telephone services. Figure 11.34 shows ‘now the Baby Bll later merged into three much larger telecommunication companies. Government's Rae in Protecting Consumers, Savers, and Investors ‘Caveat emptor. This long-standing rule ofthe mar- ketplace is Latin for "Le the buyer beware” serves ana warning to buyers that they purchase goods and. Services at thelr own risk. But in today’s complex market, buyers may not eve all the information they need to make sound judgments about products Instead they have come to rely on regulatory agen- cles to provide sch information. Consumers, savers, tnd investors also look to such agencies to ensure that products are safe and dependable tat len up no ATT ap sven ep hat esky paced thmslvex baat agetbar BY 2008, ema the eleomescatons Davina \ cingular — Sat 2N2_ nt Eamon of te abe Seerand ee EE“ Protecting consumers. Regulation to protect con sumers begun inthe early 1900s. One ofthe fest targets of government regulators was the meatpack: {ng industry, Upton Sinclair, in his novel The fg, described what went on in meatpacking plans. ‘There was never the least attention paid to what was cut up for sausage... There would be meat that had tumbled out onthe floor, the dirt and sawdust, where the workers had framped and spit... moat stored in great ples {nrooms and the water from leaky ros would drip over it, and thousands of rats would race bout omit... These rte were nuisances, and the packers would put poisoned bread out for thems they would die, and then rts, bread, and meat would go into the hoppers together. Upton Sinclair, The Jungle, 1906 ‘Thanks in part o Sinclar stomach turning prose, Congress passed both the Meat Inspection Actand the Pure Food and Drug Actin 1906, ‘Tis legislation paved the way fora new regulatory agency, now known asthe Food and Drug Adminis. tration. The FDA overses the testing and approval of drugs before they goon the market. ‘Another wave of consumer regulation began in 1965, triggered by Ralph Nader's book Unsafe at Any Speed Nader claimed tha automobiles were unsafe and that the auto industry resisted making cars ser ‘beeause ofthe added cost. The next year, Congress passed legislation requieing automakers astall scat bein all cars. This la led to the creation of an agency to set safety standards for automobiles, the National Highway Taf Safety Administration, In 1972, Congress created the Consumer Product Safety Commission to protect Americans against undue risks associated with consumer procs, “This agency now sets standards for mote than 15,000 products, fam toys to lawn mowers, Protecting savers and investors. Of the many bank: ingtlated agencies, the Federal Deposit Insurance ‘Corporation may have the most dict olin protec: ing savers. The FDIC insures nearly ll bank deposits for up $100,000 per deposior. ‘The Securities and Exchange Commission protects investors by making sure they have the information = ‘hey need to judge whether to buy, sll or hold In 1965, sph Nada’ ook Une t Any Spee sured Congres ect safety standards or ear rn other ates nde estblah th ata Hisvoy Tate Safety Aniston. Airbags ltr became sty trees tnd ren onsome motels Particular security. The SEC establishes and enforces ralesto ensue that companies provide that informa- tion ina timely and accurate manner Such regulatory agencies allow Americans to fe confident when transacting basness with total strangers. the president of 2 Federal Reserve Bank ‘once observed, Ii scems remarkable, when pow think about it, tha we often tae substantial amounts of money to our Bank and hand it over to people we have never met Before. Or that securities traders can send lions of dellar to people ‘they don’ know in countries they have never been in Yet this occurs ll the ime. We rast that... the person a the bank who takes our one doesnt just pocket it. Or that when we use our eedit cards to buy a new CD or tennis -mcguet over the Inert, from a busines that is lcated in some other slate or country, we are confident we wil get our merchandise, and they are confident they wil gt paid. Jerry Jordan, 2000 (Chapler Goerament an te Btnomy 218Bll eT Pri Marly ‘The Cees Stey ad Heath Adintration mentors ‘relgaces ta pteet ora cients wn [esuangt© OSHA ances ounding 1,0 amit ornushebpodta cut ft sccilensinthewortlee by more nee pareo. MAna¢ alec been nerunartalinsedeng Stoic nesses and ain by 40 pacer ‘Government's Role in Protecting Workers The federal government safeguards the interests of workers through the