Economic growth is driven by investments in both physical capital and human capital. To increase the health and wealth of a society, the US must ensure that businesses have access to resources (both physical and financial) but that everyone has access to resources that improve their human capital. Under this framework, government investment in irradicating diseases like malaria, polio, and measles allows individuals to live longer, healthier lives which increases their productivity.
The federal government is responsible for funding a lot of the technological innovation that we often attribute to private companies. While the purpose of some of these innovations is to be applied to the military innovation of the US armed forces, a lot of them also end up as vital components of civilian lives. Private companies may not be willing to invest in technological advancements if they may come at a cost to shareholder profit, but the government isn’t as concerned with profitability.
Whenever a country enters a recession, there are two classes of responses available: fiscal and monetary policy responses. Fiscal policy responses focus on taxation and spending while monetary policy responses refer to Central Bank activity. In the United States, fiscal policy is administered by the Federal Reserve. The Fed is responsible for influencing the quantity of money and credit in the economy. During the Covid-19 pandemic, the Federal Reserve was responsible for issuing treasury bonds to finance fiscal policy decisions.
The Covid-19 pandemic and subsequent lockdowns sent the US (and world) economies into an immediate recession. The US experienced record high levels of unemployment and a massive reduction in GDP. To counteract this recession, the federal government enacted a series of expansionary fiscal policy recommendations that increased the aggregate demand curve to account for the previous reduction.
A stable financial system is an important component of an efficient market. Ensuring financial stability allows markets to allocate resources, assess and manage financial risk, and maintain employment levels close to the natural rate. When a bank has failed, the FDIC works to ensure that there are no major disruptions of financial transactions and that economic agents can continue to operate with confidence. With a strong market, the FDIC doesn’t need to intervene often, but the agency was very active during the Great Recession when a lot of banks failed. When a bank failure does occur, the FDIC works to transfer assets of one bank to an acquiring bank or they will take on those assets themselves until the find a suitable acquirer.
In the early 1900s, the banking system wasn’t as stable as we might have hoped. Banks loan out money to borrowers, but are susceptible to a panic when a lot of customers want their money held in savings. A bank run occurs when a large number of a bank’s depositors attempt to withdraw their money simultaneously because they believe the bank will become insolvent. This happened frequently enough during the Great Depression that it put pressure on the President to create an insurance program.
In order for bartering to be a successful payment of transactions, both sides must want what the other is offering and be willing to trade for it. Unfortunately, the seen above shows the difficulty of meeting the condition known as double coincidence of wants. Even though the man has Johnny Cash headshots, the young entrepreneur is only willing to accept US cash.
US currency may say “In God We Trust” but in order for the bills to mean anything, we place our trust in the US government. US currency is a type of fiat currency (as opposed to a commodity money) that has the backing of the US government. In order for something to be considered money, it must serve three general properties: store of value, a unit of account, and a medium of exchange. Each can be seen in the clip above. A lemonade seller won’t accept just anything, they want money (medium of exchange). We know the price of the lemonade because we use dollars as a measure of its worth (unit of account) and we expect those dollars to be worth the same amount over a certain period time (store of value).
A domestic production subsidy is a government payment to firms in a particular industry in an effort to increase production. This can be done as a form of monetary policy in response to recessions or in an attempt to increase trade. Countries might also want to subsidize industries that it believes are important to the growth of the economy. One problem with such subsidies is that they may not necessarily go to their intended recipients. While farming subsidies may have helped smaller farmers during the Great Depression, they are mostly going to large corporations today.
In this clip, we see that a succession of technological advancements has changed the way Kevin Hart listens to his satellite radio provider (SiriusXM.) When satellite radio was first introduced, it was considered revolutionary. Listeners could tune into their favorite radio stations anywhere their car could go. People were no longer limited to radio stations from their geographic location. One drawback of the service was that the technology was tied to a specific physical location – the car.
Kevin Hart clearly thinks this is still the case as he is seen sitting in his car listening to SiriusXM. LL Cool J shows him he can now stream on his laptop and thus he is able to leave his car and continue listening to his favorite station! Eventually, he’s told that he can listen on his cell phone and even stream his station through his Alexa speaker. His mind is blown! Technological advancement has made all of this development possible. We now have greater flexibility about where we can listen to satellite radio.
Thanks to Erin Yetter for the clip submission and commentary.