Political Science: An Introduction

Political Science: An Introduction
Chapter 16
Political Economy
(Mike Blake/Corbis)
Copyright @ 2012, 2010, 2008 Pearson Education, Inc. All rights reserved.
Political Economy
 Political economy – Influence of politics and economy on
each other; what government should do in the economy
 Term dates back to Aristotle and early economic

theorists like Adam Smith, David Ricardo, and Karl Marx
 Radicals (Marxists) use the term to describe their

criticisms of capitalism and the unfair distribution of
wealth among and within nations. Conservatives use the
term to try to get back to the pure market system
 Virtually all public policy choices have economic

ramifications, and these can make or break the policy
Government and the Economy
 Save for libertarians, most politicians want some
government action to improve the economy
 With the outbreak of the Great Depression, the hands-off
policies tended to make things worse; people demanded
government intervention
 English economist Keynes proposed that government
action could avert the excessive swings in business
cycles
 In bad times, increase “aggregate demand” by “counter-cyclical”
spending
 When an economy overheats, raise taxes and interest rates to
slow things down
 Keynesian ideas are standard now, the basis for the
operations of the Federal Reserve Board in trying to fine
tune the economy
 Inflation
 Until 1965, U.S. inflation was low, but rose as Johnson escalated
the Vietnam War
 Too many dollars chased too few goods, the classic definition of
demand-pull inflation
 Johnson thought he could win in Vietnam quickly and cheaply,
before the war made much economic impact, but the policy failed
 Tax Hike
 President Johnson was reluctant to ask for a tax increase to pay
for Vietnam for two reasons
 First, he had just gotten a tax cut through Congress in 1964; it would
have been embarrassing to reverse course the following year
 Second, he did not want to admit that he had gotten the country into
a long and costly war
 Balance of Payments
 Starting in the late 1950s, the United States spent more abroad
than it sold
 American industries outsourced, and Americans enjoyed bargain
prices on imported goods.
 Large balance-of-payments deficits grew
 Gold Standard
 In an effort to correct this imbalance, in 1971 President Nixon cut
the link between the dollar and gold, a fixed exchange rate that
had been in place since 1944
 Nixon said no more gold and let the dollar “float” to a lower level
in relation to other currencies.
 This floating exchange rate devalued the dollar by about one-fifth
 Wage-Price Freeze
 At the same time, Nixon froze wages and prices to knock out
inflation
 Many economists think Nixon’s 18-month freeze just set the
stage for greater inflation
 Oil Shocks
 International oil deals are made with U.S. dollars; dollar’s loss in
value meant that the oil prices lower
 Stagflation
 Inflation with stagnant economic growth
 Previously, economists argued that as one went up, so did the
other
 In the 1970s, inflation hit double-digit levels but the economy
shrank and joblessness increased
 Interest Rates
 President Carter attempted to stimulate the economy, but this
made inflation worse
 Federal Reserve raised interest rates, curbing inflation, but
slowing economic growth – painful medicine with high
unemployment
 Tax Cut
 Reagan tried “supply-side economics,” focusing on investment
and production, not consumer demand
 Lowering tax rates stimulates economic growth and ultimately
generates more tax revenue; too high taxes discourage effort and
investment
 The Reagan tax cut did stimulate the economy, but it also helped
produce another problem
 Budget Deficits
 Reagan figured this would force Congress to cut domestic and
welfare spending drastically
 Congress cut little, and the U.S. federal budget reached record
deficits; deficits have continued since
 Trade Deficits
 U.S. has consumed more than it produced for several decades,
importing much more than it exported
 The foreign-trade deficit makes the United States the world’s
greatest debtor nation
 Some economists argue that the U.S. trade deficit is irrelevant
because the U.S. economy is so strong that foreign creditors
know they will be repaid
 Debt
 The 1994 Republican takeover of Congress led to serious efforts
to reduce government spending and end deficits
 President Clinton went along with the effort, and the federal
budget moved into surplus by the late 1990s
 Surpluses mainly result of high tech and investment boom,
boosting wealth of the few richest – top 1% earning as much as
bottom half of Americans
 Recession ended these surpluses – both from lower tax
revenues and from increased federal spending
 Further government spending during the 2008-2009 recession
has increased the debt
 Inequality
 Since the 1970s Americans’ incomes have grown less equal and
the middle class smaller
 The rich get a bigger slice of the nation’s economic pie; the poor
and much of the middle class get smaller pieces
 Outsourcing, cuts the number and pay of American blue-collar
manufacturing jobs
 Bubbles
 Financial markets tend to produce “bubbles,” fast growth in
investments that let people ignore risk
 One stock-market bubble ended with the 1929 Crash; the
savings and loan bubble of the 1980s, and the housing bubble of
the 2000s all burst
 The big underlying problem with all: banks and investors lent
recklessly, believing there was little risk, and this encouraged
high levels of debt; federal oversight was weak or nonexistent
Who Is Entitled to What?
 Federal budget divided into two categories: discretionary
and mandatory; discretionary expenses can be raised or
lowered by Congress each year
 Mandatory costs can only be changed by modifying the