Department f Labor. One of DOL primary alms iso protect worker’ economic sights does this by making sure workers get the ‘wages de to them, festering workplaces that are free af discrimination, and providing unemployment ‘Another goal of DOL is protecting workers physical wellbeing. To ensure sae and secure work places, DOL relies mainly on the Occupational Safty and Health Administration, OSHA sets safety fd health standards for industries. When you see ‘onstruction workers wearing hard hats of highway workers wearing reflective vests, you canbe sure DOSHIA standards ace involved. Since OSHA was 2 nr established in 1971, workplace fatalities have de ‘reas by more than 60 percent and injury rates by 40 psrcent ‘The Perils of Government Regulation Regulatory agencies area tle ike referees, Their role feto make sue that firms pay bythe rules and that n- dividuals ee protected. But referees sometines make mistakes, and so do government regulators. Econo: tists cite several problems associated with gover seat regulation incuding the three described bere Overreguation. Regulation can be very expensive both fr the regulatory agencies and forthe businesses that mast comply withthe rulings of those agencies Sometimes regulations ae so detailed and complex that they actually discourage economic activity. Por ‘example, consider tie requrerent from an early OSHA standard on ladder sale: ‘Me genera slope of grain in flat steps of not be sleeper thay 1 in 12, except that for ladders under to et in length the slape shall not be steeper than 1 in 10. Local deviations of grat ‘associated with otherwise permissible frregulaities are permite. minimum diension shi [Atuilding contractor faced with page after page of Sch regulations might well decide to simply abandon jobs that require lade Balancing costs and benefits. Most people would gre tat regulation has benefited society. Every fone wants clean wer, for example, and standards ‘enforced by the Environmental Protect (EPA) have done a great dealt adres Tution. Bat how clean does water have tobe? And a what cost? ‘Consider lake that was once so polluted that fish could no survive in it, Through regulation, water “quality improves and the fish come back, After more egulation and expense the water becomes sw sable. The water i eventually deemed tobe neat Grinkable, But some impurities remain. To remove them would cosas muchas has already gone into removing ll the other pollutants, Is drinkable lake vate reasonable gal for regulators? Or are the costs of sucha level of purity too great 0 justify?role in- make here. plex : For iy ge of radon id Regulatory capture Exmployees o's regulatory agency need to be falar wi the industry they ae regu lating, Where beter to ind qualified employes for am agency than in the indastry itself? And when those agency employees leave government service, who wil hee them The same ncisty tha they formesy regulated, ofcourse ‘This revolving doe” between goverment and indasry can lead to what economist cll regulatory ‘capture. This occurs when regulatory agencies are dominated or captured, by the indus they rept Jit, Captured agencies act inthe bet interests ofthe industry, rather han in the public intrest. ‘One way to adres the problems created by ree lation is through deregulation. Deregulation isthe proces of removing government restrictions on firms’ economic activity. Since the 1970s, Congress has deregulated the banking atin, able television, lectric power, and interstate trucking industries, among others "The effects of deregulation have been mixed. {Inthe alsin industry, for example the Civil Aero antics Board controled both airline utes and ticket prices until deregulation begaa in 1978. The result of deregulation, as Figure 1138 shows, was «dramatic risen the number of Americans ying asairfares dropped and new routes opened vp. At ‘the same ime, however, deregulation edt restr ee rowing at some airports. And a ar travel became ‘more competitive, weaker airlines had to shut down, ‘or merge with stronger atlines to survive. 