Ch.

3, American Free Enterprise

How does the public sector and the private
sector interact to maintain a stable, efficient,
and growing economy?
You will learn…
 The foundational principles of American
Free Enterprise
 The government’s role in our mixed
economy
 What is American Free Enterprise?
(Foundational Principles)
Profit Motive— Competition— Private Voluntary
force to improve rivalry to attract Property Rights Exchange—you
material well- customers & —you own may decide what
being lower costs your & when to buy &
possessions sell
Open Free Contract— Legal Equality Public Disclosure
Opportunity— you decide what —everyone has Laws—companies
everyone can agreements to the same legal provide full
compete enter into rights information
 Government’s Role…

 Thanks to the Full Employment Act of 1946,

GOVs role relative to the economy is to promote
(3) primary economic goals:
Full Employment, Price Stability, and Economic
Growth…
(The 3 Big Goals)
Promoting the 3 Big Goals
 Technically, this is Macroeconomics…
 Fiscal Policy (Ch. 15 taxing & spending)
 Monetary Policy (Ch. 16 the Fed)
 Government’s Role (cont.)

Other things GOV. does relative to the

economy:
 Regulate – Various GOV. departments/agencies issue
regulations to carry out the intent of legislation. The intent is to
get businesses, banks, financial institutions, and other “players” in
the economy to adhere to rules.
 Provide public goods/services
 Solve market failures
 Provide “safety nets”
 Regulating
 Protecting health, safety, fairness, etc.
 Can you identify these agencies and their

purpose?
 FDA
 food, drugs, cosmetics
 FTC
 unfair business practices
 FCC
 radio, TV, wire, satellite, cable, phone
 FAA
 airline safety, air-traffic
More agencies…wow!
 EEOC
 Jobs, education, civil rights
 EPA
 Pollution controls
 OSHA
 Conditions in the workplace
 CPSC
 Product design & labeling
 NRC
 Nuclear power plants
 SEC, ICC, NHTSA, NLRB, OCC, can you name more?
To regulate, or not to regulate,
that is the question!
 Heavy regulation starts in 1960s and peaks
in 1970s
 Deregulation begins in 1980s…
 What do the debates rage over currently?
 Healthcare and prescription drugs
 Banking, Financial Services, Capital Markets
 Telecommunications
 Environmental concerns
 Energy / oil
Free-Rider Problem
 Public goods solve the “free-rider
problem” (people who do not pay for a
good or service but would receive the
benefits anyway)
 Examples?
 Roads/Infrastructure
 Fire/Police protection
 PBS/NPR
Providing Public Goods
 Anything provided by the public sector
and shared by us all
 Why again? Because we can’t pay for it
individually or won’t, and it would be
difficult or impossible to exclude non-
payers (free riders)
 Brainstorm examples…
 For society, comes down to cost/benefit
Market Failures/Shortfalls
 When the “free market” does not provide
a good or service consumers need or
want at a price they can afford
 In other words, when the market does
not distribute resources efficiently:
 Highways
 Rural electrification or internet
 Healthcare
 Education
 Others?
 Externalities—Positive or
Negative?
 Economic transactions may create
“externalities”—side effects that generate
a cost or benefit to someone other than
the two parties involved in the
transaction (producer and consumer)
 Pollution
 Think of a dam…
Positive or Negative?
 Providing Safety Nets
 Transfer payments (remember Robin
Hood?)
 Directly as cash, or “in-kind” benefits
(good or service received at a discount)
- Food
- Housing (Section 8)
 Some types of safety nets to follow…
 For poverty
 What’s poverty? Who’s impoverished?
A: Depends on size of household
Ex: $26,200 for household of 4 persons (2020)
 TANF (Temporary Assistance for Needy Families)

 Pushed management of welfare programs to states

 Work requirement “Workfare” or “W to W” (welfare-to-
work)
 Time limit (5 yr. lifetime limit)
 Since 1996, designed to be temporary & transitional
 Other programs
 Section 8 housing (HUD) “subsidized”
 Subsidy – Paid for by GOV.
 Food stamps (Rochester, NY was test bed in1939!)
 Free/reduced school lunch
 Low-income home energy assistance program
 Head Start
 Etc.
For medical / healthcare
 Medicaid—health insurance for low
income people administered by states
 Medicare—health insurance for
seniors (part of Social Security
Administration)

“aid” to the poor, “care” for the elderly

For income / unemployment
 Unemployment insurance—temporary income
benefit for those laid-off or unable to find a job (26
weeks, $420/week max.)
 Congress has extended the benefit in times of
recession (up to 73 weeks)
 Minimum Wage Laws (federal and state)
 Federal = $7.25 since 7/09
 New York = $15.00 by 31 DEC 2020
 Santa Fe, NM = $12.10
 Seattle, WA = $16.39 if business employs > 500 globally
 For income / seniors
 Social Security is largely a “pay-as-you-go”
program. This means that today's workers pay
Social Security taxes into the program and money
flows back out as monthly income to beneficiaries
 The average monthly Social Security benefit in
2019 was:
- $1,470 a month for retired workers
- Slightly less a month for widows or disabled
- For people born after 1960, you can start
collecting your full benefit at age 67
For disability
 Supplemental Security Income (SSI)

 Part of the Social Security Administration

(SSA), but not funded by payroll tax
 Provides income to people who cannot
work due to physical or mental disability or
blindness.
 For catastrophe
 FEMA (Federal Emergency Management
Agency) disaster relief, medical care, food,
shelter, low-interest loans to individuals and
businesses.
- Hurricane Katrina - New Orleans, LA
2005 (1,833 total fatalities)
- Hurricane Harvey - Houston, TX 2017
- Hurricane Maria - Puerto Rico, 2017
 Conclusion
 Many roles GOV. has when it comes to the economy:
 Keep our foundational principles intact

 Big 3 Goals

 Regulate

 Provide public goods and services

 Address market failures

 Provide safety nets

 These are the platitudes of GOV. in our Mixed Model

economy / free enterprise system