Economics for everyone (episode seven)
By John F. Sase, Ph.D.
——————
Gerard J. Senick, general editor
Julie G. Sase, copyeditor
“While macroeconomic policy probably contributed to the conditions in which the crises occurred, the ultimate goal of the depth of the crisis was a deeply flawed regulatory and supervisory regime, deeply flawed in design, and deeply flawed in implementation on both sides of the Atlantic, and it would be hard not to do better.”
— Paul Tucker, economist and former deputy governor of the Bank of England, commenting on the financial crisis of 2008
Many attorneys may not have reviewed the basics of Economics for a long time. Both Macroeconomics and Microeconomics remain important for managing one’s finances as well as understanding elements of many cases including corporate, small business, personal injury losses and many other matters. During the past six episodes of “Sufficient Affluence/Sustainable Economy: Economics for Everyone,” we have established some basics of Economics for Metro Detroit and beyond. So far, we have considered the fundamental purpose of Economics as one of fulfilling our needs and wants. In order to achieve this goal, we must manage resources, scarce in time and space. We have discussed the division of these resources into human and non-human inputs. Extending our drill-down, we have delineated human resources into wage labor and for-profit entrepreneurship. Similarly, we have separated non-human resources into the land (real estate) that earns rent, physical capital that receives payments, financial capital that earns interest, and technology (Intellectual Property) that earns a percentage, referred to as royalties.
In earlier episodes, we considered examples of entrepreneurs who orchestrate resources efficiently in order to produce goods and services. By doing this, entrepreneurs hope to earn their fair share in profits. Overall, purposed production satisfies our needs and wants. Entrepreneurs take these products to markets that are relatively free. The entrepreneurs hope to exchange their products for something of equitable value. Consequently, we explored the basics of exchange through transactions that occur between the producers, who supply these goods and services, and consumers, who demand what they need and want.
Central Governments in Market Economies
In our current episode, we continue our investigation by looking at the role that central governments play in market economies. We hope that our in-depth approach will provide the background for attorneys to develop primers for sharing with their staffs as well as with clients and jurors in cases involving economic issues.
Let us begin by discussing the role of central governments generally and of the federal government of the United States specifically. National governments engage in many fundamental activities by using the tools of taxation and spending. We can summarize their duties into four goals: 1) providing in common for the national defense of all households, businesses, and subordinate levels of government within a realm; 2) leveling “the playing field” while encouraging the improvement of employable skills and knowledge among householders; 3) improving technology that enhances business access to capital and markets; and 4) managing the redistribution of resources for the commonwealth in areas of health, education, and other public goods and services.
Through national governments, we effectively manage these four tasks, which we measure with two yardsticks. The first yardstick is that of market activity, which measures inflation as the gradual upward movement of market prices and wages in respect to income. The second yardstick measures unemployment, the lack of full involvement of all available resources used in production, especially human labor. These yardsticks reflect the complex and interdependent activities of providing national defense and maintaining a level “playing field” for the private sector.
Generally, inflation tends to increase as unemployment decreases. Therefore, trade-offs occur when governments attempt to reach their vast underlying set of goals through policymaking.
A Brief History
Some historical background may enhance our understanding of applied government policy and how it works. Until early in the Twentieth Century, the responsibility for implementing formal economic policy rested in the hands of Congress. In an era when federal taxation and spending constituted a small portion of national income, the limited intervention by our government was not due to lack of need—far from it. The United States had struggled through a half-dozen international conflicts as well as the Civil War, which were coupled with six Depressions that followed these hostilities in pairs. The economic downturns included major monetary and banking collapses as well as general market failures. However, the impact of these events remained inadequately measured and analyzed until the economy hit rock-bottom during the Great Depression of the 1930s. At that time, the U.S. Government realized that it could not fix the problems without the economic theory, tools, and data to analyze what went wrong.
Regular centralized information- and data-gathering remained haphazardly intermittent until 1934. In that year, the American economist Simon Kuznets took the responsibility for developing our U.S. National-Income Accounts, a data collection housed at the National Bureau of Economic Research (NBER) in Cambridge, MA. The NBER is a private, nonprofit research organization that undertakes and disseminates unbiased economic research among public policymakers, business professionals, and the academic community. Under the guidance of Kuznets, along with the theoretical input that President Franklin D. Roosevelt solicited from English economist John Maynard Keynes, the NBER successfully reassembled fragmentary data back to 1918. This information aided in developing an understanding of what led to the Crash of 1929. Also, Kuznets instituted the practice of collecting national economic data on a monthly basis, a procedure that continues to the present day.
Moving forward, the NBER produced the first official estimations of U.S. National Income. These reports and their accompanying economic-data records provided information to Congress and supplied a new set of tools that allowed it to construct more efficient and effective policies. Also, this surge of knowledge gave the Federal Reserve Bank the ability to set better policies and to react quickly and prescriptively to any Congressional measures that ran errant.
(Continued)
