A tariff is a tax on imports or exports between sovereign states. It is a form of regulation of foreign trade and a policy that taxes foreign products to encourage or protect domestic industry; the tariff is used to protect infant industries and to allow import substitution industrialization. Paul Bairoch argues that until the early 1960s, developed countries' international trade was characterized by an era of protectionism rather than a "golden era" of free trade, that in fact, periods of economic growth in the Western world were linked to protectionist policy, he explained that during the 19th century, European countries that were subject to higher tariffs had experienced faster growth. According to Paul Bairoch, the industrialized world of 1913 is similar to that of 1815: "An ocean of protectionism surrounding a few liberal islets", with the exception of a short free trade interlude in Europe between 1860 and 1892. Only two islands of liberalism emerged in the developed part: the Netherlands.
On the other hand, "the Third World was an ocean of liberalism", with Western countries imposing so-called "unequal" treaties on colonized and politically independent countries that required the lowering of customs barriers. Bairoch write that the "Third World" has in fact become underdeveloped because of the imposition of free trade while North America and Western Europe have been able to develop because they have rejected trade liberalism in their history, he notes that:in history, free trade is the exception and protectionism the rule. Trade liberalisation in the United Kingdom from 1846 onwards was the first example of large-scale liberalisation after the Industrial Revolution and was initiated by the dominant economy. However, it is the only country where over a specific period, free trade coincided with an increase in growth. Bairoch explains this by the fact that the country had a significant lead over the other countries in 1846, given that the country had emerged from at least half a century of protectionism.
It was in 1860 that free trade made a real breakthrough in continental Europe with the Cobden-Chevalier Treaty signed by Napoleon III. The agreement was considered in France as a coup d'état, since the parliament was opposed to it, the agreement was established by means of secret negotiations between Napoleon Ill's envoy Michel Chevalier and Britain's Richard Cobden; that agreement was the first of a series which Britain would establish with several European countries, known as the "Cobden agreements": the Franco-Belgian treaty was signed in 1861 and between 1861 and 1866 all European countries joined the Cobden treaty. Only a few countries on the continent had adopted a liberal trade policy before 1860: the Netherlands, Portugal, Switzerland and Belgium; the decades that followed were not a period of growth and prosperity, but on the contrary they were likened to "the Great Depression". Paul Bairoch notes in Myths and Paradoxes of Economic History that the Great European Depression began around 1870-1872 at the height of free trade in Europe between 1866 and 1877 and ended with the return to protectionism around 1892: The important point is not only that the crisis started at the height of free trade, but that it ended around 1892-1894, just as the return to protectionism became effective in continental EuropeIt is certain that free trade coincided with the depression for which it was the cause, while protectionism was at the origin of growth and development in most of the current developed countrie.
In Europe, the slowdown in GNP growth was the result of the decline in agricultural production growth. This agricultural crisis in continental Europe can be explained exclusively by the influx of foreign cereals, which became possible thanks to the abolition of tariff protection on cereals in continental Europe between 1866 and 1872, it was the farmers who suffered because cheap imports led to the collapse of agricultural commodity prices. But it affected overall demand for industrial goods and the construction sector. In France, an agrarian economy, wheat imports, which reached 0.3% of national production in 1851/1860, rose to 19% in 1888/1892. In Belgium, this percentage rose from 6% around 1850 to more than 100% around 1890. During the 1870s and 1880s, the United States was Europe's largest supplier of cereals. There was an increasing trade imbalance between Europe and the United States until the 1900s, given that the United States had higher tariffs. In the early 1860s, Europe and the United States pursued different trade policies.
The 1860s were a period of growing protectionism in the United States, while the European free trade phase lasted from 1860 to 1892. The tariff average rate on imports of manufactured goods was in 1875 from 40% to 50% in the United States against 9% to 12% in continental Europe at the height of free trade, it experienced a period of strong growth. Around 1870, Europe's trade deficit with America represented 5% to 6% of the region's imports, it reached 32% in 1890 and 59% around 1900. Germany was the first major European country to change its trade policy by adopting a new tariff in July 1879; this new German tariff meant the end of the period of free trade on the continent. Thus, the period 1879-1892 saw the gradual return of protectionism
Public finance is the study of the role of the government in the economy. It is the branch of economics which assesses the government revenue and government expenditure of the public authorities and the adjustment of one or the other to achieve desirable effects and avoid undesirable ones; the purview of public finance is considered to be threefold: governmental effects on efficient allocation of resources, distribution of income, macroeconomic stabilization. The proper role of government provides a starting point for the analysis of public finance. In theory, under certain circumstances, private markets will allocate goods and services among individuals efficiently. If private markets were able to provide efficient outcomes and if the distribution of income were acceptable there would be little or no scope for government. In many cases, conditions for private market efficiency are violated. For example, if many people can enjoy the same good at the same time private markets may supply too little of that good.
