Статья: U.S. Economy

Статья: U.S. Economy

these basic functions require a wide range of government programs and

employees. For example, the government maintains offices for recording deeds to

property, courts to interpret contracts and resolve disputes over property

rights, and police and other law enforcement agencies to prevent or punish

theft and fraud. The Treasury Department issues currency and coins and handles

the government’s revenues and expenditures. And as we have seen, the Federal

Reserve System controls the nation’s supply of money and availability of

credit. To perform these basic functions, the government must be able to shift

resources from private to public uses. It does this mainly through taxes, but

also with user fees for some services (such as admission fees to

national parks), and by borrowing money when it issues government bonds.

In the U.S. economy, private markets are generally used to allocate basic

products such as food, housing, and clothing. Most economists—and most

Americans—widely accept that competitive markets perform these functions most

efficiently. One role of government is to maintain competition in these

markets so that they will continue to operate efficiently. In other areas,

however, markets are not allowed to operate because other considerations have

been deemed more important than economic efficiency. In these cases, the

government has declared certain practices illegal. For example, in the United

States people are not free to buy and sell votes in political elections.

Instead, the political system is based on the democratic rule of “one person,

one vote.” It is also illegal to buy and sell many kinds of drugs. After the

Civil War (1861-1865) the Constitution was amended to make slavery illegal,

resulting in a major change in the structure of U.S. society and the economy.

In other cases, the government allows private markets to operate, but

regulates them. For example, the government makes laws and regulations

concerning product safety. Some of these laws and regulations prohibit the

use of highly flammable material in the manufacture of children’s clothing.

Other regulations call for government inspection of food products, and still

others require extensive government review and approval of potential

prescription drugs.

In still other situations, the government determines that private markets

result in too much production and consumption of some goods, such as alcohol,

tobacco, and products that contribute to environmental pollution. The

government is also concerned when markets provide too little of other

products, such as vaccinations that prevent contagious diseases. The

government can use its spending and taxing authority to change the level of

production and consumption of these products, for example, by subsidizing

vaccinations.

Even the staunchest supporters of private markets have recognized a role for

the government to provide a safety net of support for U.S. citizens. This

support includes providing income, housing, food, and medicine for those who

cannot provide a basic standard of living for themselves or their families.

Because the federal government has become such a large part of the U.S.

economy over the past century, it sometimes tries to reduce levels of

unemployment or inflation by changing its overall level of spending and

taxes. This is done with an eye to the monetary policies carried out by the

Federal Reserve System, which also have an effect on the national rates of

inflation, unemployment, and economic growth. The Federal Reserve System

itself is chartered by federal legislation, and the president of the United

States appoints board members of the Federal Reserve, with the approval of

the U.S. Senate. However, the private banks that belong to the system own the

Federal Reserve, and its policy and operational decisions are made

independently of Congress and the president.

Correcting Market Failures

The government attempts to adjust the production and consumption of

particular goods and services where private markets fail to produce efficient

levels of output for those products. The two major examples of these market

failures are what economists call public goods and external benefits or

costs.

Providing Public Goods

Private markets do not provide some essential goods and services, such as

national defense. Because national defense is so important to the nation’s

existence, the government steps in and entirely funds and administers this

product.

Public goods differ from private goods in two key respects. First, a public

good can be used by one person without reducing the amount available for

others to use. This is known as shared consumption. An example of a public

good that has this characteristic is a spraying or fogging program to kill

mosquitoes. The spraying reduces the number of mosquitoes for all of the

people who live in an area, not just for one person or family. The opposite

occurs in the consumption of private goods. When one person consumes a

private good, other people cannot use the product. This is known as rival

consumption. A good example of rival consumption is a hamburger. If someone

else eats the sandwich, you cannot.

The second key characteristic of public goods is called the nonexclusion

principle: It is not possible to prevent people from using a public good,

regardless of whether they have paid for it. For example, a visitor to a town

who does not pay taxes in that community will still benefit from the town’s

mosquito-spraying program. With private goods, like a hamburger, when you pay

for the hamburger, you get to eat it or decide who does. Someone who does not

pay does not get the hamburger.