1 11.4 How Should Government Address Externalities and Public Goods? Government’ involvement inthe economy takes many forms, from ling potholes o regulating alcohol to enforcing business contract to inpecting oceangoing ‘vessels. Bat mos of what government does, t does for two base reasons. The firs to protect individuals in the economy. The second sto make matkels—and ‘thus the economy-work better. This second reason ‘is why government intervenes to correct two forms of ‘market failure externalities and pubic goods. ‘The Government’ Dealing with Externalities Externalities are spillover effets resulting fom production or consumption. They ae cost o hen ‘fits that affect someone other than the prodcer or «consumer ofa good or service. [Externalities canbe negative or positive. Air pally tion and secondhand smoke, fr example a epative externalities associated with driving and smoking. ‘Without government intervention, sich negtive externalities can cause grat, if unintended, harm, (Cuper1t Gosernment andthe Bonomy 218—————— ‘Theta you see na Iron hight nets (malty, Te compares bg sad a ns ems thater nds 0% berth east! leaning ‘harp. or dna er oreo buy ands ‘Seve ons bate ONG hemes. Inany lees, ‘Seapine bla {oorswo opt section titehay aa wertto Towpitrt fe Approach I xed nese Spo ‘capand Tada Approach tin pr stn a ri canta cit nine PCs exten stn ra ta eae 00 = sa ss2908 sn. ates J sby ret The Tragedy of ‘the Commons ‘hes catons atte the ‘rot othe commons ch ‘rcus whan common ances Stostojed trough ore. = Thatratearaonsbavs ive Rel whch oer ness ymin hrm of atten tre 1 Thescood cartons 2 common fo tere ous farmrstaleavntogefthe ‘nounced ‘Negative Externalities and the sgedy ofthe Commons [Negative externalities often arise when property rights are not well defined, The als, for example is ‘what economist calle common resoure, Everyone hus access toa common resource. For this reason, t ‘an easly be overused and evea destroyed. Bcono- ‘mists call this problem the tragedy of the comanons, Ecologist Garrett Hardin coined this term ‘The tragedy ofthe commons develops this nay. Picture a pasture open tall. Itt be expected that each herdeman wil try tke ‘many cattle as posible on the commons {One herdsman) asks, “What ithe tty fo ime of adding one more anima o my her The rational herdsman concludes thatthe “nly sensible course for him to pursue isto add another animal tis herd Ad another ‘But this isthe conclusion reached by each and every rational herdsman sharing a commons. ‘Therein is he tagedy. Bach man is locked into 4: gystem hat compels him to increase his herd without init—in a word thats iste, Rin isthe destination toward which al men rush, ach pursuing his own best intrest. Garrett Hardin, "The Tragesy of the ‘Commons. Science, 1968 [Bconomists apply the tragedy ofthe commons toa variety ofcommon resources, including Earth's atmosphere and oceans, Pllation snd other negative cexteralitios they argon resi from poorly defined property rights, Withoet sack rights, people nck the incentive to care for cammoa resources end to ensure that those resources are preserved for future use Preserving Common Resources: Tolls, uotas, and Privatization A number of government policies ae almed at pre serving common resources. One policy isto require ‘everyone who usesa common resource to pay tll ‘or fe, Highvay tol, or example, provide revenue that can be used to maintain roads, They also func- tion asa corrective tax To avoid paying tolls some drivers will sek other routes, join carpool, or take public transportation. By providing a incentive to Timit use of certain roads tolls help reduce congestion. A second way to preserve a common resource isto ‘stablish a quota or maximum amount of resource that person can use or consuanein a given period of time. The ocean, for example, sa eommon resource, ay ae the fish tha ive init. Like the herders in Har in example, people wi fish for a lving have litle Incentive to limit thee catch, IF they do someone ese will come along and take the fish they left behind. (hap Government andthe Bony 2“nag cmon property ina pate papers one vesyencsteth aaa srenans Thiscartoost evel eugesing wus of “The predictable result has been overfishing which threatens to destroy several fisheries in US. coastal ‘waters. By setting snd enforcing ish-atch quotas, however the government can control the percentage ofthe fish tock harvested each yea. These quotas ‘ill help preserve this common resource. ‘third way o deal with a rage f he commons isto turn the common resource int a private resource ~ that sto pevatize i, Private ownership restores the incentive to preserve the resource. Consider the problem of overfishing, The government might as ‘ign a group of fisheries the property rights to one stock of fish ina patil area. Their “ownership” of. ‘hese fish gives therm an incentive to peserve the re= source by limiting the amount they cath each yea ‘Government's