Business and Government Lecture

Lecture 1 September 17 The Science of Election Campaigns Topics 1. Basics of Campaign Strategy 2. Key components of an election campaign Campaign Strategy Political Triage -> divides voters into three categories 1. Your base voters (definitely voting for you) 2. Opponents base voters (will never vote for you) 3. Swing voters (undecided) Proportional Representation -> Seats in parliament allocated based on popular vote (Al Gore more votes than GWB, would have made him president under this system) - Smaller parties benefit First-Past-the-Post -> Most votes per riding wins the seat, party with most seats win the election (Canada's current system) - Larger parties benefit Political Triage in First-Past-The-Post -> 2 step process 1. Identify base and swing ridings rather than base and swing voters - In US presidential election, first-Past-The-Post is on state by state basis - Thus, ID swing or battleground states first 2. Identify base and swing voters in swing ridings Demographic Profiling -> identity characteristics of voters who do or might support you ie. old white, male = conservative Parties create profiles of different groups of swing voters (Tim Hortons crowd, 905 voters) Political Marketing -> Customize policies to groups of voters - Growing use of techniques from world of consumer marketing - Growth of professional political consultants - Sales: have a product and then sell it to all, Marketing: customize products to groups of consumers Therefore- Political Marketing: Customize policies to groups of voters Boutique Policies -> for swing voters - Single issue policies - appeal to self interest - target specific group of swing voters Red Meat Policies->for your base voters(Obama says he will renegotiate NAFTA, doesnt do it) - Policies further right or further left - Appeal to party's base voters - Motivate base to vote, donate, volunteer Wedge Issue Politics (abortion in Canada) - Emotional issues to motivate your base and split opposition

- Often social or cultural issues - Get voters to vote based on one issue Branding (advertising with emotions, rather than facts, i.e. Nike) - focus on company image rather than specific products - emphasize emotion rather than facts - Lifestyle marketing (associating products with lifestyle and image of demographics) Political Branding (scene from Adjustment Bureau) - Focus on party image rather than specific policies - Emphasize emotion rather than facts - Lifestyle marketing (Conservative changing signs, action plan, website blue to go with their party) - Greater focus on party leaders - Use of attack ads to define opponent - Use of positive ads to define own leader - Focus groups and makeovers (Harper's sweater) Components of an Election Campaign 1. The Air War - Conducted by the national level campaign - Main purpose is to persuade swing voters and motivate base voters - Paid Advertising -> attack ads, also referred to as contrast ads, negative ads -> positive ads to sell leader and message Guided by political triage and demographic profiling Advertise to target specific voters in swing ridings 'Microtargeting' through direct mail Leader's Tour - Speeches, announcements and media events - Generate 'earned media' (ribbon cutting, kissing babies/actually being there) - Leaders try to be positive/own vision - Swing ridings get most leader visits Leader's Debates - emphasis on leader - leaders prep in mock up sets - Can occasionally have big impact 2. The Ground War 3. The Cyber War

Lecture 2 September 24, 2012 Key Topics 1. Key Institutions of the Canadian and US Political Systems

2. Recent trends in the Canadian Political System 3 Components of Political Systems 1. Legislature: Legislate by passing laws/policy (parliament) 2. Executive: Governs by initiating and enforcing policy & laws (police) 3. Judiciary: Interpret policy and laws in order to settle disputes (court system) Legislature in Canada Canada's legislature is the Parliament of Canada Bi-cameral (two house institution) = House of Commons and Senate House of Commons = elected members of Parliament (Mps) Senate = Senators appointed by Prime Minister (not seen on TV, strict regional distribution) Senate= House of Lawrence in UK Representation by region = senate Representation by population = house of commons U.S. Congress Also Bi Cameral = House of Representatives and Senate House of Representatives = congressman/women elected every 2 years Senate = Senators elected for 6 year terms, 1/3 elected every three years Regional Representation -> Every state has 2 senators, regardless of population (100 senators)