Because many people can benefit from the same pubic goods and share in their

consumption, and because those who do not pay for these goods still get to

use them, it is usually impossible to produce these goods in private markets.

Or at least it is impossible to produce enough in private markets to reach

the efficient level of output. That happens because some people will try to

consume the goods without paying for them, and get a free ride from those who

do pay. As a result, the government must usually take over the decision about

how much of these products to produce. In some cases, the government actually

produces the good; in other cases it pays private firms to make these

products.

The classic example of a public good is national defense. It is not a rival

consumption product, since protecting one person from an invading army or

missile attack does not reduce the amount of protection provided to others in

the country. The nonexclusion principle also applies to national defense. It

is not possible to protect only the people who pay for national defense while

letting bombs or bullets hit those who do not pay. Instead, the government

imposes broad-based taxes to pay for national defense and other public goods.

Adjusting for External Costs or Benefits

There are some private markets in which goods and services are produced, but

too much or too little is produced. Whether too much or too little is

produced depends on whether the problem is one of external costs or external

benefits. In either case, the government can try to correct these market

failures, to get the right amount of the good or service produced.

External costs occur when not all of the costs involved in the production or

consumption of a product are paid by the producers and consumers of that

product. Instead, some of the costs shift to others. One example is drunken

driving. The consumption of too much alcohol can result in traffic accidents

that hurt or kill people who are neither producers nor consumers of alcoholic

products. Another example is pollution. If a factory dumps some of its wastes

in a river, then people and businesses downstream will have to pay to clean

up the water or they may become ill from using the water.

When people other than producers and consumers pay some of the costs of

producing or consuming a product, those external costs have no effect on the

product’s market price or production level. As a result, too much of the

product is produced considering the overall social costs. To correct this

situation, the government may tax or fine the producers or consumers of such

products to force them to cover these external costs. If that can be done

correctly, less of the product will be produced and consumed.

An external benefit occurs when people other than producers and consumers

enjoy some of the benefits of the production and consumption of the product.

One example of this situation is vaccinations against contagious diseases.

The company that sells the vaccine and the individuals who receive the

vaccine are better off, but so are other people who are less likely to be

infected by those who have received the vaccine. Many people also argue that

education provides external benefits to the nation as a whole, in the form of

lower unemployment, poverty, and crime rates, and by providing more equality

of opportunity to all families.

When people other than the producers and consumers receive some of the

benefits of producing or consuming a product, those external benefits are not

reflected in the market price and production cost of the product. Because

producers do not receive higher sales or profits based on these external

benefits, their production and price levels will be too low–based only on

those who buy and consume their product. To correct this, the government may

subsidize producers or consumers of these products and thus encourage more

production.

Maintaining Competition

Competitive markets are efficient ways to allocate goods and services while

maintaining freedom of choice for consumers, workers, and entrepreneurs. If

markets are not competitive, however, much of that freedom and efficiency can

be lost. One threat to competition in the market is a firm with monopoly

power. Monopoly power occurs when one producer, or a small group of

producers, controls a large part of the production of some product. If there

are no competitors in the market, a monopoly can artificially drive up the

price for its products, which means that consumers will pay more for these

products and buy less of them. One of the most famous cases of monopoly power

in U.S. history was the Standard Oil Company, owned by U.S. industrialist

John D. Rockefeller. Rockefeller bought out most of his business rivals and

by 1878 controlled 90 percent of the petroleum refineries in the United

States.

Largely in reaction to the business practices of Standard Oil and other

trusts or monopolistic firms, the United States passed laws limiting

monopolies. Since 1890, when the Sherman Antitrust Act was passed, the federal

government has attempted to prevent firms from acquiring monopoly power or from

working together to set prices and limit competition in other ways. A number of

later antitrust laws were passed to extend the government’s power to promote

and maintain competition in the U.S. economy. Some states have passed their own

versions of some of these laws.

The government does allow what economists call natural monopolies.