law that authorizes such programs – hard to do because
so much benefits individuals,
 Mandatory spending divided into national debt interest

payments and entitlements; together, they are half the
budget
Who Is Entitled to What?
 Traditional “welfare” isn’t the budgetary problem,
entitlements are – cuts in welfare save little and make
life much harder for our most vulnerable, especially
children
 Conservatives hold that the undertaking was inherently

infeasible, a waste of money that often did more harm
than good, locking recipients into welfare dependency
and encouraging a subculture of drugs and crime
The Costs of Welfare
 Food Stamps – expanded in 1964 nationwide from a

1961 pilot
 The Carter administration eliminated requirement that
recipients had to buy stamps at a discount, so that the
destitute could also benefit
 Reagan tightened eligibility requirements supposedly to
reduce fraud and abuse
 Actually, fraud and waste not major factors in the
program
 Clinton signed the Personal Responsibility and Work

Opportunity Act (1996) to “end welfare as we know it”
 Many accused the program of promoting welfare

dependency; many recipients were nonwhite, the issue
became connected with the struggle for racial equality
 The reform replaced entitlement-type welfare payments

with a block grant to states to administer as they saw fit;
recipients had five years’ eligibility for welfare assistance
 Many states developed workfare programs requiring

recipients to take either jobs or training
 Healthcare Reform
 The Democrats’ healthcare reform, greatly watered down, barely
passed in 2010
 Some say Medicare and Medicaid, the two giants of entitlements,
both enacted in 1965, offer warnings of how medical costs
escalate
 At least two factors induce exponential growth in medical
assistance: More people become eligible and medical costs soar
 Hospitals and doctors, once they are assured of payment, have
no incentive to economize
 Health care and how to pay for it will likely be a major U.S.
political quarrel for decades
How Big Should Government Be?
 Many think most of the federal budget goes for welfare,
which is not at all the case
 The American welfare state is small compared with that
of other countries
 Americans demand various forms of government
intervention, but scarcely is the ink on new laws dry
before we begin to criticize government interference
 Government programs tend to expand, bureaucracy is
inherently inefficient, and ending an entitlement program
is all but impossible
 The general reluctance to expand government’s role,
however, may be to America’s long-term advantage

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Political Science: An Introduction

 Term dates back to Aristotle and early economic

 Radicals (Marxists) use the term to describe their

 Virtually all public policy choices have economic

 Mandatory costs can only be changed by modifying the

 Mandatory spending divided into national debt interest

 Conservatives hold that the undertaking was inherently

 Food Stamps – expanded in 1964 nationwide from a

 Clinton signed the Personal Responsibility and Work

 Many accused the program of promoting welfare

 The reform replaced entitlement-type welfare payments

 Many states developed workfare programs requiring

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