Functions of the Legislature Passes laws and policy based on majority votes Majority vs Minority government Whipped votes (party says you have to vote this way because member of the party), confidence votes (make sure confidence is still in the gov't, if c. Vote fails, results in election) and free votes (vote of conscience / sensitive issue, Prime Minister doesnt enforce to his own party) These all refer to legislative votes of parliament to pass laws Have input on legislation through parliamentary committees -> review legislation, hold public hearings, recommend changes and amendments to a bill Question Period to the executive -> opposition parties raise issues The Executive in Canada Initiates and enforces policies and laws Includes: > Crown > Prime Minister > Cabinet > Bureaucracy The Queen is the Head of State -> represented by Governor General Governor General is appointed by the Queen on the Prime Minister's

recommendation Crown The The The The Prime Minister Leader of the party with the most seats Elected leader by the party Initiates policy and laws Appoint ministers, senators, ambassadors, judges Is assisted by political staff in the PMO (Prime Minister's Office/ advisors) Cabinet Minister's responsible for a portfolio i.e. Department Minister's are elected member of parliament, appointed by PM Assisted by Parliamentary secretaries Ex- Minister of Finance Bureaucracy Civil servants employed by the gov't Led by deputy ministers Provides technical advice and implements policy Ex Ministry of Transportation Executive in the US Seperate from the legislature White House vs Congress (seperation of power) President is elected directly (Canada, party is elected) Cabinet is non-elected and appointed by the president

US Elections General election - Every 4 years - President, House and 1/3 of Senate Mid Terms - Halfway between general elections - House and different 1/3 of Senate Primaries - How American parties choose their later i.e. Obama v H. Clinton - State by state - Year before general election Canadian Elections Some provinces have fixed election dates every 4 years PM with a majority can call election anytime within 5 years In a minority, election occurs when opposition votes against government in a confidence vote

 Federal level -> there is techinically a set election date, although Conservatives did not go by it last term Judiciary Settles disputes over policy & law Judicial review to rule on constitutionality of laws: - Federal/provincial division of powers - Charter of Rights and Freedoms Notwithstanding clause (section 33 charter, government can violate rights) Trends The Rise of Court Government greater centralization of power in the PM Influence of Mps and Cabinet Ministers replaced by political consultants Pollsters Lobbyists Communications specialists

> Centralization has led to new techniques of control ('The Harper Government' as a branding exercise) > Talking Points = memos on specific issues to keep everyone on message > includes specific arguments and phrases > Message event proposal forms all depts must fill out to hold an event or issue a media release Must be approved by PMO > The Permanent Campaign Parties campaign between elections Use science of politics techniques to sell policies to the public - Trial Balloons -> Government leaks a policy idea to see what public thinks -> If public opposes, they can deny they were considering it - Creating a Crisis -> Find a problem to justify your policy -> Use a crisis that comes up -> Create a crisis - Changing the Channel -> Getting the media to move off a topic you are taking heat on

Lecture 4 October 15 The Liberal -Neoliberal approach to Economic Policy

Topics 1. Classical Economic Liberalism 2. Neoliberalism 3. Terminology Classical economic liberalism Original free market approach (not command such as cuba, ussr) Decentralized economic decision- making by firms and consumers rather than by government Believed to be more efficient than centralized command economy (why is it more efficient...) Adam Smith Father of classical neoliberalism 1776 Wealth of Nations Invisible hand of market forces would automatically coordinate decentralized decisions Leads to Efficient allocation of resources (produce things that people actually want)

Alfred Marshall 1890 Principle of Economics (sought to formalize the invisible hand) Created Neo-Classical Economic Liberalism Formalized Invisible hand notion on laws of supply and demand price signals (tell consumer what to buy and producers what to produce) The relationship between supply and demand Price of product sent signals to producers and consumers Long weekend arriving, gas prices go up. Why? Demand increases. Demand and Prices (Short Term) Beginning of long weekend, high demand, high price End of long weekend, low demand , low price Oil rigs get knocked out in hurricane, low supply, high price More demand than supply, price rising Less demand than supply, price falling Demand and Prices (Long Term) Demand goes up, Gas Prices go up (Growth in China, permanent increasing) Because the gas prices go up, demand goes down (taking a bus rather than driving) High gas price sends a signal to consumers When gas prices go up, supply goes up (Pumping more oil, makes supply increase)