However, the government then regulates those businesses to protect consumers

from high prices and poor service, and often limits the profits these firms can

earn. The classic examples of natural monopolies are local services provided by

public utilities. Economies of scale make it inefficient to have even two

companies distributing electricity, gas, water, or local telephone service to

consumers. It would be very expensive to have even two sets of electric and

telephone wires, and two sets of water, gas, and sewer pipes going to every

house. That is why firms that provide these services are called natural

monopolies.

There have been some famous antitrust cases in which large companies were broken

up into smaller firms. One such example is the breakup of American Telephone

and Telegraph (AT&T) in 1982, which led to the formation of a number of

long-distance and regional telephone companies. Other examples include a ruling

in 1911 by the Supreme Court of the United States, which broke the Standard Oil

Trust into a number of smaller oil companies and ordered a similar breakup of

the American Tobacco Company.

Some government policies intentionally reduce competition, at least for some

period of time. For example, patents on new products and copyrights on books

and movies give one producer the exclusive right to sell or license the

distribution of a product for 17 or more years. These exclusive rights

provide the incentive for firms and individuals to spend the time and money

required to develop new products. They know that no one else will copy and

sell their product when it is introduced into the marketplace, so it pays to

devote more resources to developing these new products.

The benefits of certain other government policies that reduce competition are

not always this clear, however. More controversial examples include policies

that restrict the number of taxicabs in a large city or that limit the number

of companies providing cable television services in a community. It is much

less expensive for cable companies to install and operate a cable television

system than it is for large utilities, such as the electric and telephone

companies, to install the infrastructure they need to provide services.

Therefore, it is often more feasible to have two or more cable companies in

reasonably large cities. There are also more substitutes for cable

television, such as satellite dish systems and broadcast television. But

despite these differences, many cities auction off cable television rights to

a single company because the city receives more revenue that way. Such a

policy results in local monopolies for cable television, even in areas where

more competition might well be possible and more efficient.

Establishing government policies that efficiently regulate markets is

difficult to do. Policies must often balance the benefits of having more

firms competing in an industry against the possible gains from allowing a

smaller number of firms to compete when those firms can achieve economies of

scale. The government must try to weigh the benefits of such regulations

against the advantages offered by more competitive, less regulated markets.

Promoting Full Employment and Price Stability

In addition to the monetary policies of the Federal Reserve System, the

federal government can also use its taxing and spending policies, or fiscal

policies, to counteract inflation or the cyclical unemployment that results

from too much or too little total spending in the economy. Specifically, if

inflation is too high because consumers, businesses, and the government are

trying to buy more goods and services than it is possible to produce at that

time, the government can reduce total spending in the economy by reducing its

own spending. Or the government can raise taxes on households and businesses

to reduce the amount of money the private sector spends. Either of these

fiscal policies will help reduce inflation. Conversely, if inflation is low

but unemployment rates are too high, the government can increase its spending

or reduce taxes on households and businesses. These policies increase total

spending in the economy, encouraging more production and employment.

Some government spending and tax policies work in ways that automatically

stabilize the economy. For example, if the economy is moving into a

recession, with falling prices and higher unemployment, income taxes paid by

individuals and businesses will automatically fall, while spending for

unemployment compensation and other kinds of assistance programs to low-

income families will automatically rise. Just the opposite happens as the

economy recovers and unemployment falls—income taxes rise and government

spending for unemployment benefits falls. In both cases, tax programs and

government-spending programs change automatically and help offset changes in

nongovernment employment and spending.

In some cases, the federal government uses discretionary fiscal policies in

addition to automatic stabilization policies. Discretionary fiscal policies

encompass those changes in government spending and taxation that are made as

a result of deliberations by the legislative and executive branches of

government. Like the automatic stabilization policies, discretionary fiscal

policy can reduce unemployment by increasing government spending or reducing

taxes to encourage the creation of new jobs. Conversely, it can reduce

inflation by decreasing government spending and raising taxes. .

