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For your fifth essay, you will explore economic challenges facing our U.S. Read the instructions and guidelines below carefully and review the grading rubric before submitting your work.
Find a NEWS article that addresses a current economic issue facing the U.S. It can involve any of the challenges discussed in Chapter 18, or one of your choice. (A news article is an article from a media source like a newspaper or magazine such as the New York Times, FOX, The Washington Post, VICE, etc. that addresses a current event. It does not include sources like Wikipedia, eHow, dictionaries, academic journals, or other information websites.)
Write a minimum 300-word essay that answers the following questions:
Based on the article you chose, what is an economic challenge you chose? How does it relate to the economic challenges discussed in the book? (See Chapter 18 for a discussion of economic challenges facing the U.S.)
According to the article, who are the main interest groups involved? What does the economic issue mean for their life and/or business outcomes?
How can the economic challenge be addressed in a manner that is fair and equitable to all parties involved?
Your essay should be 300 words or more:
The 300-word limit DOES NOT include the questions, names, titles, and references. It also does not include meaningless filler statements
The essay must have factual information from the textbook and/or appropriate articles and websites.
The essay must be original work and will be checked for plagiarism, including the use of generative AI. (You will receive a zero if substantial portions of your work are taken from other sources without proper citation or generated using AI.)
The essay must have references and citations for your sources, including the textbook. Cite your sources in-text and provide references for each source according to the APA Style GuideLinks to an external site.. (FYI web addresses or links are not full references!)
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The Climate Change Challenge
Let’s conclude with a consideration of a fourth challenge—one that not only the United States, but the entire world, is facing—climate change. Climate change is occurring because too much economic production is using carbon-based fuels, which increase the levels of greenhouse gases, such as CO2′ in the atmosphere. In the words of economists, the use of carbon-based fuels is creating an externality, which, as we stated earlier, is the result of a decision that is not taken into account by the decision maker. Thus, while the private decision maker balances the costs and benefits facing him or her, those private costs do not match the social costs that the action imposes on society. This is occurring so much in the consumption of carbon- based fuels that it is changing the world’s atmosphere by increasing CO2 levels and thereby increasing the average world temperature. The result is a rising sea level and significant weather changes for many areas. (In 2020, the West Coast again experienced extreme and devastating wildfires.) Low-lying areas face flooding if, as predicted, the sea rises by 1 to 5 feet over the next century.
Economists’ answer to the problem of climate change is to see that the costs of the decision to use carbon-based fuel are taken into account by the decision maker. This can be done either by placing a tax on carbon-based fuel so that people face the true social cost, or by creating a cap-and-trade system—essentially creating property rights in pollution.
Given the fiscal problems the US government faces—and the need for additional revenue—the tax-based approach is the one most economists favor, but imposing taxes is difficult politically, and the United States has chosen to do little in the way of the substantial changes that will be necessary to make a difference. But, slowly, it is beginning to create cap-and-trade markets in pollution. As it set them up, it had to answer the question: Who would get the property rights? Most economists favored government receiving the property rights to pollution because it would have meant hundreds of billions of dollars in revenue that the government needs. All polluters would then have to pay for the pollution, and the United States would have revenue to reduce its deficit.
Initially, the US government followed economists’ suggestion, but it soon backed away from that and gave most of the rights to existing polluters. Thus, existing polluters would not have to pay; instead, they could sell pollution rights to new firms, gaining income for reducing pollution. This decision on property rights made the implementation of the cap-and-trade system politically feasible but, from economists’ standpoint, highly problematic since it essentially entrenched existing companies, and made creating new firms costlier. In a cap-and-trade system, with existing firms having the property rights, new companies starting in the United States will have to buy pollution permits from existing firms who reduce their CO2 output; this places them at a competitive disadvantage to existing companies, and thereby slows the introduction of new technologies that the new companies generally introduce.
Economists also point out that the solution to climate change must occur at the global level because, otherwise, firms will simply move to where restrictions are weakest. There will be a flight to the lowest level of regulation. Thus, without a strict international agreement that all countries of the world abide by, it is almost inconceivable that a climate change solution will be achieved. So, the economists’ perspective on climate change is that society should expect a warmer world because effective solutions are beyond our current international institutional structure, and voluntary measures do not work when dealing with problems that involve costly solutions.