Alberta Oil Sands Oil mixed with sand Must be mined rather than pumped More expensive than oil from a well/rig Oil sands have only been economically viable as oil sources due to high demand Price Signals supply and demand determines prices prices then send to producers and consumers Free markets react to change automatically Price signals are the invisible hand No need for government meetings and memos as it is decentralized this makes it much more efficient to allocate resources PRICE SIGNALS = INVISIBLE HAND Government Policy Nightwatchmen state or Minimalist State Intervention in the economy kept to an absolute minimum to let invisible hand work Governments should protect private property, enforce contracts, provide national defence and not much else Adam Smith says, even though intentions are good of the government intervention, it will gum up the works for other aspects

Benefits of a Free Market System 1. Automatically coordinates supply and demand (efficient allocation of resources) 2. Stimulates innovation (competition, marketplace of ideas, technological, social progression) 3. Automatically self-correct any economic problems that may emerge (product shortage, unemployment) 4. Decentralization of Power (economic and thus political) (free market system more efficient because no one has special power) Reduce-to-Clear (clearance sales, cheap bins) Used by stores to get rid of products for which there is little demand Lower prices until consumers are willing to buy Market automatically clears excess supply Neoclassical economists believe you can apply these economic principles to other issues i.e. HIGH UNEMPLOYMENT - Too much supply of workers relative to demand - Lower wages cause employers to hire - Unemployment automatically self-corrects - Like any other product that is not selling

- Workers must reduce-to-clear (must accept lower salary, wages, benefits) Government Intervention can corrupt the idea of reduce-to-clear ie Mccain Campaign tshirts, minimum t-shirt price $15. Markets fail to automatically correct, tshirt seller cannot afford the next best t-shirt to sell Problem of Government Intervention Government intervention disrupts free market Minimum wage prevents workers from lowering wage demands Unemployment fails to self-correct Other things: Social (employment insurance, welfare, wait longer to lower wage demands), Strong Labour Laws that support unions (prevent prices from going down in recession, less jobs and lesser economy ) Neoliberalism Contemporary branch of free market approach Classical liberalism was diminant from 1800s until the 1930s Great Depression After Depression, government intervention became more dominant Neoliberalism was attempt to bring back free market approach Friedrich Hayek was father of neoliberalism was an Austrian economist - Wrote in 1940s - Won Nobel Prize in economics - Austrian school (ron paul, we are all Austrian) Milton Friedman - Wrote in 1960s-70s - Won Nobel Prize in economics - Updated Hayeks work to bring back free market approach - Austrian school also referred to as Chicago School (U of C for Milt)

the Neoliberalist... (differences between Classical and Neoliberalism) 1. Emphasizes freedom rather than efficiency Willing to sacrifice some efficiency to preserve freedom Slightly different than classical neoliberalism Dont like government intervention because infringes on individual freedom 2. More orthodox (sanctioned) in desire to limit government intervention Lower taxes Less social spending Less regulation 3. Lock-in free market policies through constitutional provisions James Buchanan Constitutional economics Nobel Prize

Constitutions constitutions constrains governments Courts have power of judicial review (sitting down and deciding whether or not it violates charter of rights and freedoms) can declare law 'unconstitutional' (elected gov't cannot do w/e they want) restricts government regulation Ex. Property rights in charter of bills of rights, balanced budget ammendment (the government constitutionally must run balanced budget, not allow to borrow money), referendums for tax increases (California -> cannot raise taxes, no one votes for tax raisers when its only criteria) Supply-Side Economics A branch of Neoliberalism (not the same!), tends to be more pro business rather than pro market Non Keynsian (demand-side) Whats good for producers, not consumers More populist, less academic, version of neoliberalism Associated with Wall Street Journal and conservative think tanks More pro-business than pro market Policies that benefit supply side rather than demand side would benefit all Trickle Down Economics (let things fall down?) Adopted by President Reagan (Reaganomics) Focused on cutting taxes and regulation on business Laffer Curve (tax rate/revenue generated) Tax cuts would increase revenue - Stimulate growth - Broaden tax base - for more http://rightwingnews.com