In general, the federal government tries to consider the condition of the

national economy in its annual budgeting deliberations. However,

discretionary spending is difficult to put into practice unless the nation is

in a particularly severe episode of unemployment or inflation. In such

periods, the severity of the situation builds more consensus about what

should be done, and makes it more likely that the problem will still be there

to deal with by the time the changes in government spending or tax programs

take effect. But in general, it takes time for discretionary fiscal policy to

work effectively, because the economic problem to be addressed must first be

recognized, then agreement must be reached about how to change spending and

tax levels. After that, it takes more time for the changes in spending or

taxes to have an effect on the economy.

When there is only moderate inflation or unemployment, it becomes harder to

reach agreement about the need for the government to change spending or

taxes. Part of the problem is this: In order to increase or decrease the

overall level of government spending or taxes, specific expenditures or taxes

have to be increased or decreased, meaning that specific programs and voters

are directly affected. Choosing which programs and voters to help or hurt

often becomes a highly controversial political issue.

Because discretionary fiscal policies affect the government’s annual deficit

or surplus, as well as the national debt, they can often be controversial and

politically sensitive. For these reasons, at the close of the 20th century,

which experienced years with normal levels of unemployment and inflation,

there was more reliance on monetary policies, rather than on discretionary

fiscal policies to try to stabilize the national economy. There have been,

however, some famous episodes of changing federal spending and tax policies

to reduce unemployment and fight inflation in the U.S. economy during the

past 40 years. In the early 1980s, the administration of U.S. president

Ronald Reagan cut taxes. Other notable tax cuts occurred during the

administrations of U.S. presidents John Kennedy and Lyndon Johnson in 1963

and 1964.

Limitations of Government Programs

Government economic programs are not always successful in correcting market

failures. Just as markets fail to produce the right amount of certain kinds

of goods and services, the government will often spend too much on some

programs and too little on others for a number of reasons. One is simply that

the government is expected to deal with some of the most difficult problems

facing the economy, taking over where markets fail because consumers or

producers are not providing clear signals about what they want. This lack of

clear signals also makes it difficult for the government to determine a

policy that will correct the problem.

Political influences, rather than purely economic factors, often play a major

role in inefficient government policies. Elected officials generally try to

respond to the wishes of the voting public when making decisions that affect

the economy. However, many citizens choose not to vote at all, so it is not

clear how good the political signals are that elected officials have to work

with. In addition, most voters are not well informed on complicated matters

of economic policy.

For example, the federal government’s budget director David Stockman and

other officials in the administration of President Reagan proposed cuts in

income tax rates. Congress adopted the cuts in 1981 and 1984 as a way to

reduce unemployment and make the economy grow so much that tax revenues would

actually end up rising, not falling. Most economists and many politicians did

not believe that would happen, but the tax cuts were politically popular.

In fact, the tax cuts resulted in very large budget deficits because the

government did not collect enough taxes to cover its expenditures. The

government had to borrow money, and the national debt grew very rapidly for

many years. As the government borrowed large sums of money, the increased

demand caused interest rates to rise. The higher interest rates made it more

expensive for U.S. firms to invest in capital goods, and increased the demand

for dollars on foreign exchange markets as foreigners bought U.S. bonds

paying higher interest rates. That caused the value of the dollar to rise,

compared with other nations’ currencies, and as a result U.S. exports became

more expensive for foreigners to buy. When that happened in the mid-1980s,

most U.S. companies that exported goods and services faced very difficult

times.

In addition, whenever resources are allocated through the political process,

the problem of special interest groups looms large. Many policies, such as

tariffs or quotas on imported goods, create very large benefits for a small

group of people and firms, while the costs are spread out across a large

number of people. That gives those who receive the benefits strong reasons to

lobby for the policy, while those who each pay a small part of the cost are

unlikely to oppose it actively. This situation can occur even if the overall

costs of the program greatly exceed its overall benefits.