As we discussed in Chapter 5, an attempt to facilitate international cooperation to curb climate change took place in Paris in December 2015. A vast majority of the worlds countries sent representatives to Paris with the goal of creating parameters for CO2 emissions that could help slow the pace of global warming. At this convention, the signatory countries agreed to take action to cap global temperature increase at 1.5 degrees Celsius above pre-industrial levels. A 2017 study concluded that if the goals of the Paris climate agreement were met, median sea level rise in the next century could be kept to 1.7 feet.
The United States agreed to more reduction than did countries such as China and India, and when President Trump took office he argued that the Accord was unfair. He officially withdrew the United States from the Paris Climate Accord in 2020. When Trump withdrew from the Accord, several US states and companies committed to meet the agreements requirements on their own, even if the country as a whole would not. In 2021 Joseph Biden defeated Trump and became president. With the Democrats again in charge of the U.S. government, the U.S rejoined the global climate agreements.
The Income Inequality Challenge
Now let’s turn to a third challenge facing the US economy—the income inequality challenge. Market economies are built on social contracts—an implicit understanding that individuals in society will be given freedom to act and people will not complain about income inequality too much as long as the large majority of individuals in society can be provided with chances for advancement—that if one works hard, and does what society expects from them, then one can have a fulfilling life. One can expect that one’s prospects will exceed those of one’s parents. From the 1930s to the 1970s, that was the case in the United States. Income inequality fell, the difference between the rich and poor declined, while simultaneously the overall economy was growing.
The rising standard of living and the declining inequality were consistent with the general belief of most people in the United States that large inequalities in income cause problems for a functioning democracy. In the 1980s, the inequality stopped declining and instead began increasing. Unskilled workers were the most affected, seeing their wages stagnate so much that when adjusted for inflation, their wages have not risen at all; while individuals on the high end of the income spectrum have been earning double or triple what they were earning, even after adjusting for inflation. For instance, in 1965, CEO compensation was $20 for every $1 the lowest earning worker earned. Today, that ratio is closer to $200 to $1.
The reasons for this increase in inequality are varied. They are political—the progressivity of the income tax was reduced during this time period; sociological—the mores changed, and it became acceptable for top managers in firms to give themselves large increases in pay even when most workers in the firm were seeing their pay fall; and technological—new technologies developed which allowed low- and medium-skilled jobs to be replaced with winner-take-all industries, in which the top firm makes billions but other competitors do not make a profit. New technologies also allow machines and computers to replace low-skilled and repeatable jobs. This has gone on for decades.
What is now different is that what is meant by “low-skilled” is changing. It used to mean jobs like digging a hole, or manning a machine. Now with the expansion of artificial intelligence, “low-skilled” will include many activities that previously were seen as skilled, including driving; standard diagnostic work, the primary work that most doctors do; teaching standard material, the primary work that teachers and professors do; and choosing among investment alternatives, a primary job of many middle managers in finance. When what doctors, professors, and managers do is considered “low-skilled,” society is in for some enormous changes, and the basic way in which society distributes income will likely need to be rethought.
Occupy Wall Street protests against income inequality. © Alamy
Globalization has also played an important role in the income inequality challenge. Workers who faced global competition, including many lower-skilled workers in the manufacturing sector, have seen their incomes pushed down to low global levels, and workers in sectors who face less global competition, such as government workers, teachers, and lawyers, have seen their wages rise. As discussed previously, that process is now changing, and what were considered solid middle-class professional jobs will be experiencing downward pressure on their incomes in the coming years.
Economists do not have a good answer on how to deal with this income distribution challenge, in part because they have not focused their analysis on income distribution and in part because the issues are more political than they are economic. So income inequality will likely continue to be a topic of discussion in the coming years.
An important condition to note is that the law of one price is dependent on a free flow of resources and technology, and in many sectors of the economy that does not hold. For example, an American cannot get a haircut from someone in China or India, so haircuts are not tradable. This means that a Chinese haircutter can receive less than a US haircutter without the US haircutter worrying about losing his or her job. Similarly, if US firms have access to better technology than Chinese and Indian firms, which was the case for much of the twentieth century, US firms can earn higher profits and pay higher wages than Chinese and Indian firms.
