American Free Enterprise Chapter 3

Macroeconomics vs. Microeconomics

Land of Opportunity Why has America been such an economic success? Why has America been such an economic success? Land, natural resources, and flow of immigration with various skills Land, natural resources, and flow of immigration with various skills Protection of American enterprise Protection of American enterprise Constitutional Protection Constitutional Protection Property Rights – 5 th Amendment & 14 th Amendment (1868) Property Rights – 5 th Amendment & 14 th Amendment (1868) Taxation- Taxation- Article I of the Constitution – Can impose taxes Article I of the Constitution – Can impose taxes Section 2 & 9 – apportioned according to the population so that everyone will pay same amount Section 2 & 9 – apportioned according to the population so that everyone will pay same amount 16 th Amendment (1913) – set taxes based on income 16 th Amendment (1913) – set taxes based on income Enforceable Contracts – Constitution guarantees that individuals or businesses cannot use the political process to get excused from contracts. No legislature can pass a law changing the terms of someone’s business agreement Enforceable Contracts – Constitution guarantees that individuals or businesses cannot use the political process to get excused from contracts. No legislature can pass a law changing the terms of someone’s business agreement

Basic Principles of Free Enterprise Profit Motive Profit Motive Driven by desire for profit; incentive that leads entrepreneurs to accept risk of business failure Driven by desire for profit; incentive that leads entrepreneurs to accept risk of business failure Forces management to exercise financial discipline because it makes people economically responsible for their own success and failure. Forces management to exercise financial discipline because it makes people economically responsible for their own success and failure. Rewards innovation by letting creative companies grow and improves productivity by allowing more efficient companies to make more money Rewards innovation by letting creative companies grow and improves productivity by allowing more efficient companies to make more money Open Opportunity Open Opportunity Concept that everyone can compete in the marketplace; different people and different outcomes Concept that everyone can compete in the marketplace; different people and different outcomes

Economic Rights Legal Equality Legal Equality Everyone has same legal rights & everyone can compete in the economy marketplace Everyone has same legal rights & everyone can compete in the economy marketplace We maximize our human capital We maximize our human capital Those countries that limit the legal rights of women and minorities are missing out on the productive potential of a large portion of their society Those countries that limit the legal rights of women and minorities are missing out on the productive potential of a large portion of their society Private Property Rights Private Property Rights People have the right to control their belongings as they see fit. People have the right to control their belongings as they see fit. Free Contract Free Contract Allows people the freedom to decide who to enter a contract with Allows people the freedom to decide who to enter a contract with Voluntary Exchange Voluntary Exchange People have right to decide what and when to buy and sell People have right to decide what and when to buy and sell Competition Competition Because of all the above rights we have competition, which benefits the consumers with lower prices and higher quality goods Because of all the above rights we have competition, which benefits the consumers with lower prices and higher quality goods

Role of Consumer Our purchases act as signal to the producers to tell them what to sell and how much to make Our purchases act as signal to the producers to tell them what to sell and how much to make Consumers also let their wishes known by joining interest groups Consumers also let their wishes known by joining interest groups Interest Groups –private organization that tries to persuade public officials to act or vote according to the interests of the group’s members Interest Groups –private organization that tries to persuade public officials to act or vote according to the interests of the group’s members

Role of Government Information & Free Enterprise Information & Free Enterprise Educated consumers will help free market run more efficiently Educated consumers will help free market run more efficiently Public Disclosure Laws –required to give info about products Public Disclosure Laws –required to give info about products Example: Fuel efficiency labels on cars & energy efficiency labels on air conditioners Example: Fuel efficiency labels on cars & energy efficiency labels on air conditioners Protecting Health, Safety, and Well-being Protecting Health, Safety, and Well-being Government imposes some basic restrictions Government imposes some basic restrictions Environmental protection rules Environmental protection rules Example: Gas stations, zoning laws, food and medicine Example: Gas stations, zoning laws, food and medicine Public Interest- things that concern the general public Public Interest- things that concern the general public Negative Effects of Regulation Negative Effects of Regulation Costly to implement rules and regulations, which slows growth, and jacks up the prices of goods, also raised government spending Costly to implement rules and regulations, which slows growth, and jacks up the prices of goods, also raised government spending Look to page 55 for a list of relatively new agencies created Look to page 55 for a list of relatively new agencies created

Is the Economy Sick? GDP – total value of all final goods and services produced in an economy GDP – total value of all final goods and services produced in an economy Help economists predict business cycles Help economists predict business cycles Business cycle – period of growth followed by a period of decline (recession) Business cycle – period of growth followed by a period of decline (recession) Cycles are major changes not just day to day ups and downs of the market Cycles are major changes not just day to day ups and downs of the market Some cycles last less than a year while others could last years Some cycles last less than a year while others could last years U.S. – We aren’t completely a free market. The gov’t tries to prevent huge swings in economic behavior U.S. – We aren’t completely a free market. The gov’t tries to prevent huge swings in economic behavior How does the government do that? How does the government do that?