For instance, the United States limits sugar imports. The resulting higher

U.S. price for sugar greatly benefits farmers who grow sugarcane and sugar

beets in the United States. U.S. corn farmers also benefit because the higher

price for sugar increases demand for corn-based sweeteners that substitute

for sugar. Companies in the United States that refine sugar and corn

sweeteners also benefit. But candy and beverage companies that use sweeteners

pay higher prices, which they pass on to millions of consumers who buy their

products. However, these higher prices are spread across so many consumers

that the increased cost for any one is very small. It therefore does not pay

a consumer to spend much time, money, or effort to oppose the import

barriers.

For sugar growers and refiners, of course, the higher price of sugar and the

greater quantity of sugar they can produce and sell makes the import barriers

something they value greatly. It is clearly in their interest to hire

lobbyists and write letters to elected officials supporting these programs.

When these officials hear from the people who benefit from the policies, but

not from those who bear the costs, they may well decide to vote for the

import restrictions. This can happen despite the fact that many studies

indicate the total costs to consumers and the U.S. economy for these programs

are much higher than the benefits received by sugar producers.

Special interest groups and issues are facts of life in the political arena.

One striking way to see that is to drive around the U.S. national capital,

Washington D.C., or a state capital and notice the number of lobbying groups

that have large offices near the capitol building. Or simply look at the list

of trade and professional associations in the yellow pages for those cities.

These lobbying groups are important and useful to the political process in

many ways. They provide information on issues and legislation affecting their

interests. But these special interest groups also favor legislation that

often benefits their members at the expense of the overall public welfare.

E The Scope of Government in the U.S. Economy

The size of the government sector in the U.S. economy increased dramatically

during the 20th century. Federal revenues totaled less than 5 percent of

total GDP in the early 1930s. In 1995 they made up 22 percent. State, county,

and local government revenues represent an additional 15 percent of GDP.

Although overall government revenues and spending are somewhat lower in the

United States than they are in many other industrialized market economies, it

is still important to consider why the size of government has increased so

rapidly during the 20th century. The general answer is that the citizens of

the United States have elected representatives who have voted to increase

government spending on a variety of programs and to approve the taxes

required to pay for these programs.

Actually, government spending has increased since the 1930s for a number of

specific reasons. First, the different branches of government began to

provide services that improved the economic security of individuals and

families. These services include Social Security and Medicare for the

elderly, as well as health care, food stamps, and subsidized housing programs

for low-income families. In addition, new technology increased the cost of

some government services; for example, sophisticated new weapons boosted the

cost of national defense. As the economy grew, so did demand for the

government to provide more and better transportation services, such as super

highways and modern airports. As the population increased and became more

prosperous, demand grew for government-financed universities, museums, parks,

and arts programs. In other words, as incomes rose in the United States,

people became more willing to be taxed to support more of the kinds of

programs that government agencies provide.

Social changes have also contributed to the growing role of government. As

the structure of U.S. families changed, the government has increasingly taken

over services that were once provided mainly by families. For instance, in

past times, families provided housing and health care for their elderly.

Today, extended families with several generations living together are rare,

partly because workers move more often than they did in the past to take new

jobs. Also the elderly live longer today than they once did, and often

require much more sophisticated and expensive forms of medical care.

Furthermore, once the government began to provide more services, people began

to look to the government for more support, forming special interest groups

to push their demands.

Some people and groups in the United States favor further expansion of

government programs, while others favor sharp reductions in the current size

and scope of government. Reliance on a market system implies a limited role

for government and identifies fairly specific kinds of things for the

government to do in the economy. Private households and businesses are

expected to make most economic decisions. It is also true that if taxes and

other government revenues take too large a share of personal income,

incentives to work, save, and invest are diminished, which hurts the overall

performance of the economy. But these general principles do not establish

precise guidelines on how large or small a role the government should play in

a market economy. Judging the effectiveness of any current or proposed

government program requires a careful analysis of the additional benefits and

costs of the program. And ultimately, of course, the size of government is

something that U.S. citizens decide through democratic elections.

IX IMPACT OF THE WORLD ECONOMY Today, virtually every country in

the world is affected by what happens in other countries. Some of these

effects are a result of political events, such as the overthrow of one

government in favor of another. But a great deal of the interdependence among

the nations is economic in nature, based on the production and trading of

goods and services.

