The Virtues of Political Dissension?

Appeals for giving greater consideration to minority opinions tend to come from those in the minority. Thus, it is no surprise that conservative pro-business Jack and Suzy Welch wrote a column entitled "The Power of Pushback" in Business Week on May 27, 2009 extolling the virtues of listening to the voices of those currently out of power. I do not recall them making the same argument when Republicans controlled the White House and Congress. Even so, I find their opinion piece unpersuasive. They seem in imply that prosperous times are primarily due to the ascent of dissenting opinions and that economic difficulties can be blamed on the absence of such voices:

THE PERILS OF UNCONTESTED LEADERSHIP
Just think of how recent political history proves the point. Jimmy Carter's disastrous Presidency in the late '70s—with its sky-high unemployment and inflation and off-the-rails economic policies—was made possible by a yes-yes-yes congressional majority. Ultimately, Ronald Reagan was able to right matters, not just by installing Republican policies but by formulating a new approach in conjunction with the feisty Democratic opposition.

Similarly, Bill Clinton's first two years in office weren't nearly as successful as his last six, when Newt Gingrich spearheaded the Republican Party's strong counterpoint to Democratic initiatives. Surely, the sustained prosperity of that era was aided by the thoughtful (read: fierce) debate.

Finally, you need only look at George W. Bush's first six years in power to see the downside of one-party rule. The government spent like drunks at a liquor mart, abandoning fiscal principles and steering us into a difficult war.

The primary cause of the economic maladies in the 1970s was the Organization of Petroleum Exporting Countries (OPEC), which dramatically increased the price of oil through coordinated manipulation of its supplies. Since oil or the energy its helps create is an input in the production of almost every product, this led to significant cost-push inflation. This would have occurred regardless of the political party in power or whether power was shared.

A glance at the annual change in the U.S. public debt since 1940 suggests the abandonment of fiscal responsibility can more easily be blamed on the ascension of supply-side economic doctrines with the election of Ronald Reagan in 1980 and the popularity of tax cuts, rather than the lack of divided government from 2001-2006. Using the Welches´ questionable logic, one could just as easily have argued the opposite point - that divided government is detrimental to the economy. In the recessions of the early 1980s, the White House and Congress were controlled by different parties. The same can be said for the 1990-1991 recession. The 1992 elections when Bill Clinton won the presidency and Democrats gained control of the House and Senate initiated a decade of prosperity and economic growth. So which is it? I think the answer is there is no correlation between economic prosperity and whether the U.S federal government is divided. There are periods of prosperity for both divided and undivided government. The same goes for economic downturns. One can selectively choose data to imply almost anything. And even if the data showed a correlation (which they don´t), that would in no way imply causation.

I happen to agree that it is wise to ALWAYS listen to divergent opinions and to seriously consider them when making policy decisions. Yet, this has little to do with whether government is divided politically. The administration of George W. Bush seemed uninterested in alternative perspectives regardless of whether Congress was controlled by Republicans or Democrats. Colin Powell was asked to leave the Bush cabinet in November 2004 because he frequently disagreed with others in the administration. What matters is the INDIVIDUALS in positions of power and their willingness to seek a broad spectrum of advice.

Types and Causes of Inflation

Types and Causes of Inflation

Cost-push inflation is an increase in the price level caused by higher costs of production. The world experienced a dramatic increase in inflation in the 1970s when the Organization of Petroleum Exporting Countries (OPEC) caused the price of oil to quadruple, practically overnight. Cost-push inflation also can be caused when the unemployment rate becomes too low. This is frequently referred to as a tight labor market. For example, when unemployment is low, businesses may need to pay higher wages to attract new workers. Higher labor costs can lead to higher prices. This is one of the chief concerns of Alan Greenspan, the chairman of the Board of Governors of the Federal Reserve System.

A factor that contributes to cost-push inflation is the expectation of further inflation. For example, if the prices of most consumer products (e.g., groceries, clothing, rent) are increasing and people expect the inflation to continue, there is a natural tendency for people to ask for wage and salary raises to cover their increased living costs. Wage and salary increases, however, are increased labor costs for businesses. Higher costs of production lead to even higher prices for the consumer products and the expectation that the inflation will continue. Once inflation becomes entrenched in an economy, it tends to be self-perpetuating. Businesses seek higher prices for their products to cover increasing costs. In turn, workers seek higher wages & salaries to cover their increased cost of living. A key to reducing cost-push inflation is to break the cycle of expectations that the price level will continue to rise.

