Chapter VI short survey of the united states economy lecture 6

Government Role in the U.S. Economy

The economies of all nations mix elements from two main economic models. These models are (1) capitalism and (2) central planning.

Central planning calls for government control of all major economic activities and government ownership of nearly all productive resources. It calls for giving government planners control of the production, pricing, and distribution of goods and services.

The United States economy is based largely on a free enterprise or free market system. In such a system, individuals and companies are free to make their own economic decisions. Individuals and companies own the raw materials, equipment, factories, and other items necessary for production, and they decide how best to use them in order to earn a profit. Even though the U.S. economy is based on free enterprise, the federal, state and local governments have four major roles in economy. These governments (1) establish and enforce laws that affect economic activity, (2) set up public utilities, (3) provide goods and services for the public, and (4) work for economic stability.

1. Laws. In the United States, the people depend on the government to pass laws that assure economic fair play. These laws aim at preventing individuals and business companies from taking unfair advantage of each other.

Many of the most important laws governing the U.S. economy concern business completion (laws designed to keep one company or a few firms from controlling entire business. Such control, called a monopoly, does away with competition and enables controlling companies to charge high prices and reduce the quality of good). Other laws ban harmful or misleading advertising still others set standards for working conditions, set minimum wages and prohibit business from refusing to hire people or lend money to them because of their race, sex or age. The U.S. government also issue regulations designed to protect the environment. States issue charters that allow companies to operate.

2. Public utilities. Public utilities are companies that provide services essential to the public. These services include electric power, water, gas, sewerage, and local telephone service. The government grants legal monopolies to public utility companies so they may operate without competition. But federal and state agencies regulate the prices and standards of service of most public utilities. Governments may own and operate some public utilities themselves.

3. Public services. Governments on all levels provide many services that could not be furnished as well by private companies. These services include police and fire protection, public health programs, national defense, postal services, and roads and streets. Governments at federal, state, and local levels also offer welfare programs. These government programs, which are often called public assistance, offer medical services, public housing, and other economic aid to needy people.

Some people in the United States receive financial aid from social insurance or social security programs. These programs are financed by special taxes on workers and employers. They replace income lost because of retirement, unemployment, disability, or death of a provider. They also help most elderly and disabled people pay for medical care.

All the goods, services, and income assistance provided by government make up the public sector of the economy. In the United States government revenues and spending equal about one-third of the nation’s gross domestic product.

4. Economic stability. The U.S. economy has grown rapidly at times, but there have been periods when the economy did not grow and there have been periods when the economy zoomed to great heights of prosperity. Periods of above average business activity are called booms. Brief and small declines in business activity are known as recessions. Severe business slumps are called depressions.

Until the 1930’s the government made few attempts to control booms and depressions. Most people thought these periods should be allowed to run their course without government interference. But since the Great Depression of the 1930’s, the government has worked to promote economic stability.

During a depression, the government may increase its spending on goods and services and on income assistance for unemployed people and others. It may build new public buildings or improve major highways. This additional spending aims at creating jobs for the unemployed. Government spending also attempts to increase the general demand for goods and services. Increased demand encourages business activity. The government may also try to increase demand by cutting taxes so that the people have more money to spend.

During a boom, the government may try to curb inflation by cutting its own spending and thus reducing total demand. Or the government may try to reduce private spending by raising taxes. Then people would have less money to spend on good and services.

In recent years, however, the government has worked for economic stability mainly through the Federal Reserve System (FRS), the central banking organization of the United States. All national banks and some state banks belong to the system. The FRS manages the nation’s supply of money and credit. If inflation threatens the economy, the FRS may adopt policies that decrease the amount of money that banks have available to loan. To fight depression, the FRS may pursue policies that give banks more money to loan and thus encourage borrowing and spending.

Overview of the U.S. Economy

The American economy had to be built from the ground up. In the beginning, of course, there were simply no farms or houses or factories. Whatever was needed had to be made by the settlers themselves or it had to be imported at great expense. The results achieved in the first hundred years following independence are amazing. By 1890, for example, the USA was producing more iron and steel than Great Britain and Germany combined. By 1900, according to several criteria, the USA has become the greatest industrial nation, and its citizens enjoyed the highest standard of living in the world. In 1913, the United States accounted for more than a third of the world’s industrial production. By the post-World War II era, the United States was producing 50% of the gross world product.

Today, the American economy no longer dominates the world as it clearly did then. But with only 5% of the world’s population and about 6% of its land area, the USA still produces around 25% of the world’s industrial products, agricultural goods, and service. It gross national product (GNP) has tripled since the end of World War II. In 2003, the U.S. GNP amounted to $10.98 trillion, with a per capita GDP of $37.800.

The 20^th century has seen the rise and decline of several industries in the United States. The auto industry, long the mainstay of the American economy, has struggled to meet challenge of foreign competition. The garment industry has declined in the face of competition from countries where labour is cheaper. But other manufacturing industries have appeared and flourished. America remains the world leader in biochemical and genetic engineering, aerospace research and development, communications, computer and information services, and similar high-technology fields. American firms which sell passenger aircraft or computers retain the largest share of the world market. One of the best-selling cars in the world is a Ford.

Many countries now have their own Silicon valleys, but the first and biggest computer research and production area is still Silicon Valley, near San Francisco, where some 4,000 high-tech firms are located. The onrush of technology largely explains the gradual development of a ‘two-tier labor market’ in which those at the bottom the education and the professional/technical skills of those at the top and, more and more, fail to get comparable pay raises, health insurance coverage, and other benefits.

The American blue-collar worker is among the highest paid in the world, and his benefits and pensions also make one of the most expensive. The average production worker in the USA earned $9.50 an hour in 1985. In addition many firms in the USA have profit-sharing plans for their employers. Through these agreements, employers receive a certain percentage of the profits the company makes. Profit shares may be paid in cash or company stock at the end of the fiscal year or may be put into a trust fund and distributed to participants at retirement (‘deferred plan’). In 1984, some 20 million Americans participated in plans to receive a share of company profits. In addition, around 82% of American workers were covered by a retirement pension plan from their firms.

Recently a new trend has emerged which attempts to put employees and employers on much the same level. In some firms all employees own a part of the company and do all kinds of jobs. But all share in the profits or losses as well.

Many American prefer to be there own bosses. Some 10 million Americans owned their own businesses in 1984, and about 42 million owned parts of businesses and industries through stock.

In 2006 the number of millionaires in the USA reached 8,300,000. The unemployment rate in 2003 was down to 6.2%.

Reasons Accounting for the Rapid Growth of the U.S. Economy

There are a lot of reasons explaining why the USA has been able to go from a small, struggling economy to the leading industrial and agricultural nation in such a short time. One reason, obviously, is its size and natural resources. The United States is a land rich in mineral resources and fertile farm soil, together with a moderate climate. Secondly, the amount of available labour helps determine the health of economy. Generally, the United States has been fortunate in having enough people to provide the labour necessary for a constantly expanding economy. In the early years of the 20^th century large numbers of Asian immigrants came in the later years. Immigrants prospered, earning far more than they would have in their native lands, and the economy of the nation prospered as well. Another factor is the quality of available labour – how hard people are willing to work and how skilled they are. The strong emphasis placed on education including technical and vocational education has greatly contributed to America’s economic success. America’s vitality, its so-called spirit of enterprise and initiative, has certainly played an important role. The American system of government has encouraged citizens to vigorously pursue their own economic interest. The rapid progress of American industry and agriculture may also be traced to a characteristic which has often been called typically American. This is the constant willingness to experiment, combined with the desire to find new solutions to old problems. Social and geographical mobility have also played a part.