Government and the Economy

There are four major roles that the government plays in concern of the economy: Providing public goods Dealing with externalities Maintaining competition Regulating market activity

The government is responsible for providing public goods such as: Public parks Public libraries Museums Highways Street lighting Safe air travel The government typically provides these services because they are difficult to charge for and if private companies attempted to, the services would probably be inadequate.

Externalities are unintended side effects that affect someone not involved in the action. They can be positive or negative.

Prevent monopolies (sole provider of a good or service) Antitrust laws 1890 Sherman Anti-Trust Act Used to Break up Standard Oil Company in 1911 Used to break up AT&T in the 1990s Mergers (when 2 or more companies want to consolidate) The government prevented Staples and Office Max from merging

There are government agencies that try to ensure that businesses act fairly and follow the laws: Security and Exchange Commission (SEC)- Oversee the sale of stocks and bonds Environmental Protection Agency (EPA)- prevents air and water pollution Federal Aviation Administration- Oversees the air travel industry Food and Drug Administration (FDA)- Makes sure that food, drugs, and cosmetics are pure, effective, and truthfully labeled.

There would be meat that had tumbled out on the floor, in the dirt and sawdust, where the workers had trapped and spit uncounted billions of consumption [tuberculosis] germs. There would be meat stored in great piles in rooms;… and thousands of rats would race about on it…. A man could run his hand over these piles of meat and sweep off handfuls of dried dung of rats. These rats were nuisances, and the packers would put poisoned bread out for them; they would die, and then rats, bread, and meat would go into the hoppers together…. There were things that went into the sausage in comparison with which a poisoned rat was a tidbit." (Upton Sinclair, The Jungle.)

The economy does not stay constant. When it grows, businesses produce more goods and services, and hire more workers. As a result, these people have more money and spend more. The gross domestic product (GDP) is the measure of the economy’s output. It is the dollar value for all the goods and services produced in a country in a year.

Expansions- occurs when the real GDP goes up. They tend to last longer than recessions. The longest recent expansion occurred from March 1991 to March 2001, exactly 10 years. Recessions- occurs when the real GDP goes down for six straight months. Most last longer than that. On average, recessions last for around a year.

Another way to measure the economy is to look at the unemployment rate (percentage of people in the workforce who are not employed, but are looking for work). Tends to rise during recessions US unemployment rate: 8.8 % as of March 2011 Alabama’s Unemployment rate: Recently dropped to 9.25% (as of April 2011)