One of the most rapidly growing and changing sectors of the U.S. economy

involves trade with other nations. In recent decades, the level of goods and

services imported from other countries by U.S. consumers, businesses, and

government agencies has increased dramatically. But so, too, has the level of

U.S. goods and services sold as exports to consumers, businesses, and

government agencies in other nations. This international trade and the

policies that encourage or restrict the growth of imports and exports have

wide-ranging effects on the U.S. economy.

As the nation with the world’s largest economy, the United States plays a key

role on the international political and economic stages. The United States is

also the largest trading nation in the world, exporting and importing more

goods and services than any other country.. Some people worry that extensive

levels of international trade may have hurt the U.S. economy, and U.S.

workers in particular. But while some firms and workers have been hurt by

international competition, in general economists view international trade

like any other kind of voluntary trade: Both parties can gain, and usually

do. International trade increases the total level of production and

consumption in the world, lowers the costs of production and prices that

consumers pay, and increases standards of living. How does that happen?

All over the world, people specialize in producing particular goods and

services, then trade with others to get all of the other goods and services

they can afford to buy and consume. It is far more efficient for some people

to be lawyers and other people doctors, butchers, bakers, and teachers than

it is for each person to try to make or do all of the things he or she

consumes.

In earlier centuries, the majority of trade took place between individuals

living in the same town or city. Later, as transportation and communications

networks improved, individuals began to trade more frequently with people in

other places. The industrial revolution that began in the 18th century

greatly increased the volume of goods that could be shipped to other cities

and regions, and eventually to other nations. As people became more

prosperous, they also traveled more to other countries and began to demand

the new products they encountered during their travels.

The basic motivation and benefits of international trade are actually no

different from those that lead to trade within a nation. But international

trade differs from trade within a nation in two major ways. First,

international trade involves at least two national currencies, which must

usually be exchanged before goods and services can be imported or exported.

Second, nations sometimes impose barriers on international trade that they do

not impose on trade that occurs entirely inside their own country.

A U.S. Imports and Exports

U.S. exports are goods and services made in the United States that are sold

to people or businesses in other countries. Goods and services from other

countries that U.S. citizens or firms purchase are imports for the United

States. Like almost all of the other nations of the world, the United States

has seen a rapid increase in both its imports and exports over the last

several decades. In 1959 the combined value of U.S. imports and exports

amounted to less than 9 percent of the country’s gross domestic product

(GDP); by 1997 that figure had risen to 25 percent. Clearly, the

international trade sector has grown much more rapidly than the overall

economy.

Most of this trade occurs between industrialized, developed nations and

involves similar kinds of products as both imports and exports. While it is

true that the U.S. imports some things that are only found or grown in other

parts of the world, most trade involves products that could be made in the

United States or any other industrialized market economies. In fact, some

products that are now imported, such as clothing and textiles, were once

manufactured extensively in the United States. However, economists note that

just because things were or could be made in a country does not mean that

they should be made there.

Just as individuals can increase their standard of living by specializing in

the production of the things they do best, nations also specialize in the

products they can make most efficiently. The kinds of goods and services that

the United States can produce most competitively for export are determined by

its resources. The United States has a great deal of fertile land, is the

most technologically advanced nation in the world, and has a highly educated

and skilled labor force. That explains why U.S. companies produce and

export many agricultural products as well as sophisticated machines, such as

commercial jets and medical diagnostic equipment.

Many other nations have lower labor costs than the United States, which

allows them to export goods that require a lot of labor, such as shoes,

clothing, and textiles. But even in trading with other industrialized

countries—whose workers are similarly well educated, trained, and highly

paid—the United States finds it advantageous to export some high-tech

products or professional services and to import others. For example, the

United States both imports and exports commercial airplanes, automobiles, and

various kinds of computer products. These trading patterns arise because

within these categories of goods, production is further specialized into

particular kinds of airplanes, automobiles, and computer products. For

example, automobile manufacturers in one nation may focus production

primarily on trucks and utility vehicles, while the automobile industries in

other countries may focus on sport cars or compact vehicles.