In the late twentieth century and the beginning of the twenty-first century, those qualifiers—which made it possible for US incomes of many US workers to significantly exceed those of workers in other countries—have been fading away. One reason is because technology has opened up new areas where trade can take place that did not exist before. This expansion of trade has occurred in both goods and services. Trade has expanded in terms of goods because of enormous technological changes in shipping and transportation. Modern containers allow much lower-cost shipping of bulky items than was previously possible. Today, the oceans are filled with gigantic containerized ships that are unloaded at ports and sent on their way by computerized systems that have significantly lowered the cost of shipping.
Digital communications technology has also allowed instant contact with firms all over the world, which reduces much of the advantage of producing for US consumers in the United States. Simultaneously, countries previously hostile to markets have introduced markets into their economies and thus have become trading partners and competitors, creating billions of additional potential workers competing for a job. This has added enormous competition to the manufacturing sector in the United States and has changed its very nature, from one where most manufactured goods consumed by US consumers were produced in the United States, to one where most US manufactured goods consumed by US customers are produced abroad. Today, US manufacturing specializes in certain niche and high-tech consumption goods and in research and development. China is now the factory for the world much more than is the United States.
It is not only in goods that this movement has taken place. It is also in services, and the loss of service jobs to other countries goes under the name outsourcing—the shifting of jobs from the United States to lower-wage developing countries. Thus, while US haircutters do not face competition from abroad, people working in service support positions do. For example, call centers now are typically found in India and other English-speaking developing countries. So when you call for technical support on your computer or with a question about your bill, the telephone call will likely be handled by someone in India.
Similarly, accounting and bookkeeping for firms is more and more done in India. The areas of competition are expanding. Say you need some tutoring. Now you can go online and hire an Indian tutor to help you with your homework. We can expect much more such competition in the future.
To maintain its dominance in a globalized economy, and the higher wages that go with that dominance, the United States will have to maintain a technological edge over other countries. Doing so will likely become increasingly difficult as India and China move up the technological ladder—just as Japan, Korea, and the European countries did earlier. This does not mean that US income must fall from where it is now; it only means that the largest growth in income and output will likely be in countries such as China and India, and that the United States and Europe will experience relatively slower growth.
What do economists have to offer to meet the globalization crisis? If you are looking for an easy fix, the answer is “not much.” They see globalization as an inevitable process, not a crisis. They argue that the best a country can do is to learn to live with it. It must concentrate on producing as efficiently as possible and must learn to no longer see itself as special. In an economy, you are only special to the degree that you can produce goods people want at a lower cost than others. Both President Trump and President Biden moved away from free trade and implemented tariffs on imports. That has led other countries to impose tariffs on US exports, and we can expect to see a movement away from free trade in the coming years.
Why shouldn’t the United States impose tariffs to project our jobs? As we will discuss in Chapter 20, economists argue that imposing tariffs would lead to other countries imposing tariffs, which would reduce demand for US goods, and which could enter the world economy into a trade war. With the globalization process, the market is doing precisely what it is designed to do—channeling production to the lowest-cost area so that goods are produced as efficiently as possible. It is this globalization of goods and services that has allowed the United States to develop the high standard of living it enjoys today. So, economists’ solution to the globalization challenge is that the United States should learn to live with it and compete as hard as it can to maintain its standard of living. As a result of this competition, US businesses will be pushed to develop creative solutions in order to be at the cutting-edge of the market.
Government’s Indirect Role in the Economy
The government’s indirect role in the economy is to provide a legal and institutional setting for the workings of the market by establishing and enforcing laws that regulate actions of individuals and businesses. Such laws have significant influence on who gets what, how people spend their money, and how people conduct economic activities.
Lets first consider governments influence on who gets what. Say the government passes a law that people can freely share downloadable songs and movies, or even that they can provide a site that allows other people to share songs and movies. Such a law will transfer income away from the producers of songs and movies to consumers of songs and movies.
Alternatively, if the government establishes laws that prevent someone from practicing law or from teaching without a license—even if other people want to hire them despite their lack of a license—that law will transfer income to licensed lawyers and teachers and away from consumers. The list of ways in which the government indirectly determines the distribution of income with such laws and regulations is long and can be extended almost infinitely In other words, what someone earns reflects not only his or her efforts but also the rules the government establishes that govern how the income is earned.
