Policies of the State

State ActivityUK, Sweden, US

Very different…but very similarLate 20th century, we see a push for strong

governmentEven 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, howeverMost are poor…some have mineral wealth…

some have industrializedOn average, government operates at a

lower level of involvementBut even that amount depends (see Table

4.1)Why?

On the Whole, Why Are States Expanding?People are becoming more prosperousGovernment has gotten better at secret

taxesElections lead to a bidding up of servicesInternal pressures for bureaucracy to

expandGovernments have less control in a

globalized society

ConstraintsGross Domestic ProductPPP per capita GDP

How much of comparable things people in different states can buy

Effects of being a democracyBroad needsLife expectancies and mortality rates

DefenseMonopoly powers

Why?Table 4.2 shows some great variation,

howeverU.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?

EducationMost basic serviceWhat makes it tough for Third World?Table 4.3

Differences

Research and DevelopmentIndustrialized countries need technological

developmentCompetitive edgeThey have given up on basic industries

Why?

Table 4.4Government-sponsored, industry-specific,

and universities

Health and Social WelfareGovernments expected to provide

reasonable servicesHealth, housing, old age security,

disability/disasterDifficulties for Third World:

Life is a catastropheSurplus fundsLarge military budgets

Tables 4.5 and 4.6Life expectancies and infant mortality

It’s The Economy…Stupid

Citizen ConcernsWhat 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 UNEMPLOYMENTUnemployment

Not enough jobs for those that want to workThose who can’t work are devastated and it

is highly inefficientTo 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 poorProgressive taxation

As opposed to regressive…Table 5.1

Poorer states have greater inequalityDemocracy makes a difference with social welfareGovernments can make a special effort to

redistributeIncomes are unequal in all systems

Independent Central BanksTools to help us make better economic policySet-up by government…handle transactions,

coordinate private banks, control interest ratesSome 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

CorruptionThis is an impediment to sound economic

policyUse of public resources for private gainEffects are horridBut different levels in different places

Thus…we can control it in theoryCynicism, 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?