Open Classroom PPS 225 Economic Growth with Equity

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Open Classroom PPS 225Economic Growth with
Equity

• Week 1
• Overview of the Semester
• Barry Bluestone
• Cathy Minehan
• January 7, 2009

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We begin this Open Classroom at a tumultuous time
for the Global economy

• Not since the 1930s have we faced such
  inauspicious economic times
• The U.S. and global economies are in decline
• Unemployment and economic insecurity are rising

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The Year in Review 2008

• 1.9 million jobs lost
• SP 500 Index -38
• Dow Jones Wilshire 5000 Loss of Market Value
  -6.7 Trillion
• Median Home Price - 21.7
• Oil Price 145.29 (July 3)
• 44.60 (December 31)
• Banks U.S. owns stock in 206
• Only 40 of Americans think that Americas best
  days are in the future
• Consumer confidence at its lowest level since the
  early 1950s when survey introduced

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What Now?

• What do we want government to do?
• Get us out of this mess
• The Obama effect
• What should our economy look like in the long
  run?
• Highly market-oriented (last 30 years)?
• Highly regulated European Model?
• Trade-offs in each
• How we deal with these tradeoffs along a wide
  range of issues financial regulation, legal and
  political institutions, government policy,
  immigration, education, trade is what this
  course is about.

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Perspective of Course

• This Open Classroom will step back from the
  current economic situation to ask fundamental
  questions about how an economy operates -- what
  makes its prosperous and what can make it more
  equitable
• Economic Growth with Equity

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Introduction Critical Issues of the Course

• What makes for a Good Society?
• What statistics and indicators can we use to
  assess whether we are making progress toward an
  improved society?
• What public policies can we pursue for an
  improved society?

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Course Content

• Week 1 (January 7)
• Introduction to Course
• (Cathy Minehan Barry Bluestone)
• Week 2 (January 14)
• What Makes Economies Grow?
• (Robert Solow, Lynn Browne)
• Week 3 (January 21)
• What Political Legal Requirements are
  fundamental to Economic Growth?
• (Jeswald Salacuse)

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Course Content (cont)

• Week 4 (January 28)
• What explains Americas Post-WWII Glory
  Days?
• (Cathy Minehan Barry Bluestone)
• Week 5 (February 4)
• Why has America become more Unequal in Income
  Wealth?
• (Andy Sum, Tom Shapiro, and Barry Bluestone)
• Week 6 (February 11)
• What can Government do to foster Economic Growth
  and Stable Prices?
• (William Dickens, Cathy Minehan)

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Course Content (cont)

• Week 7 (February 18)
• How Much Regulation of Financial
  Institutions do we Need?
• (Jerry Corrigan)
• Week 8 (February 25)
• How does International Trade affect Economic
  Growth and Economic Opportunity?
• (Dani Rodrick)
• Spring Break (March 4)

Invited
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Course Content (cont)

• Week 10 (March 18)
• How do Trade Unions and Labor Market
  Policies affect Economic Growth and Economic
  Opportunity?
• (Tom Kochan, Lisa Lynch, Steve Vallas)
• Week 9 (March 11)
• How does Immigration and Demographic Change
  affect Economic Growth and Economic Opportunity?
• (Paul Harrington, Andrew Tilton)
• Week 11 (March 25)
• How does Education affect Economic Growth and
  Economic Opportunity?
• (Claudia Golden Larry Katz)

Invited
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Course Content (cont)

• Week 12 (April 1)
• Can we Grow and be Green?
• (Joan Fitzgerald, Stephanie Pollack, Danny
  Faber)
• Passover Holiday (No Class) (April 8)
• Week 13 (April 15)
• Summing up The Economics, Politics, and
  Policies of Economic Growth and Economic
  Opportunity?
• (Cathy Minehan Barry Bluestone)

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Week 1 Key Topics

• What Makes a Good Society?
• What makes Economies Grow?
• How is Output Distributed?
• What can the Market do on its own?
• What roles must Government play to achieve the
  output and distribution we seek?

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Goals of a Good Society

• Increase in material standard of living
• Improvement in the quality of life
• Fair Distribution of income and wealth
• Environmentally Sustainable economy
• Full Employment
• Stable Prices
• ?
• ?
• ?

