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CommonSenseEconomics.com
Government promotes economic progress by: 1. protecting the private rights of individuals and 2. supplying goods that cannot be provided through markets.
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Governments protective function includes the maintenance of a framework for security and order.
Protect people and their property against aggressors through force if necessary. Enforce contracts. Help avoid restrictions, regulations and discriminatory taxes.
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The legitimate object of government is to do for a community of people whatever they need to have done, but cannot do, at all, or cannot, so well do, in their separate and individual capacities. ~ Abraham Lincoln
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Clear Thinking Proposition #2 Government is not a corrective device. It can and does fail!!!!
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A Democratic Government
A method of social organization where individuals make and carry out choices collectively.
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In a Democratic Government
Decisions are made at the margin. Voters, elected officials and lobbyists support those proposals from which they expect to derive net benefits. Too often the secondary effects of political actions are ignored and/or pushed into the future when the elected officials are out of office. So there is no assurance that governmental actions will be productive.
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Building a Road or Civic Center Voter Adams Brown Green Benefits Received $15.00 (30% of $50) $15.00 (30% of $50) $15.00 (30% of $50) Plan A
Equal Tax
Jones
Smith
TOTAL
$ 3.00
(6% of $50)
$12.00
$12.00 $60.00
Policies proposed by the government may or may not be productive. Policies favored by the voting majority do not necessarily promote economic progress. The benefits and costs faced by voters belonging to different interest groups are often disproportionate.
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Producers can not force consumers to buy their products. They have incentives to undertake only productive activities.
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3.
The government can use coercion to tax and subsidize. Markets can not. Markets can charge high prices but can not force people to pay. Governments can and do. Unconstrained political democracy is a system of majority rule, while market allocation is based on proportional representation. In markets, consumers buying one commodity will not interfere with the ability of others to buy a different one.*
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Government expenditures share of total U.S. spending on goods and services produced represents approximately 35% of total GDP. When the costs of regulations are added, this share rises to over 50% of GDP. Government is big in the U.S.!
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Taxes in a Nutshell
Taxes distort prices. Taxes transfer income from individuals to the government.
Businesses do not pay taxes. Instead, they collect taxes from customers, employees and shareholders.
Politicians want to conceal the tax costs of their programs and make you think businesses are paying!
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Do you agree or disagree? Explain. Taxing is much like plucking a goose. It is the art of getting the greatest number of feathers with the least amount of hissing. ~ Senator Bob Dole
Wall Street Journal December 16, 1983
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Unless restrained by constitutional rules, special-interest groups will use the democratic process to fleece taxpayers and consumers.
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A Democratic Government
Can contribute to economic progress when it fills its protective and productive roles. However, more than a majority rule and popular vote is needed to assure that it restricts itself to those roles. Why? Incentives matter! Consider the following three examples.
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Government regulators and legislators may be heavily influenced by lobbyists and the possibility of securing highly paid jobs after leaving government, and so they may focus on the interests of the regulated party rather than citizens.*
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If a small but organized group cares a great deal about a certain government policy, while the majority is unorganized and apathetic, then the special interest often prevail.*
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Question: Restrictions that limit sugar imports, subsidies for the construction of sports stadiums, and federal spending on programs like the construction of an indoor rain forest in Iowa all provide examples of government programs that,
a. Are based on careful analysis of benefits relative to costs. b. Are designed to redistribute income from the rich to the poor. c. Reflect the political attractiveness of special-interest issues. d. Promote the general welfare.
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Unless restrained by constitutional rules, legislators will run budget deficits and spend excessively.
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Government slows economic progress when it becomes heavily involved in trying to help some people at the expense of others.
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Production or Plunder?
A neutral government can help make the economic production pie bigger when it protects property rights and provides public goods! It shrinks the economic pie when it plunders the income of one group to satisfy the interests of another.
Counterproductive, favor-seeking activities are a natural outgrowth of unrestrained democracy. CSE, p97
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The costs of government income transfers are far greater than the net gain to intended beneficiaries.
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Income Transfers
It is difficult to improve peoples wellbeing through income transfers when benefits are not attached to costs. The unintended consequences of secondary effects can get in the way.
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2. Competition for transfers erodes most of the long-term gain of the targeted beneficiaries.
When qualification requirements must be met, resources and potential production are wasted as individuals seek to qualify for the transfers. 43
War
Central planning replaces markets with politics, which wastes resources and retards economic progress.
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2. The incentive of governmentoperated firms to keep costs low, be innovative, and supply goods efficiently is weak.
a. Boosting efficiency or lowering costs generate little political gain. b. Per-unit costs rise as increased inefficiencies get built into the political allocation.
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Constitutional rules that bring the political process and sound economics into harmony will promote economic progress.
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Constitutional Checks
The scope of government must be limited. An unrestrained government results in the fleecing of citizens. Constitutional checks:
10th Amendment 5th Amendment
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List the seven constitutional constraints presented by the authors. Explain the purpose of each constraint. Indicate why you think it will be either effective or ineffective.
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