Terminology Classical Liberalism -> Smith 1776; original free market theory, includes Smiths Free market system and the Invisible Hand. Neoclassical Liberalism -> Marshall 1890; formalized Smiths notion in laws of supply and demand and price signals Neoliberalism -> Hayek, Friedman, Buchanen (Post WWII) Neoconservative (media) -> neoliberal or association of neoliberalist ideas with present political parties (conservatives, republicans) Liberal (media) -> Keynsian-Welfare(A) (more government intervention, pro gay rights, pro choice) Laissez-faire = neoliberal (A), free market (means invisible hand) Libertarian = neoliberal

** For Essay stick to Academic terms

Lecture 5 October 22, 2012 The Keynesian-Welfare Approach to Economic Policy Topics 1. Origins of the Keynesian-Welfare approach 2. Rationales for government intervention Origins Believes in market system Advocates some intervention to correct `market failures` Market Failures Market failure is a situation in which the free markets dont work in the way they are supposed to and will not fix itself by itself Creates rationale for intervention to correct failure Keynesian-welfare only want to intervene when the result will be an increase in efficiency Sometimes `the invisible hand` gets gummed up. They try to fix it They aim to make markets more fair by: a) reducing inequality, and b) deal with social problems Goals: Efficiency and ``social justice`` Social programs put in place to help Ex. (Canada`s public health care, Cheap tuition for public Univ. Like UWO compared to private Harvard) Branches of Economics Microeconomics (one tree) - Focus on producers and consumers and individual products - firm level Macroeconomics (forest) - Focus on economy level - taxes, spending etc Welfare Economics (Micro) Arthur Pigou 1920`s ``Economics of Welfare`` About welfare of society as a whole, not welfare programs for poor people Market system was most efficient but subject to failures Sometimes prices don`t reflect products true value Sends false signals to producers Can Lead to: - over-supply of bad products - Under-supply of good products Market failures create rationale for intervention Use taxes and subsidies to make prices reflect true cost of product Invented use taxes to influence behaviour (LCBO)

 Were originally used to raise money, believed now can do both (also influence behaviour) Tax things society doesn`t want (i.e. Fattening food) Subsidize things society does want (i.e. Education) `pigouvian taxes and subsidies`` ``Sin-Tax`` Tax= consumer pays more cause its bad (smoking, liquor, gambling) Subsidy= consumer pays less cause its good (farming, education) Current Issue: Sugar or Fat Tax. Lower childhood obesity Keynesian Economics (Macro) John Meynard Keynes 1936 ``General Theory of Employment, Interest and Money`` Focus on Market failure at Macroeconomic level Failure of high unempoyment to self correct Recession Stock or housing market crash Creates vicious circle of : 1. falling confidence 2. less spending 3. bankruptcies, layoffs and unemployment Free Market Economics High Unemployment will self correctf Unemployment forces workers to lower wage demands Employers then hire Only government intervention prevents lowering of wages Great Depression Wages didn`t fall and unemployment didnt self correct as free market theory predicted Was little government intervention or unions to explain why Keynes said free market theory treated people like other products Unlike products, people have families to feed and they don`t accept lower wages Reduce-to-Clear fails T shirts do not get emotionally upset, therefore the EXACT same theory cannot be applied to non-passive emotional beings People politically protests are an example of the result Keynesian Economics cont. Market might self-correct eventually However, high unemployment or drastic wage cuts could lead to political revolution ``In the long run, we`re all dead`` Lack of self-correction was a market failure Created rationale for government intervention Government stimulus to boost spending, sales and hiring