Role i Providing Public Goods “The government plays another widely accepted sole in he economy asa provider of public goods. Abra ham Lincoln encouraged this form of government engagement wien he wrote, ‘Te legitimate objet of sovermment isto do {fora community of people, whatever they need to have doe, but can nt do, all, oF ean not ‘0 well do, for themseles—in thei separate, ‘and individual capacities. Abraham Lincoln, 1854 Consider a good that cou be produced by a prt, vate firm, such asa dam to contol the flooding of 220 nit Emel he Pb Setr ling o pay forthe proestion the dam provides. But the frm would not be able to provide that protection ‘only to those poople and withhold it from others. Any fone living inthe floodplain would be able o enjoy that protection free of charge. No profit coding irm canbe expected to provide good that consumers do net have to pay for. A go. ‘ernment by contrast, doesnot seek to make a profi. Rather, itcan pay for public goods with tax dollars, thus ensoring that ll taxpayers contribute to the cost. ‘Analyzing the Costs and Benefits ‘of Providing Public Goods “Most people want government to provide public goods, suc as national defense and streetlights. But the sary frces-tradeofis principle reminds uy ro government has the resources to provide every thing that people might want. I has to make choices, ‘bat how? One way sto analyze the costs and benefits ‘of producing that good. ‘Consider «proposl before acity council to widen «road in oder to relieve congestion, City planners provide the counel with detailed estimates ofthe cos of buying the needed land and hiring a construction ‘company, Estimating the benefits ismore challenging the road ie widened, commuters ae likey to spend Jes time and se less gs stalled in heavy trafic. How rach les is uncertain. Nonetheless, estimates of these benefits are made and assigned a dolar valeAt this point, political considerations may alsa Play a part in the council’ decisions. f enough vot ers want a wider rad, the council members might decide to approve the project even if the costs seem likely to out-weigh the benefits. The result would bean inefficient use of the citys scarce resources, The funds used to widen the road might well have provided more benafits to more peopl had they been used differently, Economists describe situations in which gor ‘ramen. intervention leds toan inefficient use of resourcesas government failures, Such failures arise for several reasons. Politicians who want to stay in office may support legisation that pleases voters but Pn ‘Analyzing Costs and Bonofts a Public Provision “his anh surnarizsthe cos benefit ens of popesalo expand prescaoedeaton nh. The ay estes of sang new poschool clases in public schaolouldngs, Thy mo ones me esieste “on in four ae, + Sings schol stan Cian wt ttendprechol comets lanatary shel ete prepared i lorn + Sse syst igs Chen wo and pera! als kl sonmi h + Sruns ie eath ad eto oragrana: Preston nye rh ntan on ese ch pelo. + insased incom terrors Paeits with chon np Cost-eneht Analysis ot Expanding Ey Childhood Education, 2008 ‘snot cost effective. Or they may engage in logolling agreeing to vote for another lawmaker’ legislation iftat lawmaker agrees o vote for thei own legs tion, Such compromises often lead to wasteful pend: ing and economic ineficiency. Politicians may also be influenced by interest groups when making decisions. Interest groups ere ‘organizations dedicated to getting certain policies ‘enacted into law. Although such policies have high utility fora specifi group, they may not benefit the ‘economy asa whole. People who work fr regulatory agencies may also contribute to government flare, Staying em- ployed is an incentive for them to find new problems arfred vp ro wark (Caper Goverment nde onomy 221 ee ___———E—ETE a, to solve, Government employees may press for more regulation even iit isnt the most ficient solution toa problem, 11.5 What Does Government Do ‘to Promote Economic Well-Being? Before the onset ofthe Great Depression inthe 1930s, the federal goverament generally followed sshands-off policy toward the economy. Except for times of national emergency, such asthe Civil War and World War I the ole ofthe government in the lies of ordinary poople remained small. Then came the stock market crash of 1929, which plunged the nation into the worst economic rss its history. How the Grest Doprssion and World War It ‘Changed U.S. Economic Policy ‘The 1929 tock market cash triggered