Economics for Leaders

1. Economics for Leaders Lesson 8: Costs & Benefits Of Government Action

2. Institutions Shape Incentives • Having the RIGHTINSTITUTIONS in place. • Rule of Law • Private Property Rights • Open, Competitive Markets • Interaction & Exchange (information & competition) • Entrepreneurship and Innovation

3. Institutions Shape Incentives • Institutions are the formal and informal rules of the game that shape incentives and outline expected and acceptable forms of behavior in social interaction. • Incentives are the rewards and penalties that influence people’s choices and behavior.

4. Institutions Shape Incentives • The rules of the game shape decisions. • Decisions result in outcomes. • People respond to incentives in predictable ways. • INSTITUTIONS MATTER!

5. How do we evaluate government’s role in the economy? Use economic reasoning to… INVESTIGATE! Data Knowledge Evidence

6. The Role of Government (Founding Fathers) • limit power of central government • life, liberty, pursuit of happiness (self interest, profit, well-being – not selfish) • establish and enforce the protection of private property rights • government should do what citizens cannot do!

7. The Role of Government

8. Layered Opportunity Cost of Government Spending? • The opportunity cost of government spending is private spending. • The opportunity cost of government spending on a particular program is the foregone benefit of the other program where the money could have been spent. • What else could we do?

9. When is this most likely to be the case? public goods externalities monopolies Government should act when: MB≥MC

10. Public Goods Guns or Butter • Non-rivalrous in consumption • Non-exclusive in consumption

11. Negative Externalities

12. Positive Externalities

13. Price Discrimination ???

16. Source: Economic Indicators, Council of Economic Advisors

17. Source: US Office of Management & Budget

18. The Mix of Government Expenditure

19. budget deficit: gov’t spending > tax revenue • Source: http://www.whitehouse.gov (millions of dollars)

20. budget deficit: gov’t spending > tax revenue • Source: http://www.whitehouse.gov(millions of dollars)

21. budget deficit: gov’t spending > tax revenue • Source: http://www.whitehouse.gov

22. National Debt = Debt Clock: http://www.brillig.com/debt_clock/ • MB vs. MC? • What else could we do? • Investment or Consumption Party?

23. Public Choice Theory: The power of Special Interest Groups derives from the distribution of benefits and costs • Like private individuals, elected officials act in their best interests. • Elected officials’ abilities to accomplish their goals depend on being elected (and re-elected). • Elected officials have an incentive to pay more attention to those constituents who are able and likely to influence the election.

24. Big benefit to a small but organized group of voters Small cost to a large number of unorganized, sometime voters Concentrated Benefits and Diffuse Costs?

25. Do you know your US Senators? Do you know your US Congressional representative? What did they do today? What will they do tomorrow? They spend your (our) money! Rational Ignorance

28. Big Ideas • Government facilitates wealth-producing voluntary exchange by establishing and enforcing the rules of the game that secure property rights and provide incentives. • The opportunity cost of government spending is private spending/what else could have been done.

29. Big Ideas • The marginal benefit of government involvement in the economy may outweigh the marginal costs when significant externalities exist or in the case of public goods and monopolies. • The incentive to expand government activities beyond the point where MB = MC is explained by public choice theory and rational ignorance.

30. U.S. Injects $30 Billion & Will Own 60% of GM“The sale likely will save more than 3,000 U.S. jobs in manufacturing and engineering, and at various Hummer dealerships.”

31. “This is a great opportunity for US agriculture and would also mean more food for the Cuban people.”Not to mention the cigars!

32. I can’t believe I have to breathe their smoke. There should be a law!A law banning smoking will hurt my business!

34. ERP-5: Understanding based on knowledge and evidence imparts value to opinions. • Opinions matter and are of equal value at the ballot box. But on matters of rational deliberation the value of an opinion is determined by the knowledge and evidence on which it is based. Statements of opinion should initiate the quest for economic understanding, not end it.