 The jump start principles Try to put a stop to old bad vicious circle, government spending Rising consumer and biz confidence === More Spending and Sales === More hiring and growth (new vicious circle) Keynesian-welfare Economics (Rationales for Government Intervention) Paul Samuelson merged Keynesian macro with welfare micro Market was best system but government is needed to correct market failures Led to identification of key rationales for government intervention 6 categories of situations for government interventions 1. High Unemployment - Use stimulus to fight recessions - Use stimulus, outside recessions, to keep unemployment very low - Departed from original Keynesianism and causes problems 2. Negative Externalities - costs not incorporated into price of a product - i.e. when a firm can pollute for free - Externalizes the cost onto others who have to pay for clean-up - Also produce economic costs for others, ie smog filled town = no tourism, acid rain on farm crops = no agriculture - Unfair to those who must pay for clean up - Inefficient as costs of prevention often cheaper than clean up - Market failure as will never self-correct as firm has no incentive to pay for prevention - Solutions: Regulation on emissions, subsidies - Creates rationale for government intervention - Tax on pollution to create incentive to reduce - Internalizes cost making supply and demand work again 3. Public Goods - Goods or Services that government must provide because the market wont or cant provide - To meet definition must be : a) non-rival, and, b) non-excludable -non-rival = consumption doesnt use up the good or service. Your consumption does not interrupt my consumption - Cake = rival good, eaten and its gone - Street light, radio, national defense = non-rival, everyone uses it and is not used up - Non Excludable = no effective way to prevent people from using even if they havent paid - Creates ``free rider`` problem - Means markets wont provide - people who live on the street wont pay for a street light, so no private sector party would want to provide it

- Creates rationale for government intervention - Only governments can force payment through taxes - Key is to pay for good rather than provide it (Construction by Pave-AL, paid by region of peel) 4. Monopolies - 1 seller - Oligopoly (Few Sellers) ex. Cellphone companies - Monopsony (1 buyer) ex. Blockbuster, Chapters - Considered a market failure as: a) emerge naturally b) limit competition Problems: - Hurt consumers through higher prices and poor service - Less incentive to innovate - Concentration of power economic power and political influence (political ads by corporations etc) - Too-big-to-fail = Domino effect, forces government to bail-out (Lehman Brothers, George Bush) Government Remedies for Monopolies a) Regulate (Obama banks) - prices - risk taking b) Break-Up (Bell and Astral media merger cancelled) - Make too small to matter - Problem is competitiveness c) Nationalize - crown corporation (government run) 5. Assymetric Information - One party to economic transaction has more info than other - i.e. used cars, food content (Mileage of used cars, illegal to rollback odometer) - Creates rationale for transparency, labelling and other regulations 6. Social Goal - Problems can emerge even when free market works as its supposed to - i.e. inequality, loack of worker rights, homelessness Lecture 6 The Politics of Economic Policy and the Structure of the Canadian Policy Topics 1. The Relationship between ideas and interests 2. The political spectrum in Canada and the US 3. The structure of the Canadian Economy Reminders Economic goals of the Neoliberalist Free Market Approach Key Goal: Individual Freedom Privatize government owned industries Lowering Taxes

 Why

Less government spending (social) Fewer regulations on general on business Weaker Unions Free Trade Less government spending? (Beliefs) The market will regulate itself More efficiently allocate resources Stimulate innovation Self-correct problems (invisible hand) Decentralize economic and political power (private corporations have power)

Goals of the Keynesian-welfare economic approach Efficiency and social justice More government Higher taxes More social spending More regulations Stronger Unions Managed trade Explaining Causes of Problems Neoliberal Individual responsibility Government intervention Homelessness (individuals fault) Financial crisis (country's fault) Solution is less government Justification for unequal outcomes Keynesian-welfare System not individual Market failures and inequality Homelessness (systemic causes) Financial crisis (financial system) Solution is government intervention

Ideas and Interests Robert Cox: All theory is for someone and for some purpose Theories often rationalize interests of specific groups in society Who benefits? Tax cuts = High income people (proportionately pay more tax), naturally support neoliberal free market Lower regulations = Business's, banks More taxes = low income people (social programs, funded my taxes, redistribution of income) More regulations = environmentalists, labour unions

Who advocates for who? Neoliberal Firms Wealthier indivudals Keynesian-welfare Unions Social activists Environmentalists Interests More powerful groups prefer less rules as they have resources to take care of themselves Less powerful groups prefer more rules to level the playing field (Medicare) Different Interests Focus on Different Problems What problems do you choose to focus on? (ex. National Post is Neoliberal, Toronto Star is Keynesian-welfare left of centre) Neoliberal Keynesian-welfare Focus on competitiveness and Focus on social problems to justify productivity to justify tax cuts programs Focus on problems with social programs Focus on market failures to justify to justify cuts regulation The Political Spectrum Spectrum rather than set camps Left Wing Wing Centre-Left Centre-Right Right

