Midterm #2 is now available to review this week ONLY. Please bring your Student ID to 166 SWKT

Transcription

1 Monday, March 26 th Midterm #2 is now available to review this week ONLY Please bring your Student ID to 166 SWKT Essay 2 due in labs this week Citizenship timecard and write-up due April 5 and 6 in labs

2 The Constitutional Convention 2 Results for Exam 2 Copyright , Brigham Young University. All Rights Reserved. ExamStat is a Trademark of Brigham Young University.

3 Government Weaknesses 3 GROWTH OF GOVERNMENT AND GOVERNMENT WEAKNESSES

4 Government Weaknesses 4 Outline Growth of government the record Response to market weaknesses Government weaknesses Special interest effect Rent seeking Shortsightedness effect Inefficiency Prospects for government spending

5 Government Weaknesses 5 Growth of Government 1870: 51 thousand federal employees one for every 800 people. All levels of government spent about 5% of total output. 2011: 3 million federal employees 1 for every 100 people. All levels of government spent over 40% of total output.

6 Growth of Government Government Weaknesses 6

7 Government Weaknesses 7 Growth of Government These measures of the growth of government understate the growth of government influence since the regulatory role of government has also grown. I.e., the proportion of private spending required to meet expanding regulatory requirements has also increased.

8 Government Weaknesses 8 Growth of Government Why has government grown so rapidly? Response to market weaknesses (last time and today) Changing views of role of government Stabilizing the economy (Next class) Economic inequality (Next Monday) Government weaknesses (Today)

9 Government Weaknesses 9 Response to market weaknesses Industrialization followed the Civil War produced staggering changes A hallmark of industrialization was increasing scale of business and expansion of private power - monopoly Progressive Era ( ) was a response to these consequences of industrialization

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11 Government Weaknesses 11

12 Government Weaknesses 12

13 Government Weaknesses 13

14 Government Weaknesses 14 Response to market weaknesses Industrialization followed the Civil War produced staggering changes A hallmark of industrialization was increasing scale of business and expansion of private power - monopoly Progressive Era ( ) was a response to these consequences of industrialization Also a period of government corruption; political bosses and their machines

15 Government Weaknesses 15 Famous political cartoon by Thomas Nast denouncing Tammany Hall as a ferocious tiger killing democracy.

16 Government Weaknesses 16 Tammany Ring by Thomas Nast: Who stole the people s money? / Twas him.

17 Government Weaknesses 17 Response to market weaknesses Progressives called for economic reform Monopoly: 2 strategies Break up monopolies (e.g., breakup of Standard Oil) Regulate monopolies (e.g., ICC, utility regulation) Imperfect information Regulatory agencies (e.g., FDA) Externalities Public schools; Prohibition (18 th Amendment) Public goods Provided clean water, public sanitation services

18 Government Weaknesses 18 Government Weaknesses When thinking about government action, remember: Like the market, government is people interacting and people are motivated by self interest. Government use of resources always has an opportunity cost Government is a monopoly; action generally results in a one-size-fits-all outcomes

19 Government Weaknesses 19 Government Weaknesses There are at least four reasons why government is likely to work poorly. We call these government weaknesses. Special interest effect Rent seeking Shortsightedness effect Inefficiency (in lab)

20 Government Weaknesses 20 Special interest effect A special interest issue is one that brings substantial benefits to a small minority while imposing costs on the majority. There is an incentive for government to respond to special interests. Examples: Tariffs and other trade restrictions Bridges to nowhere and other earmarks Failure to reduce carbon emissions

21 Government Weaknesses 21 Video: The Peanut Program Why is it illegal for you to grow and sell peanuts? Who is helped by the Peanut Program and by how much? Who is hurt and by how much?

22 Government Weaknesses 22 Rent seeking There are two ways to acquire wealth: production and government redistribution Rent seeking is actions by individuals or groups intended to affect government policy in such a way as to redistribute income toward them This favor seeking activity is not productive; wastes resources. Examples: Thousands of lobbyists in Washington, D.C. (AARP) Lobby-financed political junkets

23 Government Weaknesses 23 Rent seeking An insightful observation: Few capitalists love capitalism. They love capital and they are anxious to increase their capital by restricting capitalism. Lant Pritchett Harvard University

24 Government Weaknesses 24 Shortsightedness effect The shortsightedness effect is the misallocation of resources because government action is biased in favor of proposals with clear current benefits but large or difficult-to-identify future costs (E.g., Social Security and Medicare; government deficits; state government pension obligations) against proposals with clearly identifiable current costs but difficult-to-identify future benefits (E.g., programs to limit carbon emissions)

25 Government Weaknesses 25 Video: Solyndra Look for evidence of government weakness Special interest effect Rent seeking Shortsightedness effect

26 Government Weaknesses 26 Solyndra: Government Failure? March 2009, Solyndra receives a commitment for $535 million in government loan guarantees May 2010: President Obama holds a publicity event at the factory touting it as a model for government investment September 2011: Solyndra declares bankruptcy; the government (taxpayers) then had to repay the loans Other facts: Solyndra spent $1.8 million on lobbying while the loan guarantee was under review. Several Solyndra shareholders were substantial contributors to President Obama s election campaign. Solyndra executives were involved in meetings at the White House One of the benefiting lenders was a fund with a close connection to an important Obama fundraiser.

27 Example: Solyndra Government Weaknesses 27

28 Government Weaknesses 28 Inefficiency Milton Friedman's Law on Spending Money: When I spend my money on me, I care about how much is spent and how it is spent. When I spend my money on someone else, I care about how much I spend but not so much on how it is spent. When I spend someone else's money on me, I care little about how much is spent but am concerned about how it is spent. And when I spend someone else's money on someone else, I care little about how much is spent and about how it is spent.

29 Government Weaknesses 29 Inefficiency Little incentive for government to be efficient produced by government and paid for by taxpayers Market production more likely to be efficient Good produced by: Private firms Government Good paid for by: Consumer/P urchaser E.g., apples, televisions E.g., Post Office Taxpayer/ Third party E.g., health care, food purchases with food stamps E.g., gov t schools, roads, national defense

30 Government Weaknesses 30 Video: $16 Muffins Would you spend $5.50 for a can of soda? Why would the Defense Department be willing to pay $5.50 for a soda?

31 Government Weaknesses 31 Video: More Waste in the Defense Department Would a private business spend this kind of money on a service they could acquire more cheaply elsewhere? Why not? Why does the government do it? Why can the government get away with it when private businesses cannot?

32 Government Weaknesses 32 Government Weaknesses Conclusion Even when the market fails to be fully efficient, government action is likely to be far from perfect. Implication: We should have realistic expectations regarding the likely outcome of government action. Perhaps there are structural ways to improve government performance.

33 Government Weaknesses 33 Prospects for Government Spending Will governments continue to grow in the future? Government obligates itself through key entitlement programs like Social Security and Medicare (Affordable Care Act?)

34 Government Weaknesses 34 Prospects for Government Spending Noninterest Federal Government Spending and Revenue Projections, by Category, Through 2085 [CBO, 2011]

35 Government Weaknesses 35 Projections: Federal Government Revenues and Spending Including Interest Payments (GAO) Note: This is just federal government spending

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37 Government Weaknesses 37 Prospects for Government Spending Will governments continue to grow in the future? Government obligates itself through key entitlement programs like Social Security and Medicare (Affordable Care Act?) These programs are unsustainable but the existence of government weaknesses makes it extremely difficult to resolve them in a timely way.