a financial cr sis that forced thousands of hanks to go out of busi ress. Millions of depositors lost thei savings. Con sues slowed their spending, and firms cut back production or shut davin altogether. The economy tooka nosedive, and the Great Depression began. Ding Grost Depresin, ‘hogovernsents le ihe ‘sconry exanded. Oe ot fhngovrnment’s goa tapetpeopa bck oor The waters shone na tied vous government brogram known ath Won Progress Admins. ThelPAputsoneesmilin tulings pra ane port 222 Unt Ennoite he abi Ser _At firs the government did ite, assuming that the economy would stabilize on its own, Butas the economy worsened, many people looked tothe government for hep. in 192, Franklin D. Roosevelt fvon the presidency by promising a different lpproach a New Deal for the American people “The Nev Deal greatly expanded the fedetal governments ole inthe economy. Iterated dozens ff new programs and agencies aimed at reforming the banking sytem, helping businesses, and provid- Ingjobs. Most New Deal agencies didnot outlast the Great Depression, However, the buge federal burea- racy spawned bythe New Deal ied on. "The Depression ended when World War I began, But the federal government di not return toits traltional hands-off oe, Instead it took charge of the wartime economy, overseeing industries a they converted from consumer to military production. To psy for the war effort, the government also sharply fncreased individual and comporate income taxes. ‘When the war ended, the federal government ended its supervision of industrial production. Bat many Americans feared a return to hard times and ‘widespread unemplayment, Congres responded to those fears by pasting the Employment Actot 1946,& id the of bey To iy at nd to 6. —e—“(‘i i Ml] “This act clearly stated an important ole for govern ‘ment in stabilizing the economy. “the Congres hereby ceclres hat ti the con- ‘ining policy and responsibilty ofthe Federal Government 0... promote masinuan employ ‘ment, production, and purchasing power Employment Act of 1946 "This act gave the federal government an active role in managing the nation’s economy. T cay out thatrole, the ae established the Council of Economic Advisers. This counll helps the president formulate sound economic polices, The at aso established a Joint Economic Committe that includes members foom both houses of Congres. The committee's job isto review te state ofthe economy and advise ‘Congress on economic policies. Promoting Economic Stability cans clearly benefit from economic stability Ina stable economy, jobs are secure, goods and ser vices are readily available, and prices ae predictable Producers, consumer, and investors can plan forthe ature without having to worry about sudden upeav- alsin the nations economy. ‘The government promotes economic stability part by creating a widely accepted curreney—the dol Jar—that maintains is value. The government also promotes stability by stimulating business activity during economic slowdowns. It des this through tax Incentives, which encourage businesses to invest in new capital equipment, and through ax rebates, which ‘encourage consumers to spend more money, 12008, for example, difficulties inthe housing market set the economy into alsin, Reacting 19 the uncertainty, consumers cut back on spending. ‘To generate more spending, Congress enacted an economie stimulus packoge—legislation specifically esigned to stimulate busines activity. The pack age called on the Internal Revenue Service to all checks of $600 or more, depending on fay size, to 130 million houscholds, The nation’s eaders encour aged Americans to spend their stimulus checks on consumer goods and services, ‘come Distribution and Poverty nthe United States Markets allocate resources efficients Adam Smith * noted when he described the invisible hand ofthe “Tne seme shorter economic sia The goverment pramoteseonomi aby party trying to madre Soom ane iste 208 9 he onony sag, th government night spr uss ivy wit ste ocago ee taxpayers sins ‘heks, with hohe tha people would spent noney ‘marketplace. But Smith didnot conchae that markets allocate resources faily, Some people for example, end up with vastly higher incomes than others. very year the US. Census Bureau charts the Alistribution of income in the United Sates starts by raking households onthe bass oftheir incomes. ‘Then it divides the entice list of households into five equal pats, called quintiles, The bottom quintile con- tains the lowest incomes, and the