Greater specialization allows producers to take full advantage of economies

of scale. Manufacturers can build large factories geared toward production of

specialized inventories, rather than spending extra resources on factory

equipment needed to produce a wide variety of goods. Also, by selling more of

their products to a greater number of consumers in global markets,

manufacturers can produce enough to make specialization profitable.

The United States enjoyed a special advantage in the availability of

factories, machinery, and other capital goods after World War II ended in

1945. During the following decade or two, many of the other industrial

nations were recovering from the devastation of the war. But that situation

has largely disappeared, and the quality of the U.S. labor force and the

level of technological innovation in U.S. industry have become more important

in determining trade patterns and other characteristics of the U.S. economy.

A skilled labor force and the ability of businesses to develop or adapt new

technologies are the key to high standards of living in modern global

economies, particularly in highly industrialized nations. Workers with low

levels of education and training will find it increasingly difficult to earn

high wages and salaries in any part of the world, including the United

States.

B Barriers to Trade Despite the mutual advantages of global

trade, governments often adopt policies that reduce or eliminate

international trade in some markets. Historically, the most important trade

barriers have been tariffs (taxes on imports) and quotas (limits on the

number of products that can be imported into a country). In recent decades,

however, many countries have used product safety standards or legal standards

controlling the production or distribution of goods and services to make it

difficult for foreign businesses to sell in their markets. For example,

Russia recently used health standards to limit imports of frozen chicken from

the United States, and the United States has frequently charged Japan with

using legal restrictions and allowing exclusive trade agreements among

Japanese companies. These exclusive agreements make it very difficult for

U.S. banks and other firms to operate or sell products in Japan.

While there are special reasons for limiting imports or exports of certain

kinds of products—such as products that are vital to a nation’s national

defense—economists generally view trade barriers as hurting both importing

and exporting nations. Although the trade barriers protect workers and firms

in industries competing with foreign firms, the costs of this protection to

consumers and other businesses are typically much higher than the benefits to

the protected workers and firms. And in the long run it usually becomes

prohibitively expensive to continue this kind of protection. Instead it often

makes more sense to end the trade barrier and help workers in industries that

are hurt by the increased imports to relocate or retrain for jobs with firms

that are competitive. In the United States, trade adjustment assistance

payments were provided to steelworkers and autoworkers in the late 1970s,

instead of imposing trade barriers on imported cars. Since then, these direct

cash payments have been largely phased out in favor of retraining programs.

During recessions, when national unemployment rates are high or rising,

workers and firms facing competition from foreign companies usually want the

government to adopt trade barriers to protect their industries. But again,

historical experience with such policies shows that they do not work. Perhaps

the most famous example of these policies occurred during the Great

Depression of the 1930s. The United States raised its tariffs and other trade

barriers in legislation such as the Smoot-Hawley Act of 1930. Other nations

imposed similar kinds of trade barriers, and the overall result was to make

the Great Depression even worse by reducing world trade.

C World Trade Organization (WTO) and Its Predecessors

As World War II drew to a close, leaders in the United States and other

Western nations began working to promote freer trade for the post-war world.

They set up the International Monetary Fund (IMF) in 1944 to stabilize

exchange rates across member nations. The Marshall Plan, developed by U.S.

general and economist George Marshall, promoted free trade. It gave U.S. aid

to European nations rebuilding after the war, provided those nations reduced

tariffs and other trade barriers.

In 1947 the United States and many of its allies signed the General Agreement

on Tariffs and Trade (GATT), which was especially successful in reducing

tariffs over the next five decades. In 1995 the member nations of the GATT

founded the World Trade Organization (WTO), which set even greater

obligations on member countries to follow the rules established under GATT.

It also established procedures and organizations to deal with disputes among

member nations about the trading policies adopted by individual nations.