The enormous increase in regulations. © Reuters/Kevin Lamarque
The governments influence on how we conduct economic activities is just as pervasive. For example, if you want to drive a car, most states require you to have car insurance. You must wait until you are a certain age to begin to work, and when you do work, you must keep certain records and file tax returns. Firms must abide by certain nondiscriminatory practices when hiring, provide proof of insurance, and ensure their products meet certain standards. It is because of government’s large indirect role that we called our economic system a pragmatic market economy rather than a free market economy as it is sometimes called. A free market economy would be anarchy. The US economy is far from anarchy; it is a highly regulated market economy where the regulations reflect pragmatic considerations and attempts to correct problems caused by markets and problems caused by government. Both are problematic, and all societies continually search for the right combination.
The Problem of Regulating the Economy
All individuals agree that some regulation is needed. The questions are: How much? And what type? One type of regulation that has come under specific attack is unfunded mandates, or regulations by the federal government that impose significant costs on individuals and states but do not provide the funds to pay those costs. One example of an unfunded mandate is the law passed by the federal government to make all public buildings in the United States accessible to all individuals, including people with physical and mental disabilities. Passing the law was easy and seemed right to many Americans. But the law imposed serious costs on many businesses, and the law did not provide those businesses with a way to pay for them. Governments pass many such laws and regulations every year that impose large costs on individuals and firms in the economy—costs that someone, either the firm or their customers, must pay.
The debate over regulation is ongoing. Supporters of a particular regulation generally argue that the regulation serves an important purpose of protecting individuals and of ensuring that economic activities are carried out in a way that the legal system considers fair. Opponents of a particular regulation generally argue that the costs of the regulation are too high, citing examples such as the following, which appeared in the Wall Street Journal. An upstate New York nursing home had been cited by state officials as “a shining example” of what such an establishment ought to be. However, not long afterward, the owner of this home closed it down with the following explanation:
It was just impossible. There were eighteen state and federal agencies putting forms, questions, and statistical requests across my desk. Medical reports . . . census figures . . . Social Security… unemployment insurance … workers’ compensation … withholding taxes … daily time sheets . .. work plans. … It was just one thing after another.
According to the owner, she sometimes spent eighteen hours a day just handling the government paperwork required for only twenty patients and fourteen employees. Such large-scale regulations have brought about a reaction on the part of some people supporting the doctrine of laissez-faire, the theory that government should interfere with business as little as possible.
The problem for strong advocates of laissez-faire is that while there are many examples of large-scale and intrusive regulation, there are also many examples of regulations that have helped society, and there are parts of society that most observers would consider underregulated—areas of the economy where the lack of regulation has caused significant problems for the economy Let’s consider a couple of them. The first involves pollution. In the past, firms and people have been able to pollute without facing any limitations on their actions. That pollution has often made streams unusable, the air unbreathable, and has destroyed beautiful areas and public lands. In economists’ parlance, such problems are caused by externalities—the effects of a firm’s actions or decisions that negatively affect others but that the firm does not consider when undertaking the action. When there are externalities, the situation is made worse for the majority of people by the action that caused the externality. Economists agree that even in a primarily market-based economy, regulation is needed to see that those creating negative externalities stop doing so at least to the degree that others would be willing to pay them not to undertake those activities.
Another example of an area where lack of regulation has caused problems involves financial firms that borrowed enormous amounts of money to buy highly speculative mortgage-backed securities (bonds backed by risky mortgages). When the value of those bonds fell in 2007, the firms could not pay back the loans, and they would have collapsed without government intervention. Many felt that these financial institutions deserved to collapse. Unfortunately, their collapse would have brought down the entire US, and probably world, economy along with it, which would have made the situation worse for everyone. They were considered “too big to fail,” which means that the US government felt it necessary to step in and bail out the firms, and it did so in 2009. The problem here is the fact that if a firm is too big to fail, it is too big not to be regulated; and following the bailout, the US government explored ways to increase the regulation of financial firms in an attempt to avoid another financial crisis in the future. It passed a law, called the Dodd-Frank Act, for this purpose; however, the rules were about 900 pages long and were nearly impossible for anyone not specializing in the law to understand.
There are huge differences of opinion about how much and what kind of regulation is desirable. It is clear that many government regulations have served the public interest, but it seems equally clear that some intended to do so have not. What makes finding the right mix of regulation so difficult is that the problem of regulation cannot be solved once and for all and then forgotten. Technology and social situations are continually changing, which means that regulations appropriate in the past may no longer be appropriate. People also figure out ways to get around regulations, so that the regulations become less effective over time. Thus, regulation must be seen as a continual process, which requires regulators to stay ahead of the firms and the individuals regulated. Successfully doing so requires enormous expertise and commitment—expertise that is expensive and often beyond the budget of governments.