top quintile contains the highest incomes, The Census Bureau also calculates the percent ‘of total income each quintile received, In 2007, for ‘example the bottom fifth received 3 percent of all, Income, while the top fitheecived 4.7 percent (Clearly income is not distributed equally inthe United States. ‘Another tool for measuring the distribution of ‘income isthe poverty rate. This rate i the pereent age of households whose incomes fll below a certain Chapter 1 Goverment adie Economy 223,Income Distribution TheUlS Conus Burns nesses core etibton by dina sprout table sows the ange fine for each ein 207, re afha nator total ienn rested by ech ui 207 tht hac ene ye hatte excl graph nw the 1 Chaar te personage eres ‘Annual Houscholdincome, 2007 | Seconds S20292t0838100 | Botiomity $2028 andbelow | dollar amount determined by the Census Burea. ‘That dolar amount, called the poverty threshold, ‘thecatimated minima income needed t support family. "The poverty threshold varies depending on family size and composition. For example family with 160 ‘eutts and one child is expected olive an less income than a family with one adult and four children. “The government considers families tobe poor i ‘his incomes fal below their poverty thresbol In 2006, by thi measure, about one family i ten tved in poverty. Altogether, the members of those families represented 123 pecent ofthe US. population. The poverty rat, then was 12.3 percent in 2006. ‘Poverty rates wiry depending on such factorsas sage, race ethcty, and family composition. Its ako worth noting that the ensus Barents rankings ‘ary from year to year. Just because a family isn {he bottom fifth this year does not mean it will stay there. A hallmask of American society is economlc ‘mobility People who werlehard are usually able to ove up the econorlc ladder. Asa resul elatively few families remain i poverty forthe long erm. Government's Role in Rodistributing Income For much of our nations istry the poor relied nally on friends, fail and pevate charities to 228 is Benois the bli Seton da Fut sth provide forthe basic needs. Local communities ometine established poor houses and poor farms to house the very oot. Otherwise the poor were lft to fend for themselves as best they could “Then came the Great Depression, With itcame an expanded roe for government inthe economy. ‘New Deal programs aided millions of Americans ‘The Social Security Act for example did much to edie poverty among disabled and older Ameri ‘ans, However, these programs did not ft every family out of poverty ‘Daring the 1960s, te federal government launched a War on Poverty op the nation’s need- ies families, Congress devised dozens of entipoverty ‘programs that together created an economic safety fet Those programs had some success. The poverty ‘ate for families dropped from 18.1 percent in 1960 to 10 percent in 1970, ‘Since the 1960s, most antipoverty programs have tnvalved some frm of Income redistribution, 2 policy designed to reduce the gap between the ric tnd the poor. This policy works by taxing wealthit trembers ofa society and then dstibating that ‘money tothe poor to achieve greater income equal ity, Redisteibation takes a numberof forms, inca ing those described here Welfare. When most people talk bout weltOne way the sverment eis trbutesincome by asig food sampso people wih Tow teames Foot stan ar voucher sensed hugh an leew otic tht on to promotng wet bing Sin fod ar pa puape banots sci se olny Te iv they ae refering to Temporary Assistance fr Needy from the government to individuals, Families. The TANF program, funded largely by the Other TANF benefits are distributed inthe fer of federal government but run by the states, provides goods of vouchers, rather than cash, These ikind benefits, services, and work opportunities toneedy transfers include fod stamps, public housing, families In some states, TANF benefits comein the school lunches, and Medicaid. For example, when form cadre det ppmecefeub — apemon'metnorhedthocwcs eoeie my Tha trl gener ev eahuing | ; tee Gibo acerca are Sian se | ay | Y ees W510 i" = ~ fates a = 7 ch Mer sl hep Goverment te Rnomy 228 ee“Theatres sng eb eileby rect ine triton programas [Gy Goodn deste ie ‘nai Pits emer Coots beon proving inva Tegal of is anni Togo peop tosis they rod omoveovof waar ari thewort Medics program, the government pay the health care provider. No csh goes to the Medica recipient. “Earned income tox credit. The government also ‘hcp the working poor through