1789 National Assembly in France Nobles supporting monarchy sat on right Revolutionaries sat on left Right = small seed conservatives, Left = Radical, want change faster (In Economic Policy) Left = Socialist Keynesian-welfare = Left (closer to centre) (market system, but want intervention) Classical Liberal = Barely left of Centre Neoliberal = Right to centre Libertarian = Right (in social policy) Left Wing (not exclusive but- Democrat) Right Wing (not exclusive butRepublican) Socially progressive or liberal Social conservative or religious right Pro-choice Favour gay marriage Pro-Life Opposed to gay marriage

Favour strict gun control Anti-capital punishment Root cause national security and law

Opposed to strict gun control Pro-capital punishment Military/Police and national security and law

Groups may be on one side of social policy interests but on the other for economic This is why spectrum is needed Political Parties Left Centre NDP Liberals Bloc Greens (moving left) Democrats Canadian Media Left Toronto Star National Post Huffington Post CBC City TV CBC Radio Talk Radio American Media Left NY Times Journal Huffington Post Washington Post Mag CNN Harpers Magazine Standard The Nation Times Centre Right Conservatives Republicans Right SUN Maclean's CTV Global Centre Wall Street Fox News National Review National Interest Weekly Washington Right

Comedy and Talk Radio Left Comedy (SNL, Colbert, Jon Stewart) Right Talk Radio (Rush Limbaugh) Dependence on Natural Resources (Canada) Oil in Alberta, Saskatchewan and Newfoundland Forestry in BC & Quebec Agriculture in prairies

 Fishing on coasts Mining in north Due to: 1. 60% of exports (affects dollars) 2. More significant outside Ontario and Quebec (ex. GDP of Alberta is all oil) 3. Many manufacturing and services tied to resources (job providers) Resource Politics ``Dutch disease - Negative consequences arising from large increases in a country's income. Dutch disease is primarily associated with a natural resource discovery, but it can result from any large increase in foreign currency, including foreign direct investment, foreign aid or a substantial increase in natural resource prices. Oil or mining boom leads to large investment inflows Drives up dollar and makes export more expensive Hurts manufacturing NDP argues that Alberta oil sands creates Dutch disease Oil creates regional politics and divisions 1980 National Energy Program Lecture 7

Monetary and Financial Policy

Topics 1. Domestic Macroeconomics 2. International Macroeconomics 3. The World Economy Before the Great Depression Domestic Macroeconomics Review: Demand and Prices Demand Demand Supply Supply Price Price Price Price

Aggregate Demand the total demand for goods and services in the economy Determined by: - amount of money consumers and firms have to spend - consumer and business confidence (recession) Growth Changes in the size of a national economy Measured through Gross Domestic Product (GDP)

GDP: the value of all goods and services produced in a country in a given year

Negative Growth When GDP shrinks, its referred to as negative growth 2 quarters of negative growth = recession (after growth, officially/technically out of recession) Aggregate Demand and Growth Demand Growth If people have more money, buying more goods, making more, growth will increase Demand Growth - Less money, less spending, less production Unemployment the percentage of the labor force that is seeking employment that is not employed does not include part timers looking for full time work Demand and Unemployment Demand Unemployment Demand Unemployment Inflation an increase in the general level of prices Measured through Consumer Price Index (CPI) Inflation rate is percentage changes in the price level over time Erodes savings and purchasing power Disinflation (inflation rate goes down, price not rising as fast) vs. Deflation (negative inflation, prices fall) * WILL BE ON EXAM* Demand Inflation Demand Inflation As more people demand more, widespread prices go up Inflation goes up because of Inflation Deflation very rarely happens. Only in crisis If Demand Goes up.... Growth increases Unemployment decreases Inflation Increases If Demand Goes down.... Growth decreases Unemployment increases Inflation decreases

