Policies of the State

State Activity UK, Sweden, US Very different…but very similar Late 20 th century, we see a push for strong government Even expanded in many cases When do we see increased demand for state activity in the US? On the same token, when do we see demand drop?

OK…but the Third World is Different…Right? Industrialized democracies are prosperous…democracies…per capita average income of over $20k 2/3 of the world population does not fit in this category, however Most are poor…some have mineral wealth…some have industrialized On average, government operates at a lower level of involvement But even that amount depends (see Table 4.1) Why?

On the Whole, Why Are States Expanding? People are becoming more prosperous Government has gotten better at secret taxes Elections lead to a bidding up of services Internal pressures for bureaucracy to expand Governments have less control in a globalized society

Constraints Gross Domestic Product PPP per capita GDP How much of comparable things people in different states can buy Effects of being a democracy Broad needs Life expectancies and mortality rates

Defense Monopoly powers Why? Table 4.2 shows some great variation, however U.S. spends 4% of GDP (highest advanced industrialized democracy) North Korea spends 25% What are the problems for Third World countries when they devote large funds to defense? Then why do they?

Education Most basic service What makes it tough for Third World? Table 4.3 Differences

Research and Development Industrialized countries need technological development Competitive edge They have given up on basic industries Why? Table 4.4 Government-sponsored, industry-specific, and universities

Health and Social Welfare Governments expected to provide reasonable services Health, housing, old age security, disability/disaster Difficulties for Third World: Life is a catastrophe Surplus funds Large military budgets Tables 4.5 and 4.6 Life expectancies and infant mortality

It’s The Economy…Stupid

Citizen Concerns What do we worry about when it comes to the economy? Why are we concerned with these aspects more than others?

GROWTH  Performance Indicator 1  Baumol’s Disease  Pay in service sector will increase at a rate greater than inflation, even though workers are not producing any more than previously done  Thus prices must increase or quality drops  College tuition, symphony concerts, hospitalization  States can make a difference in per capita GDP performance  Some make big mistakes in guiding investment in the economy

GROWTH  Rents  Transfers of money that do not relate to production  Building roads and education through taxes is productive  Pork barrel and patronage are not  Sends money to pockets of dominant coalitions  Inefficient!  Import-substitution industrialization  Try to encourage industry within state  High tariffs on imports  Then companies wrongfully take advantage

INFLATION AND UNEMPLOYMENT  Performance Indicator 2  Inflation  General rise in prices…currency is worth less  Occurs when we have lots of $ to spend relative to what we want to buy  Excess demand  We bid against each other, driving up prices  Causes:  Deficit spending  Shortage of important goods  Monopolies  Trade restrictions  Effects of inflation over 5% annually:  Churns the society up—big winners and big losers  Diverts attention away from productive investment

INFLATION AND UNEMPLOYMENT Unemployment Not enough jobs for those that want to work Those who can’t work are devastated and it is highly inefficient To control inflation, government raises interest rates. Higher interest rates lead to more unemployment. Government jobs programs

What About Distribution? Two options to help equality Subsidies and aids for the poor Progressive taxation As opposed to regressive… Table 5.1 Poorer states have greater inequality Democracy makes a difference with social welfare Governments can make a special effort to redistribute Incomes are unequal in all systems

Independent Central Banks Tools to help us make better economic policy Set-up by government…handle transactions, coordinate private banks, control interest rates Some are independent and some are controlled Why might we want them to be separate? “To take away the punch bowl when it looks as though people are beginning to enjoy the party…” States with more independent central banks jhave stronger records on inflation

Corruption This is an impediment to sound economic policy Use of public resources for private gain Effects are horrid But different levels in different places Thus…we can control it in theory Cynicism, lack of faith, but also direct economic costs

Effects of Globalization? Look at the world economic crisis Are we set up like dominoes? If so, how do we separate ourselves? Currency markets, each day, move about a trillion dollars IMF will come in and save you…along with upping interest rates to curb inflation and restraining government spending

Rational Choice What is it?