Demand-pull inflation is an increase in the price level caused by excess demand. It is often referred to as "too much money chasing too few goods." The link between the supply of money and the inflation rate is often made using the quantity theory of money. The quantity theory of money is based on the following axiom:




where:
M = the supply of money (influenced by the Fed)
V = the velocity of money (the number of times a unit of money is typically spent)
P = the price level
Q = the quantity of output produced and sold

The left side of this equation measures the value of the products purchased in the economy. The right side of this equation measures the value of the goods and services produced and sold in the economy. The above equation is a truism because it states that the value of the goods and services purchased in an economy is equal to the value of the goods and services produced and sold in the economy. The quantity theory of money adds two assumptions to this equation. The first assumption is that the velocity of money is relatively constant. Measurements of the velocity of money indicate this is a fair assumption. The second assumption is that is that the quantity of output is relatively constant over time. This assumption is less realistic. If it were true, however, then the quantity theory of money predicts that any changes the price level (P) are caused by changes in the money supply (M). According to the quantity theory of money, the way to prevent demand-pull inflation is to keep the money supply (M) from increasing. This theory suggests a different conclusion if the assumption about the quantity of output (Q) remaining constant is relaxed. In order to keep inflation low, the price level (P) needs to remain fairly constant. If the economy’s quantity of output (Q) changes [and if the velocity of money (V) is relatively constant], then the way to keep the price level (P) constant is to change the money supply (M) in proportion to changes in output (Q). If real GDP increases by 3%, for example, then the money supply should also grow by 3%. Thus, if monetary policy is used to keep inflation low, it should try to increase the supply the money at the same rate as the growth of the economy’s real GDP.

The Economic Perspective on Incentives

Economists believe incentives always matter. An incentive is something that induces a particular behavior or action. Price changes are incentives because they usually alter consumer behavior. An increase in the price of a product normally causes people to buy less of it. If beef becomes a lot more expensive, for example, many people buy less beef and more of a substitute product, such as chicken or fish.

Not everyone believes in the power of incentives. In the 1970s, the price of gasoline quadrupled as a result of manipulations of the world oil market by the Organization of Petroleum Exporting Countries (OPEC). At the time, American consumers bought over 90 percent of their automobiles from the three major U.S. auto producers: Chrysler, Ford, and General Motors. Economists predicted the rapid increase in gasoline prices would cause consumers to want more fuel-efficient cars. The heads of the American automobile companies ignored the fact that incentives matter, however. Chrysler, Ford, and General Motors continued to manufacture large, gas-guzzling automobiles without providing consumers the option of an American-made fuel-efficient car. Japanese automobile producers, however, were eager to sell their compact, fuel-efficient cars to American consumers. Throughout the 1980s, Japanese car companies gained an increasing share of the U.S. automobile market. It is unlikely that American automobile companies will ever regain all of the shares of the automobile market they lost to foreign producers after oil prices increased dramatically in the 1970s. Japanese brands, such as Honda and Toyota, are firmly entrenched in the U.S. car market. This occurred because the highly educated business leaders of some of the largest American corporations ignored a basic economic principle. Incentives always matter.

If society uses appropriate incentives, then people’s behavior can be altered. Economists use incentives when designing social policies. If society wants more of something, it should subsidize it. If society wants less of something, then it should tax it.

A subsidy is monetary assistance from the government to promote an activity deemed advantageous to the public. For example, the government subsidizes lunches in public schools. Public school cafeterias provide nutritious meals to students at low or no cost. This is because society believes it is beneficial for all students to have access to a balanced diet, at least on school days, even if families have difficulty affording it.

A tax is a charge (usually of money) imposed by the government on people or property. For example, in cases where the government can measure pollution emissions, it sometimes charges a pollution tax. Companies that generate more pollution pay more in pollution taxes than those that pollute less. This creates an incentive for businesses to find methods of operation that are cleaner for the environment.

Other examples of taxes used to alter social behavior are the excise taxes on cigarettes and alcohol. These are called sin taxes because they are designed to discourage the consumption of these “sinful” products. An excise tax is levied on a particular product. Other products that are typically subjected to excise taxes are fuel, hotel rooms, cable television, and telephone service.

Subsidies and taxes are important components of social policy.