 Unemployment and Inflation have an INVERSE relationship Unemployment and Inflation both not desired Monetary Policy Governments control over interest rates through the central bank i.e. Bank of Canada, US Federal Reserve Use interest rates to regulate demand and maintain balance between inflation and unemployment Interest rates effect how much people borrow, high interest rates make people borrow less Interest Rates and Demand Lower interest rates make loans cheaper People and firms pay less interest on existing loans Cheaper to get new loans for purchases and expansions go buy house, or car Interest Rates = The price of money (set by the bank) Demand increases Used to stimulate economy in a slowdown Slow-Growth of Recession Demand Unemployment Growth Inflation If this is the case, central bank will LOWER interest rates, to stimulate demand Interest Rates go down... Demand Unemployment Growth Inflation Inflation goes up... Interest Rates go up... The central bank will raise interest rates (as prices for goods do up, price of money goes up) Demand Unemployment Growth Inflation The Business Cycle created by central banks reacting to the changes in economy 1. Recession: slow growth/high unemployment 2. Trough: Lower interest rates 3. Recovery: Higher inflation and growth 4. Peak: Higher interest rates to cool down economy

International Economics International Finance Like trade, international finance can be either free or restricted Free finance is known as capital mobility Governments can prevent capital mobility through the use of capital and exchange controls Exchange Rates The value of one currency priced in terms of another currency i.e. Canadian dollar priced in US dollars Capital Flows and Exchange Rates When money flows in, the currency goes up When money flows out, the currency goes down i.e. oil and the Canadian $ Interest Rates and Exchange Rates Interest Rates goes up, Currency goes up (Investors receive more money so they invest more) Interest Rates go down, currency goes down (Investors spend money elsewhere, do not buy bonds) Exchange Rate Regimes Floating exchange rate, a.k.a. Flexible exchange rate The value of the currency is determined by market forces as money goes in and outstanding What does Canada have? Floating exchange rates The Mundell-Funding Thesis (He likes this) AKA the impossible trinity Governments can only pursue 2 of the following 3 goals at any one time 1. Capital mobility 2. Fixed exchange rate 3. Discretion in Monetary policy TRIANGLE Can only have 2!! Logically incompatible If you do have capital mobility (no regulations, money can move across borders), also want fixed exchange rate (canada says same as US, use interest rates).. therefore cannot have discretion on monetary policy (interest rate changing is being used for F.E.R. M-F Thesis and Economic History

 The history of the international economy often boils down to which 2 of 3 MF thesis options government have chosen The World Economy Before Depression Had CAPITAL MOBILITY (economic globalization, free market economy) and FIXED EXCHANGE RATE 1. Capital Mobility Ivestment flowed freely across borders Original period of economic globalization 2. Gold Standard Fixed Exchange Rates All currencies stayed a fixed amount above how much gold was moved up or down in relation to price of gold No discretion in Monetary Policy Meant that governments could not use interest rates to respond to recessions and high unemployment Great depression was a recession with massively raised interest rates Crazy low demand Great Depression happened because they had no discretion in monetary policy Fixed exchange rate = THE EURO That is why Europe economy is so bad right now, because same concept of great depression Cannot change their interest rates and they have no discretion in monetary policy they instead have Capital Mobility and Fixed Exchange Rate (Euro) Lecture 8 Exam (December 8, 9:30am) 2 parts = 3 Long answer questions (no essay framework), choose 2 (use common sense, will be based on a self-contained lecture, or concept that fits together) = Multiple choice questions (30-35 is lecture, 15-20 is readings) (big picture)

Fiscal Policy

Topics: 1. Key Types of Taxes 2. Key Types of Government Spending Reasons for Taxation 1. Raise revenue 2. Create incentives (micro, taxing cigarettes, booze, carbon tax) 3. Affect Aggregate Demand (macro, interest rates)