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Two Big Tradeoffs in Achieving our Economic Goals

• 1 Maximize Economic Output vs.
• Equal Distribution
• 2 Free Market vs. Regulation

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Tradeoff 1 Equality and Efficiency (Arthur
Okun, 1975)

• Efficiency vs. Equity
• Rights vs. Market Goods
• Features of Rights
• Features of Market Goods

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The Big Trade-Off

• Political institutions provide universally
  distributed rights and privileges that proclaim
  the equality of all citizens
• Economic institutions rely on market-determined
  incomes that generate substantial disparities
  among citizens in material welfare

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The Big Tradeoff

• Equal Rights and Unequal Incomes generate
  tensions between the political principles of
  democracy and the economic principles of
  capitalism
• This constitutes an uneasy compromise rather
  than a fundamental inconsistency

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Features of Rights

• Acquired at no monetary cost
• Violates comparative advantage (i.e. People with
  a great stake in a certain right have no more
  right to it than others)
• Equal without regard to ability or intelligence
• Not distributed as incentives
• Violates equity and freedom (e.g. a childless
  couple must pay for education to ensure education
  rights for all)
• Cannot be bought and sold (e.g. no voluntary
  transactions in votes cannot sell vote for
  other things)

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Reasons for Rights

• Liberty Protect individual from encroachment by
  the state (e.g. freedom of speech)
• Pluralism Rights are protection against
  intervention of market in all parts of life and
  society (e.g. Olympic medals)
• Humanism Stress on human dignity and mutual
  respect (Rights without a quid pro quo)

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Problems with Rights

• Our rights can be viewed as inefficient, because
  they preclude prices that would promote
  economizing, choices that invoke comparative
  advantage, incentives that would augment socially
  productive effort, and trades that potentially
  would benefit buyer and seller alike. (Okun)

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Features of Market Goods

• Can only obtain if you have money to purchase
  them
• Provide for comparative advantage (e.g. those who
  want more can purchase more)
• Those with greater ability or intelligence can
  usually parley these qualities into the ability
  to purchase more
• Distributed as incentives (e.g. the more you
  work, the more you earn, the more you can
  purchase)
• Provides freedom to purchase what you wish and
  not purchase what you do not wish
• Always bought and sold

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Rights-Market Goods Spectrum
Perfect Rights
Perfect Market Goods
Freedom of Speech
Diamond Pinky Rings
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Rights-Market Goods Spectrum
Perfect Rights
Perfect Market Goods
Freedom of Speech
Diamond Pinky Rings
Where would you place the following on the
Spectrum?
K-12 Education
Employment
Higher Education
Food
Health Care
Personal Security
Housing
Transportation
Cultural Amenities
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Economic View of Tradeoffs

• Production Possibilities Frontier Maximum
  Output with given Inputs
• Consumer or Social Preferences the
  Indifference Curve

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Production Possibilities Frontier
Guns vs. Butter
Guns
G
0
B
Butter
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Production Possibilities Frontier
Guns vs. Butter
Guns
G0
0
B0
Butter
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Production Possibilities Frontier
Guns vs. Butter
Guns
G1
G0
0
B1
B0
Butter
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Production Possibilities Frontier
Guns vs. Butter
Guns
Indifference Curves
Pareto Optimum
G
0
B
Butter
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Production Possibilities Frontier
Output vs. Equality
Output
Maximum Output
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Perfect Equality
Perfect Inequality
Equality
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Production Possibilities Frontier
Output vs. Equality
Output
Maximum Output
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Perfect Equality
Perfect Inequality
Equality
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Production Possibilities Frontier
Output vs. Equality
Output
Maximum Output
?
?
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Perfect Equality
Perfect Inequality
Equality
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Top 20 receive 40 of Income
Bottom 40 receive 25 of Income
Bottom 20 receive 10 of Income
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SummaryThe Big Tradeoff 1

• How much economic output are we willing to
  sacrifice for more equality?
• How much equality are we willing to sacrifice to
  increase economic output?
• Where on the Rights/Market Goods spectrum should
  we be?

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The 2nd Big Tradeoff

• When are there free market excesses?
• When are there regulatory excesses?
• Finding the right balance

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Free Market-Regulation Spectrum
Regulation
Free Market
Government Regulation of Industry, Financial
Markets, Labor Markets
Laissez Faire Markets
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Now for a look at the U.S. Economy in Numbers