Whose Desires Does the Government Reflect?
If government always reflected “society’s will,” there would be far less debate about regulation and governments role. But it doesn’t. “Society’s will” is an artificial construct; there is no society that has a will of its own that can be specified separately from the collective will of the individuals within the society. Whose desires will be reflected by government as society’s desires is subject to enormous political infighting; it reflects the political power of various groups: Those with political power get their desires met, while those without political power do not.
Often, from many outside observers’ perspectives, government laws and regulations are not designed to help the general public, but instead are designed to help special interests. Consider the issues of patents and copyrights. All agree that some patent and copyright protection is useful because it creates incentives for the development of new technologies and products, but many argue that the length of time that patents and copyrights last is far longer than necessary to encourage such developments and that the length of patents and copyrights in the United States could be shortened significantly, thereby benefiting the general public with minimal negative effects on incentives.
© Wiley Miller and www.cartoonstock.com
Why don’t governments shorten these times? Critics claim that the reason is that it would reduce the patent and copyright owners’ income—and those owners lobby Congress hard to prevent that from happening. An example of this is the Copyright Term Extension Act of 1998, often called the “Mickey Mouse Protection Act” because the Disney Corporation was a big beneficiary of the law. Disney’s copyright on Mickey Mouse was about to expire after seventy-five years. That would have let anyone produce Mickey Mouse goods without paying Disney. Disney lobbied Congress hard, and Congress extended the copyright for decades longer, essentially transferring billions of dollars from consumers to Disney. Many similar examples exist.
So while most people agree that, in principle, regulations can improve the workings of an economy, there is far less agreement on whether, in the real world, regulations do improve the workings of the economy or whether regulation simply provides an alternative method through which special interests can improve their position.
Fluctuating Attitudes Toward Regulation
Attitudes in the United States toward regulation have fluctuated. In the 1960s and early 1970s, regulation was seen as a necessary limit to private powers. About the mid-1970s and well into the 1980s, the pendulum of public opinion shifted, and many believed that the US economy was suffering from overregulation. This led to a belief that deregulation, or the removal of those excessive regulations, would improve the workings of the economy. Then, in the 2000s, the pendulum swung again as first accounting scandals, and then the financial crisis of 20082009, rocked the economy and brought it to the verge of collapse because of financial risk-taking by large banks and insurance companies. In response, public opinion shifted to favor more, or at least better, regulation.
In recent years, there have been dramatic pendulum swings between regulation and deregulation as the presidency has changed hands from Donald Trump to Joe Biden. President Trump aligned with traditional Republican values, believing that regulation hindered the growth of the economy and business. But President Biden veered toward Democratic values, that is, more regulation is necessary to ensure that no American is left behind, and to redress socioeconomic inequality.
Government’s Direct Role in the Economy
Besides its indirect role of making laws and regulations for the economy, government also plays a direct role in the economy. By that we mean that it is an active participant in the economy and that it collects and spends trillions of dollars a year. The reason government has a direct role in the economy is because some things are better done collectively than individually, and government is the natural institution in our society to carry out collective action. Let’s consider one example of something best done collectively: defense. If each of us provided for our own defense for attack from another country, our country would likely be taken over by another country—each individual in our country could not afford to provide even one plane or one battleship. These collective consumption goods, sometimes called public goods, are more efficiently supplied by government than by individuals.
Where the Government Spends Its Money
Each year, until recently the federal government has spent about $4 trillion to finance its activities, and state and local governments have spent more than $3.4 trillion to finance their activities. Figure 18.1a shows the normal division of federal government expenditures; and Figure 18.1b shows the normal division of state government expenditures. Starting in 2021, normal budgeting has been superseded by Covid spending—spending designed to offset and make up for the government shutdowns of activities to present the spread of Covid. Thus, in 2020, the federal government spent a record-breaking $6.5 trillion. It is is likely to spend equal amounts in 2021 even though government revenues are far below that.
As you can see, the federal government spends the largest percentage on social welfare programs. By contrast, after administration, state governments spend most of their money on education and public welfare. In addition to federal and state governmental activities, there are also local governmental activities. Local governments spend most of their budgets on education and roads.
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