Types: 1. Personal Income Tax Tax on an individuals income Progressive Income Tax System The more money you make, the higher % of income you pay through taxes Tax brackets i.e. Income $0-$10,000 pays 10% $10,000-20,000 pays 15% 20,000 50,000 pays 25% 50 000 + pays 40% In Canada we have this, but Marginal Tax Brackets Instead of just percentage of total, overall income, Percentage accumulates at each bracket segment, therefore you pay less tax Canadian Marginal Tax Brackets First 41,544 pays 15.5% 83,088 pays 22% 128,800 pays 26% 128,800+ pays 29% Pay provincial tax as well What is considered taxable income? All write offs are deducted from total income (charitable donations etc) b) Regressive System Everyone pays the same absolute amount of money regardless of income Is mainly theoretical: applies to user fees (no country does this) i.e. everyone pays $5,000 Lower income ends up paying higher percentage Flat Tax System Everyone pays the same PERCENTAGE of their income taxes i.e. everyone pays 10% Only one tax bracket Strong fiscal conservatives advocate flat tax No developed country has a flat tax Said to make tax code much less complicated Complications come from tax deductions not tax brackets Consumption Taxes Taxes on consumer goods and services Like a flat tax (everyone pays the same %) i.e. GST and PST and HST Used to lower income and corporate taxes

Wealth Taxes Tax assets rather than income Capital gains tax (portion of gain that must be counted as income, when stock pays dividends, you must pay tax) Inheritance tax (estate tax, death tax) = not in canada, in usa Corporate Taxes On the income or profits of an organization Capital Tax On corporate assets Many countries do not have this How Tax Effects Aggregate Demand Taxes go down AD goes up Taxes go up AD goes down Purposes of Government Spending 1. Public Goods 2. Affect macro-economy (spending) 3. social programs Public Goods Goods/services markets won't provide Spending to influence demand Spending increase = Demand increase Spending decrease = Demand decrease 2 methods: A) Automatic Stabilizers Employment Insurance & Welfare Automatically increase spending when unemployment rises Increases spending when unemployment rises Decreases spending when unemployment falls $1200/month x 1 million unemployed = 1.2 billion per month $1200/month x 2 million unemployed = 2.4 billion per month welfare works in the same way B) Discretionary Spending Specific decision to increase spending stimulus package i.e. a new infrastructure construction program Budget Deficits Spending is greater than Revenue Forces government to borrow money Borrows by issuing bonds Most likely to do this during recession (Tax revenues go down, Less income, spending on automatic stabilizers will go up by itself)

 Spending on stimulus packages goes up Government Debts government debt is the total of accumulated deficits Key is debt-GDP ratio! (Parties do not always stress this, this Is what really matters) 586 billion Budget Surplus Revenues greater than spending Deficit = Annual Shortfall Surplus = Annual

Social Programs Promote social goals not dealt with by free market Many have the effect of redistributing income Types: Health care, education, pensions (AKA Entitlement programs) Income support: EI, social assistance, housing Nation-building Economic development Entitlement Programs: Health Care, Education, Pensions redistribution rather than pure 'efficiency' Do not meet definition of a 'public good' Can be provided in a number of ways ranging from fully public to fully private Universal Fully Public Health Care AKA Socialized Medicine Government runs and provides (pays for) health care by running clinics, hospitals etc Government pays for health care for all (universal) Cuba, United Kingdom Universal Single-Payer Health Care Private sector (or public-private mix) provides health care Government pays for health care for all (one payer) Doctors on 'free-for-service' Specific fee's are set by government (doctor hourly wages) Equal access no queue/line jumping Government pays for 'listed services Can purchase private insurance for unlisted services (excess dental, cosmetic surgery, prescription drugs) Two-Tier Means Tested Health Care Private sector provides health care

 Government only pays for those in economic need (means testing, like OSAP) Rest buy private insurance or have no money Money = priority Obamacare Private provision & two-tier, means tested Expands number corrected Expands medicaid (more people qualify) Subsidies and tax credits for employers (Incentives to provide) Guaranteed issue and individual mandate (Insurance companies cannot deny people of preexisting conditions, cannot charge different rates due to demographics) Fully Private Health Care health care treated like any other product health care providers and insurance companies compete very few have this More money equals better and faster health care

Private Health Care with Government Support Private sector provides health care Government provides limited support to needy Defined contribution not defined benefit Voucher system/premium support Governments give needy set amount to use towards insurance Health savings account Tax credits and voucher for health investment account (RRSP)