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Canada (161,538)
POLS 3470 (14)
Tim Mau (14)
Chapter 2

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Political Science
POLS 3470
Tim Mau

Chapter 2 (Hale) – The Role of Government in the Economy: Economic Perspectives  Purpose of economic policies: foster conditions that enhance the economic well-being of individual citizens and the broader society  Public policies most effective in promoting increased prosperity by providing stable and adaptable framework of rules that enable individuals, business and other organizations to pursue economic well-being in ways that contribute directly/indirectly to collective well-being of society  Successful economic policies involve a multi-dimensional balancing act  Seek to promote overall economic growth while ensuring vast majority of citizens have opportunity to share (directly/indirectly) in benefits of growth  Organization of government of geographic concentration of industry may shift focus of policy-making to emphasize sectoral or regional effects  sustainability important in economic policies  macro-economic policy – sustainability refers to capacity to balance current consumption of goods and services with investments that will increase future economic opportunities o also the ability of govs to combine improvements in citizens’ material living standards with environmental preservation and related quality- of-life issues Major Concepts and Objectives of Economic Well-Being  debated on both normative and empirical grounds  government economic policies have traditionally addressed 4 major goals: 1. the promotion of sustainable economic growth and improved living standards 2. the promotion of economic efficiency – including measures to offset the effects of market or gov behaviour that undermine the efficient operation of the economy (market failure and gov failure) 3. the provision of public goods 4. promoting “fairness” and “equity”  govs are encouraged to facilitate structural changes in economic environment because: o large-scale technological change o changes in forms of business organization o trends towards continental and global economic integration  govs don’t “create” economic growth  economics influenced by neo-classical economic tradition emphasize conditions necessary to achieve economic efficiency and growth as a precondition of improved living conditions  aggregate economic growth reflected in national income or GDP may be any combination of: o growing populations o rising participation rates in the paid labour force o increased levels of capital investment o increased efficiency in use of labour, capital and technology  Economist Pierre Fortin: “there are only 4 ways private households and corporations can get richer: putting more people to work, producing more output per worker, retaining a larger fraction of domestic income after tax, transfer and net foreign payments and by cashing in on higher relative export prices”  Social democratic economists emphasize the distributive effects of economic policies (including impact on employment levels and degree which lower and middle income earners share in general prosperity)  Economic changes involve mix of gains and losses – some better off than others  John Rawls’ insistence the economic policies give priority to improve the well- being of the least well-off members of society – economic losses tend to weigh heavily on those with less to lose  Promotion of greater economic equality has taken 4 main forms: 1. Provision of direct financial assistance through a variety of income transfer programs 2. A redistributive tax system with varying degrees of “leakage” 3. Improved public services designed to provide basic social needs and improved opportunities 4. Promotion of high levels of employment and job creation  Redistribution may contribute to both economic and social benefits  Deadweight loss: Emphasizing redistribution over promotion of economic growth may reduce overall economic efficiency and output because of high marginal tax rates – imposing losses greater than the benefits  Economists argue in favour of designing tax systems that generate max benefits to recipients in return for the least cost to society (administrative costs and tax-induced distortions in decision-making)  Recent efforts to integrate economic and social policy goals to be made to complement and reinforce each other (rather than mutually contradictory)  Challenge of Pareto efficiency: (allocational efficiency) achieving an allocation of resources so that its impossible to make anyone better off without making someone else worse off  Increasing management efficiency/productivity is central to improvements in living standards as it increases the range of choices available to participants in the marketplace o Capacity to increase overall economic output relative to additional units of input o Includes labour, capital and technology  Increased industrialization and growing competition in international markets – forces business and govs to increase productivity in order to be able to improve citizens; living standards while maintaining current levels of profits and gov revenues for provision of public standards  Neo-classical economics – the prosperity can’t be taken for granted and rational decision-making requires the recognition of trade-offs in choices among competing goods in order to make the most available economic resources and expand overall size of economic pie Firms and Profits, Supply and Demand  corporations: organizations incorporated under the terms of relevant federal or provincial laws  incorporation limits the liability of the firm’s owners or shareholders to the amount of capital invested in the firm rather than making them personally liable for the company’s debts  private business corporations exist to produce goods & services for profit – the revenues resulting from business activity should be greater than the costs of carrying on business  capital gains: profit returns comparable to or greater than other potential investment with similar levels of risk  economic markets involve a complex mixture of economic actors who perform a variety of roles: o workers (producers) o consumers o sellers o buyers o borrowers o lenders (investors)  risk-reward trade-offs is one of many ways in which individuals and businesses carry out economic activity subject to the principles of supply and demand  market participants balance relative risks and benefits  govs may influence the activity of markets in many ways: o making rules that increase/decrease costs of transactions or shift from one economic actor to another o provide or require the provision of information that enables market participants to make more informed decisions on supply, quality and value of product and services o provide incentives (subsidies/tax breaks) for certain economic activity and disincentives for others o direct gov participation in supply of goods and services in ways that can either encourage/discourage innovation and competition from other suppliers o rationing the supply of particular services traditionally under gov control or financed from public funds o redistribution of income between individuals/groups or to balance current spending/consumption with both voluntary and “forced” savings – social insurance programs, to provide for future income needs  capacity of a broadly capitalist economy coexisting with high levels of public services to generate widespread and increased prosperity – central to political legitimacy of private enterprise and market system Economic Growth and Stabilization  economic growth provides the solvent which gov may redistribute income through taxes, transfers and improvements to public services so that such policies don’t become a zero-sum game in which the benefits received by some social and economic groups come primarily at the expense of others  conditions necessary for growth reflect the complex interaction of individuals, businesses, other organizations and govs pursuing a variety of personal preferences, organizational and policy goals  macroeconomic policies: (stabilization policies) intended to stabilize overall levels of economic activity through the use of fiscal and monetary policies  structural adjustment policies: intended to address sources and individuals to changing economic circumstances  microeconomic policies: affect the decisions and choices available to individuals as investors, workers, savers, consumers and managers Fiscal and Monetary Policies  fiscal policy: includes major policy instruments that shape the overall levels and distribution of gov revenues and spending, as well as the budget balances (surpluses or deficits) that result  discretionary fiscal policies affect several areas: o changes to levels and distribution of gov spending resulting from deliberate policy changes or new legislation o changes to particular tax rates or to the tax mix: a govs relative reliance on certain revenue sources compared to others o decisions to stimulate the economy through a mix of tax reductions and spending increases, resulting either in larger deficits or small surpluses o decisions to constrain the economy’s overall growth rate in order to restrain inflationary pressures, frequency by pursing the opposite mix of policies  fiscal policies presented to public through gov annual budget  govs use monetary policy to: o manage the money supply (levels of credit and inflation) o interest rates (cost of borrowing) o exchange rates (relative value of national currencies)  open economies (Canada) – characterized by high volumes of trade and capital flows – central banks can’t manage all these policy targets at the same time  Canada’s monetary policies have focused on maintaining low and relatively stable rates of inflation (1-3%) and on constraining/stimulating the rate of economic activity by raising/lowering interest rates  Bank of Canada has some flexibility, but takes into account other major central banks – es
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