the Earned Income ‘Tax Credit, Love-wage workers can claim this credit when they file thel federal income tax forms, The fred applied against whatever tanes ae doe. Depending om a worker’ family size and income, the credit can exceed those taxes. fit does, the ‘worker receives tax refund. ‘Unemployment insurance, Eraployers through fed- cal and stat anes, conte ta fund that proves “unemployment insurance fr workers. f workers are [aif fom their obs the state sends them payments unemployment compensation—fora certain petiod ‘of time or unl they find another ob. Each state a tninister its own unemployment insorance program, bse on federal standards ‘The Unintended Consequences of ‘Autipovorty Policies "Through its antipoverty policies, the government redistributes income ina way that is intended to help the poor. Yet critics charge that these policies have had unintended negative consequences forthe very ~ people they are meant to help 226 nit Economies he Pai Seer “These sities worry that aatipoverty programs promote dependence onthe government and euce People's incentive to Become sl suficient. TANF, food stamps, Medicaid, and the Earned income Tax {Credit are what economists call means-tested pro- igrams-—that is they are ted to family income, The Fore a family earns the fewer benefits that flly a claim, For this reason, recipients of government “ssn may have litle incentive to get ajob and arn money, I their incomes exceed the poverty threshold, they wil lose thei government benefits ‘or welfare ecpients with minimal skills and siucatin, getting a job may Indeed make them ‘worse off This because the kinds of jobs availble to low skill workers usually pay minimum wage ad have no benefits Consider asingle mother with ls than a high schol education. She leaves welfare and takes alae paying job with no bealth insurance ben fits She still most stroggle to support her chien fon her low wages, But now, because she is working ‘heand her children are ineligible for government provided health services, Policymakers have developed a variety of pro posal to adaress such problems. One sto provide fob training and education for welfare recipients Jereas their human capital and help them becomeble sod cst and ben: & le | self-sufficient, Another isto ris the cap on certain means-tested programs, so tat benefits are grad ally reduced as income rises. Both ofthese proposls would lead to higher costs and, mot likey, higher taxes to pay for those cost. A tind possible solatin is public service employ. ‘ment. Asit did durin the Great Depression, the government could pay the unemployed to perform ‘wef work. But this might cause load of workers to shift from private jabs to more secure government jobs a goat expense to taxpayers, Asaliays, when resources ae limited, whatever choices a government males will result in tredeofs ‘You may not be aware ofthese tadeofts now, but at some point you willbe. Why? Because government programs are funded by tx dollars, and once you enter the word of work, you wll become a taxpayer. Inthe next chapter, you will arn more about taxes and how they ae used to support the many roles government paysin out lies, ‘The government plays limited but important role in the economy. It protects property sighs rules she marketplace, comets art ue, nd promotes the economic | ‘el beng othe American peopl : How dows the goverment protect repay igs? “he govemman is empowered by ‘he Contain to protect rate property igh. 1 das this through he course, Tole forces and the Patent an Trademark Ofc, The government ma int propery ‘ight through power of eninet domain competition; safeguard consumers, saves and investor; and protect workers, It carries out these tasks though regulatory agencies, which create and ‘nfore standards and regulations for industries. ‘How should government adress externalities and public goods? The eral and sate governments implementa varetyof policies to limit neputie externalities and support ‘otic externalities They aso provide public gods hat ate deem necessary or desirable What does government dot promate economic well-being? [uring the Grea Dees ‘soo, the ole the governmentin the economy greatly expanded. Since then the govern- | ‘ment as taken on even mote responsiblity forthe economic well-being ofits ctizens | ‘When necestry to preserve economic stability, the goverment stimulates the esonomy | ‘by spending mre money. The goverment als eisiutes income to cambat poverty, (Chapter Goer andi onomy 227