ECONOMIC ANALYSIS AND PUBLIC POLICY
This website focuses on both analysis and its use in helping you think through the public-policy issues America faces. There is no one best way of thinking straight about policy problems—for instance, what should be done to check an infla- tion or avoid unemployment. But most experts agree that an orderly, systematic job of thinking through a “decision” problem of this sort (be it in economics or any other field) must include the following broad interacting steps:
1. First, define the problem. In economic policy issues, defining the problem usually has two parts: (a) understanding the situation in which the problem exists, and (b) clarifying the objec- tives you want to achieve. In simple words, you need to clarify where you are and where you want to go. In 1964, for instance, what was the basic economic situation, and what specific goals did we want to accomplish with the proposed tax cut? Unless you’re straight on these two questions, you’re lik’~ly to behave like a headless horseman, rushing this way and that, trying one tack after another, but getting more exercisc than results. Unless we know where we are and where we want to go, our chances of getting there are poor.
2. Second, map out the main alternative ways of achieving the desired goals—the alterna- tive paths from where we are to where we want to be. In the 1964 unemployment case, for example, there might have been three major approaches: increase the public’s spending power through cut- ting taxes, increase the money supply, or raise gov- ernment spending. No one can see in advance what all the fruitful alternatives may be, but a plan that covers systematically the major alterna- tives suggested by preliminary analysis will usu- ally save time and help keep the main issues up- permost.
3. Third, analyze carefully the alternative policies outlined in step 2. “To analyze” means to trace through carefully the effects of the different policies. Here the analytical models you’ve learned will come in handy. Economic theory should help you make a tentative choice on the best steps to take. Perhaps in the analysis of your three main alternatives you’ll hit on a fourth one you hadn’t thought of at first. Although it’s important to systematize your thinking, it’s equally important to remain flexible and alert for new solutions.
4. When you finally have a tentative solu- tion to the problem (for example, pass a law that puts ceilings on all prices and wages), don’t stop! The fourth step is: Check your solution—both against flaws in your own analysis resulting from fallacies or blind spots, and against past experi- ence. The world has had recessions and unemploy- ment before, and governments have tried to eliminate them, before. If your preferred alterna- tive has failed before, why? It’s no fun to have to throw out a solution after you’ve gone through a lot of analysis to get it. But if your checking suggests that something is wrong, take another look.
THE PROBLEM OF ECONOMIC GOALS: A DIGRESSION
Clearly defined goals are necessary as a basis for making an intelligent choice among alternative courses of action. In a free society, every person has the right, and the duty, to make up his own mind on economic policy issues.
Does our present economic system do a good job? Nobody can honestly answer this question uiitil he has thought through what he wants the system to accomplish. In the same way, you can’t judge whether a piece of furniture is doing a good job until you specify what you want—color, de- sign, comfort, durability, strength, and so on. If you put major weight on how a chair looks and your roommate on how it feels, you may end up arguing about whether or not it’s a good buy. And someone else who says that durability is all- important may come up with a still different answer. And so it is with the economic system.
Some Thntative Goals
Consider the following list of objectives for the American economic system:
1. Progress: A rising average standard of liv- ing.
2. Individual freedom and opportunity.
3. Economic security.
4. Production in accordance with consumer demands.
5. An equitable distribution of income.
Would a system that produced these five things look good to you? If you’re a typical Amer- ican, it might, since this list is an attempt to mirror widely expressed goals. But make up your own set. The main purpose in presenting the list above is to give us something to work with, not to suggest that you ought to agree with it.
If you think about the list a minute, you’ll see that there are two main problems. First, some of the words are ambiguous: ‘What does “indi- vidual freedom” mean? You and your neighbor may have quite different ideas. Second, the objec- tives may conflict with one another. How com- patible are individual freedom to do as you please and security against the risks of economic life? ‘What if the lure of big incomes is the only way to get maximum progress, but we also want to attain a more equal distribution of incomes?
There are no easy answers to such questions. Different people do have different “value judg- ments” about what is most important in the world, and most of us have conflicting value judgments even within our own minds. It’s your job as an individual to straighten out your own thinking by clarifying what ends you think are most important, and by weighting them when you have to give up some of one to get more of another. It’s the job of an individualistic, democratic system to compromise the differing judgments of different individuals in order to reflect the wishes of the majority while respecting minority views. Over and over, we shall see that we face a “trade-off” among economic goals; we can get more of one thing only by taking less of another.
To provide a common basis for analysis, throughout this website we will use these five tent a- tive criteria for judging how well our system works. So stop here to ask yourself what these goals mean to you, and whether you’d substitute some others. Then see how well your list and your interpretations check with your friends’. For example, as you see it now, is individual economic freedom consistent with government imposition of taxes on you when you don’t personally benefit from the government expenditure? Is individual freedom consistent with a law requiring all workers in a plant to join a union if they benefit from the wages it negotiates? What does eco- nomic security mean? Does this goal conflict with getting maximum output to raise our standard of living?
Conflicts among goals, and the need to re- solve them, will reappear time after time in the pages ahead. So, whatever you decide your own social goals are, keep them clearly in mind in the following chapters as your basis for judging par- ticular proposals and evaluating how well our economic system works.
For Analysis and Discussion
Be especially sure you understand the following concepts introduced in this chapter:
1. Why should we assume “other things equal” in economics when we
know they aren’t that way in the real world?
2. We suspect that I O-year-olds’ demand for ice cream cones depends on
the temperature, their allowances, and the price of ice cream cones. Can 3. According to the “laws” of probability, if you toss an unbiased penny
100 times, it will come down heads and tails about 50 times each. How
does this compare with an economic “law”—for example, that with
people’s wants for a commodity unchanged, an increase in the amount
produced will, in competitive markets, lead to a lower price?
4. “Theory is all right for college professors, but not for me. I’m a practical
man. Give me the facts and they’ll speak for themselves.” Do you agree
or disagree with this sentiment? Why? How do facts speak for them-
selves?
5. Do you agree with the broad economic goals listed on pp. 3 1—32? How
would you rank them in importance?
6. Should wealthy citizens of New York be taxed to provide schooling and
food for poor sharecroppers in Alabama? To provide better housing for
slum-dwellers in New York? Can you justify your position against some-
one who differs with you?
7. (Based on the Appendix) Analyze the validity of the following state-
ments. In each case, explain carefully why you accept or reject the state-
ment.
a. What goes up must come down. (True about prices?)
b. Sales taxes burden the poor, so they are inequitable taxes.
c. In the past, booms have always been followed by depressions, so
we can look forward to a real depression in the next few years.
d. Millions are hungry in Asia, but government-owned wheat rots in
storage bins. The administration’s farm policy couldn’t be more
nonsensical.
e. American industry is owned by the man in the street. A recent
study by the New York Stock Exchange shows that 20 million
Americans own stock in corporations.
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