In 1992 the United States also signed the North American Free Trade Agreement

(NAFTA) with its closest neighbors and major trading partners, Canada and

Mexico. The provisions of this agreement took effect in 1994. Since then,

studies by economists have found that NAFTA has benefited all three nations,

although greater competition has resulted in some factories closing. As a

percentage of national income, the benefits from NAFTA have been greater in

Canada and Mexico than in the United States, because international trade

represents a larger part of those economies. While the United States is the

largest trading nation in the world, it has a very large and prosperous

domestic economy; therefore international trade is a much smaller percentage

of the U.S. economy than it is in many countries with much smaller domestic

economies.

D Exchange Rates and the Balance of Payments

Currencies from different nations are traded in the foreign exchange market,

where the price of the U.S. dollar, for instance, rises and falls against

other currencies with changes in supply and demand. When firms in the United

States want to buy goods and services made in France, or when U.S. tourists

visit France, they have to trade dollars for French francs. That creates a

demand for French francs and a supply of dollars in the foreign exchange

market. When people or firms in France want to buy goods and services made in

the United States they supply French francs to the foreign exchange market

and create a demand for U.S. dollars.

Changes in people’s preferences for goods and services from other countries

result in changes in the supply and demand for different national currencies.

Other factors also affect the supply and demand for a national currency.

These include the prices of goods and services in a country, the country’s

national inflation rate, its interest rates, and its investment

opportunities. If people in other countries want to make investments in the

United States, they will demand more dollars. When the demand for dollars

increases faster than the supply of dollars on the exchange markets, the

price of the dollar will rise against other national currencies. The dollar

will fall, or depreciate, against other currencies when the supply of dollars

on the exchange market increases faster than the demand.

All international transactions made by U.S. citizens, firms, and the

government are recorded in the U.S. annual balance of payments account. This

account has two basic sections. The first is the current account, which

records transactions involving the purchase (imports) and sale (exports) of

goods and services, interest payments paid to and received from people and

firms in other nations, and net transfers (gifts and aid) paid to other

nations. The second section is the capital account, which records investments

in the United States made by people and firms from other countries, and

investments that U.S. citizens and firms make in other nations.

These two accounts must balance. When the United States runs a deficit on its

current account, often because it imports more that it exports, that deficit

must be offset by a surplus on its capital account. If foreign investments in

the United States do not create a large enough surplus to cover the deficit

on the current account, the U.S. government must transfer currency and other

financial reserves to the governments of the countries that have the current

account surplus. In recent decades, the United States has usually had annual

deficits in its current account, with most of that deficit offset by a

surplus of foreign investments in the U.S. economy.

Economists offer divergent views on the persistent surpluses in the U.S.

capital account. Some analysts view these surpluses as evidence that the

United States must borrow from foreigners to pay for importing more than it

exports. Other analysts attribute the surpluses to a strong desire by

foreigners to invest their funds in the U.S. economy. Both interpretations

have some validity. But either way, it is clear that foreign investors have a

claim on future production and income generated in the U.S. economy.

Whether that situation is good or bad depends how the foreign funds are used.

If they are used mainly to finance current consumption, they will prove

detrimental to the long-term health of the U.S. economy. On the other hand,

their effect will be positive if they are used primarily to fund investments

that increase future levels of U.S. output and income.

X CURRENT TRENDS AND ISSUES

In the early decades of the 21st century, many different social, economic and

technological changes in the United States and around the world will affect

the U.S. economy. The population of the United States will become older and

more racially and ethnically diverse. The world population is expected to

continue to grow at a rapid rate, while the U.S. population will likely grow

much more slowly. World trade will almost certainly continue to expand

rapidly if current trade policies and rates of economic growth are

maintained, which in turn will make competition in the production of many

goods and services increasingly global in scope. Technological progress is

likely to continue at least at current rates, and perhaps faster. How will

all of this affect U.S. consumers, businesses, and government?

Over the next century, average standards of living in the United States will

almost certainly rise, so that on average, people living at the end of the

century are likely to be better off in material terms than people are today.

During the past century, the primary reasons for the increase in living

standards in the United States were technological progress, business

investments in capital goods, and people’s investments in greater education

and training (which were often subsidized by government programs). There is

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