Business Cycles

What does this mean to me? Where we are in a given business cycle affects your daily life Where we are in a given business cycle affects your daily life High school graduates High school graduates Inability to buy what we need because prices increase but incomes don’t Inability to buy what we need because prices increase but incomes don’t

What should we do? There’s no immediate or simply “easy” button There’s no immediate or simply “easy” button Policymakers use 3 main ways to stabilize the economy: Policymakers use 3 main ways to stabilize the economy: 1. Employment Goal to provide jobs for everyone able to work Goal to provide jobs for everyone able to work Unemployment rate between 4-6% is okay Unemployment rate between 4-6% is okay Current unemployment rate is: 8.1% Current unemployment rate is: 8.1% In Michigan: 12% In Michigan: 12% 2. Growth Standard of Living Standard of Living 3. Stability Create economic confidence in economy and our financial institutions Indicators: prices- either direction can hurt which can set off a chain reaction Indicators: prices- either direction can hurt which can set off a chain reaction For example: price of gas or milk For example: price of gas or milk Keep the banks open, ensured, and money flowing Keep the banks open, ensured, and money flowing Interest Rates- Why are they so important? Interest Rates- Why are they so important?

Ways to Create Growth Technology Technology For example the invention of the light bulb (1879) For example the invention of the light bulb (1879) Because of technology some things may reused Because of technology some things may reused Government’s Role Government’s Role Federal agencies fund many grants for research and development projects Federal agencies fund many grants for research and development projects Morrill Acts of 1862 and 1890 –land grants Morrill Acts of 1862 and 1890 –land grants NASA NASA Patents (20 year permit) and Copyrights - can sell work Patents (20 year permit) and Copyrights - can sell work

Providing Public Goods Public Goods- a shared good or service for which it would be inefficient or impractical to make people pay individually or to exclude non taxpayers Public Goods- a shared good or service for which it would be inefficient or impractical to make people pay individually or to exclude non taxpayers 1. Mount Rushmore cleaning or space shuttle launch bill? 2. Basic services should be available to all- (example: highways) Public vs. Private Sector Public vs. Private Sector Public sector means the government pays Public sector means the government pays Private sector involves individuals and businesses Private sector involves individuals and businesses

Externalities Economic side effect of a good or service other than to the person deciding how much to produce or consume Economic side effect of a good or service other than to the person deciding how much to produce or consume Externalities can be positive or negative Externalities can be positive or negative + Externalities = American Axle hires underprivileged teenagers and trains them to work in offices or buying the house across the street + Externalities = American Axle hires underprivileged teenagers and trains them to work in offices or buying the house across the street - Externalities = chemical waste or bachelor neighbor - Externalities = chemical waste or bachelor neighbor

Providing a Safety Net Because of uneven distribution of wealth Because of uneven distribution of wealth Detroit? Detroit? Poverty Threshold - income level below that which is needed to support families or households Poverty Threshold - income level below that which is needed to support families or households Determined by federal government Determined by federal government 2000 – single parent under age 65 with one child is $11,869; 4 person family is was $17, – single parent under age 65 with one child is $11,869; 4 person family is was $17,463 Detroit - $35,025 Detroit - $35,025

Government’s Role Welfare – Government aid to the poor Welfare – Government aid to the poor History – FDR during Great Depression and expanded in 1960’s under LBJ “War on Poverty” History – FDR during Great Depression and expanded in 1960’s under LBJ “War on Poverty” Critics – dependence and discourages productivity thus enabling poverty Critics – dependence and discourages productivity thus enabling poverty

Redistribution Programs Social Security Social Security elderly lost life savings and couldn’t survive elderly lost life savings and couldn’t survive Elderly and disabled Elderly and disabled Collects payroll taxes from current workers and redistributes that money to current recipients Collects payroll taxes from current workers and redistributes that money to current recipients Unemployment insurance Unemployment insurance Funded jointly by state and federal government Funded jointly by state and federal government Must show that they’ve tried to get a job Must show that they’ve tried to get a job Worker’s Compensation Worker’s Compensation Cash help to those hurt on the job Cash help to those hurt on the job Employers pay insurance to cover any future claims that employees may make Employers pay insurance to cover any future claims that employees may make

In-kind benefits In-kind benefits Goods and services provided for free or at greatly reduced prices Goods and services provided for free or at greatly reduced prices Examples: food stamps, subsidized housing, legal aid Examples: food stamps, subsidized housing, legal aid Medical Benefits Medical Benefits Medicare - U.S. provided medical benefits to the elderly over age 65 Medicare - U.S. provided medical benefits to the elderly over age 65 Medicaid – provided to the poor Medicaid – provided to the poor Education Education Student Aid Student Aid Positive – add to the nation’s human capital and labor productivity Positive – add to the nation’s human capital and labor productivity Faith Based Initiatives Faith Based Initiatives Non government sources of charity Non government sources of charity G.W. Bush initiative in 2001; established Office of Faith Based and Community Initiatives G.W. Bush initiative in 2001; established Office of Faith Based and Community Initiatives Public funding for charitable activities Public funding for charitable activities

Inflation General increase in prices General increase in prices Higher prices mean you can purchase less for the same income Higher prices mean you can purchase less for the same income While many people are hurt by inflation, especially when its unexpected, others may benefit While many people are hurt by inflation, especially when its unexpected, others may benefit Let’s take a look Let’s take a look

Who’s been most hurt by inflation? Directions: Did the following gain or were they hurt by inflation? Explain Priscilla “Homeowner and worker” Priscilla “Homeowner and worker” Mayor Mayor Peter “Store Owner” Peter “Store Owner” Elmer “Retired Elmer “Retired Mr. Sad Class “Teacher” Mr. Sad Class “Teacher” Lucy “High School Senior” Lucy “High School Senior” Helga “Retiree” Helga “Retiree”