YOU DECIDE: What are the big economic issues?

Date posted: January 6, 2012

Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.Dr. Michael Walden is William Neal Reynolds professor of agricultural and resource economics at N.C. State University.

Media Contact: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

By Dr. Mike Walden
North Carolina Cooperative Extension

This year — 2012 — is a big election year, and as a result, we’ll hear much discussion about economic issues. Indeed, most political analysts say economics will be front and center in the many election campaigns.

In this column, I will not discuss specific issues, like how to reduce unemployment, methods to lower the federal deficit and reforms to the health care system; all very important topics.

Instead, I want to step back and look at the big picture, at four overarching, basic economic themes that are at the root of most of our specific policy discussions and differences. Then, as always, I’ll let you decide what path to follow.

Efficiency vs. equity. Efficiency and equity are two concepts most people can support. Efficiency means we get the most for our resources; in other words, we use our resources effectively.

Equity implies some fair distribution of resources among households. Most of us don’t want people to go hungry, to be unsheltered or to suffer from lack of medical care.

However, two disagreements emerge from this seeming consensus. First, how far should equity be pushed? How many resources should be redistributed from the haves to the have-nots?

Second, what will redistribution of resources in the name of equity do to efficiency? To what degree will those receiving assistance be less motivated to make changes to their lives — where they can — that will allow them to use their talents and capabilities fully and increase their self-sufficiency? And will redistribution motivate the haves to reduce their work effort?

While most people will support efficiency and equity, there can be a clash between the two.

Proportional vs. progressive taxes. With proportional (or “flat”) taxes, taxes paid per dollar of income are the same for all dollars. For progressive taxes, the rate of tax paid per dollar rises as the person earns more dollars.

Supporters of each think their position is fair. Flat tax fans say the system is simple, and that the ultimate test of fairness is to treat every item — here, dollars — the same.

Pushers of progressive taxes use two arguments. First is a practical point about ability to pay. They state that people with more income can simply afford to pay a greater percentage of income in taxes without hurting their ability to afford necessities.

Second, they say an extra dollar of income to a richer person is worth less than an extra dollar of income to a poorer person. So following this idea, equalizing taxes between richer and poorer people requires the rich pay taxes at a higher rate.

One reason there’s so much disagreement about taxes is there’s not much middle ground in these positions.

Public vs. private. One of the deepest divisions in policy debates is over the role of government. At one end is a very limited view of government, sometimes summarized in the phrase, “If it’s listed in the yellow pages, government shouldn’t do it.” Essentially, this view is that government shouldn’t do anything that private, profit-seeking companies can do. If government does perform these functions, private promoters say, it will simply supplant private efforts and will cost more.

At the other end of the spectrum are those who take a broader view of government. Here, government’s role is to provide or support all essential — or necessary — functions for life, such as food, housing, transportation and medical care. Government can either directly produce these services (for example, building roads), or government can subsidize the services (as with Medicare and Medicaid).

Free Market vs. intervention: Should the economy be allowed to move at its own pace, in good times and in bad, or should the federal government intervene to smooth out the bumps in the business cycle? This is a long-running debate, but one that has been elevated in recent years.

The free marketers claim only the unrestrained actions of profit-seeking businesses and satisfaction-led consumers ultimately give the highest standard of living for the greatest number of people. Further, they state that government simply doesn’t have the resources or the knowledge to effectively change free market outcomes, and attempts to do so will only be detrimental.

Fans of government intervention may concede the long-run benefits of the free market, but they do see failures. Specifically, economic downturns (recessions, depressions) may be self-correcting, but the process can take a long time and be at a high cost.

Keep these core debates in mind when you evaluate different proposals for the economy. This will be a year when we will all decide.

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Dr. Mike Walden is a William Neal Reynolds Professor and North Carolina Cooperative Extension economist in the Department of Agricultural and Resource Economics of N.C. State University’s College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The College of Agriculture and Life Sciences communications unit provides his You Decide column every two weeks. Previous columns are available at http://www.cals.ncsu.edu/agcomm/news-center/tag/you-decide

Related audio files are at http://www.cals.ncsu.edu/agcomm/news-center/category/economic-perspective/

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