1. Economics of the Constitution: A Chance to Hit Reset

2. A Chance to Reset the Government The stated goal of Constitutional Convention that convened in 1787 was to revise the Articles of Confederation. Instead the delegates drafted a new Constitution. Without one man, it probably never would have happened.

3. It Could Have Been Different He had retired from public life to live with his wife and two adopted children to manage his farm. His farm had declined during the Revolution so there was much to be done. But, he knew things were going badly for the nation. “We probably had too good an opinion of human nature in forming our confederation.” He was approached to head to his state’s delegation to the Constitutional Convention but refused. But, he finally agreed to be a delegate. And you know the rest of the story…

4. Problems Under the Articles of Confederation

5. A New Nation in Economic Crisis No protection of the Navigation Acts No British navy Huge debts No power to tax Tariff fights between the states

6. The Problems Following Independence “There is scarcely anything that can wound the pride or degrade the character of an independent nation which we do not experience... we owe debts to foreigners and to our own citizens...these remain without any proper or satisfactory provision for their discharge....We have neither troops, nor treasury, nor government.... Are we entitled by nature and compact to a free participation in the navigation of the Mississippi? Spain excludes us from it. Is public credit an indispensable resource...? We seem to have abandoned its cause.... Is commerce of importance to national wealth? Ours is at the lowest point.... Is respectability in the eyes of foreign powers a safeguard against foreign encroachments? The imbecility of our government [under the Articles of Confederation] even forbids them to treat with us.” “The Federalist, No. 15” (December 1, 1787)

7. Problems Under the Articles of Confederation Problems Debt No Power to Tax Tariff Battles Military Weakness

8. One Nation or Thirteen? 1. Debt You are a member of the Congress of Confederation in 1781, considering the issue of war debts. Predict the consequences likely to follow if war debts are not repaid. Use economic reasoning.

9. One Nation or Thirteen? 2. Predict the consequences likely to follow if the Congress gains no new power to tax. Use economic reasoning.

10. One Nation or Thirteen? 3. Tariff Wars Predict the consequences likely to follow if the several states retain exclusive authority to govern interstate commerce. Use economic reasoning.

11. One Nation or Thirteen? 4. Military Strength You are considering whether the federal government should be authorized to develop a strong military force to provide for Americans’ commerce and security. Predict the consequences likely to follow if no such authority is granted. Use economic reasoning

12. Economics of the Constitution

13. A Constitutional Mystery Many nations have adopted written constitutions but have failed nonetheless to grow economically. How is it that the U.S. Constitution became an effective force in promoting economic growth within a market system?

14. Wealth of Nations, 1776 Smith attacked mercantilism. – Government subsidies, bounties, monopolies – Such practices fostered inefficiency Smith proposed: – Competition – Free markets to provide incentives – Specialization and division of labor – Free trade

15. Interest Groups James Madison argued that the aim of the founders should be to prevent one interest (faction) from controlling the political system. Madison’s idea was to make it more costly to redistribute resources from rich to poor or from poor to rich.

16. Well-Defined Property Rights The Constitution provided a system of well defined property rights that allowed for a market economy to develop. – Checks and balances – Enforcement of contracts – Regulation of interstate commerce – Enforcement of due process of law – Congressional power to tax – Congressional power to coin money – Enforcement of copyrights

17. A Guide to Economic Reasoning 1.People make choices because they face scarcity. 2.People’s choices involve costs - - opportunity cost 3.People respond to incentives in predictable ways - - profits, self-interested behavior and competition 4.People create economic systems - - rules of the game - - that influence individual choices and incentives. 5.People gain when they trade voluntarily - - specialization 6.People’s economic actions have primary effects and secondary effects.

18. The Constitution: Rules for the Economy A. Contract Clause Use economic reasoning to predict what would happen if apartment renters today did not have to hold to the provisions of the lease agreements they signed.

19. The Constitution: Rules for the Economy B. Commerce Clause The Illinois state legislature, grown weary of the unearned and boastful pride of Wisconsin “cheeseheads,” approves a 10 percent tax on all cheese “imported” from Wisconsin. Use economic reasoning to predict what would happen if Illinois could impose such a tax.

20. Commerce Clause If Illinois placed a tax on Wisconsin cheese, cheese would become more expensive to people in Illinois; people would buy less WI cheese. Illinois dairy farmers would be protected from competition from WI. Illinois would set up the Bureau of Cheese Police to enforce and collect the tax. Tax revenues would flow to Illinois state coffers.

21. Commerce Clause Wisconsin would retaliate and place a tax on all Illinois vacationers coming to lake resorts in northern Wisconsin. Wisconsin would set up the Bureau of Vacation Police to enforce and collect the tax. Wisconsin vacations would become more expensive for people from Illinois. Tax revenues would flow to Wisconsin state coffers. The standard of living would decline in both states.

22. The Constitution: Rules for the Economy C. Fifth Amendment Fearing growing inflation and a default on its national debt, in November of 2001, Argentineans began withdrawing money from banks. On December 2 of 2001, the government of Argentina froze all the bank accounts for 12 months. Use economic reasoning to explain what might happen when the government can take property by force.

23. The Constitution: Rules for the Economy D. Taxation Clause The United States has often run budget deficits. What would happen to confidence in U.S. bonds if the federal government did not have the power to tax?

24. The Constitution: Rules for the Economy E. Coinage Clause The 25 nations of the European Union established a common currency, the euro, in 2002. Explain how the establishment of a common currency might help to stimulate economic growth in Europe.

25. The Constitution: Rules for the Economy F. Copyright Clause Imagine that the work of musicians and movie actors could be acquired electronically without compensation to the artists. Explain how the prospect of not being able to copyright songs and movies and enforce copyrights, would influence the production of artists

26. Study Guide Economic Feature of the Constitution Provision of the Constitution Explain how this provision helped changed the “rules of the game” which promote a market economy. Limited the Role of Government System of checks and balances Established an Economically Trustworthy Government The Taxation Clause Protected Commerce The Taxation Clause Promoted Voluntary Exchange The Commerce Clause Protected Private Property Rights (1) The Contract Clause Protected Private Property Rights (2) Fifth Amendment:: The Takings Clause Study Guide: Economics of the Constitution Directions: Review pages 44- 47 of the Economic Episodes in American History and complete the table below.

27. Questions