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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?
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
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