National defense is one example of non-rival consumption, or of a public good."Market failure" occurs when private markets do not allocate goods or services efficiently. The existence of market failure provides an efficiency-based rationale for collective or governmental provision of goods and services. Externalities, public goods, informational advantages, strong economies of scale, network effects can cause market failures. Public provision via a government or a voluntary association, however, is subject to other inefficiencies, termed "government failure." Under broad assumptions, government decisions about the efficient scope and level of activities can be efficiently separated from decisions about the design of taxation systems. In this view, public sector programs should be designed to maximize social benefits minus costs, revenues needed to pay for those expenditures should be raised through a taxation system that creates the fewest efficiency losses caused by distortion of economic activity as possible.
In practice, government budgeting or public budgeting is more complicated and results in inefficient practices. Government can pay for spending by borrowing, although borrowing is a method of distributing tax burdens through time rather than a replacement for taxes. A deficit is the difference between government spending and revenues; the accumulation of deficits over time is the total public debt. Deficit finance allows governments to smooth tax burdens over time, gives governments an important fiscal policy tool. Deficits can narrow the options of successor governments. Public finance is connected to issues of income distribution and social equity. Governments can reallocate income through transfer payments or by designing tax systems that treat high-income and low-income households differently; the public choice approach to public finance seeks to explain how self-interested voters and bureaucrats operate, rather than how they should operate. Collection of sufficient resources from the economy in an appropriate manner along with allocating and use of these resources efficiently and constitute good financial management.
Resource generation, resource allocation and expenditure management are the essential components of a public financial management system. The following subdivisions form the subject matter of public finance. Public expenditure Public revenue Public debt Financial administration Federal finance Economists classify government expenditures into three main types. Government purchases of goods and services for current use are classed as government consumption. Government purchases of goods and services intended to create future benefits – such as infrastructure investment or research spending – are classed as government investment. Government expenditures that are not purchases of goods and services, instead just represent transfers of money – such as social security payments – are called transfer payments. Government operations are those activities involved in the running of a state or a functional equivalent of a state for the purpose of producing value for the citizens. Government operations have the power to make, the authority to enforce rules and laws within a civil, religious, academic, or other organization or group.
Income distribution – Some forms of government expenditure are intended to transfer income from some groups to others. For example, governments sometimes transfer income to people that have suffered a loss due to natural disaster. Public pension programs transfer wealth from the young to the old. Other forms of government expenditure which represent purchases of goods and services have the effect of changing the income distribution. For example, engaging in a war may transfer wealth to certain sectors of society. Public education transfers wealth to families with children in these schools. Public road construction transfers wealth from people that do not use the roads to those people that do. Income Security Employment insurance Health Care Public financing of campaigns Government expenditures are financed in three ways: Government revenue Taxes Non-tax revenue Government borrowing Money
The business cycle known as the economic cycle or trade cycle, is the downward and upward movement of gross domestic product around its long-term growth trend. The length of a business cycle is the period of time containing a single boom and contraction in sequence; these fluctuations involve shifts over time between periods of rapid economic growth and periods of relative stagnation or decline. Business cycles are measured by considering the growth rate of real gross domestic product. Despite the often-applied term cycles, these fluctuations in economic activity do not exhibit uniform or predictable periodicity; the common or popular usage boom-and-bust cycle refers to fluctuations in which the expansion is rapid and the contraction severe. The first systematic exposition of economic crises, in opposition to the existing theory of economic equilibrium, was the 1819 Nouveaux Principes d'économie politique by Jean Charles Léonard de Sismondi. Prior to that point classical economics had either denied the existence of business cycles, blamed them on external factors, notably war, or only studied the long term.
Sismondi found vindication in the Panic of 1825, the first unarguably international economic crisis, occurring in peacetime. Sismondi and his contemporary Robert Owen, who expressed similar but less systematic thoughts in 1817 Report to the Committee of the Association for the Relief of the Manufacturing Poor, both identified the cause of economic cycles as overproduction and underconsumption, caused in particular by wealth inequality, they advocated government intervention and socialism as the solution. This work did not generate interest among classical economists, though underconsumption theory developed as a heterodox branch in economics until being systematized in Keynesian economics in the 1930s. Sismondi's theory of periodic crises was developed into a theory of alternating cycles by Charles Dunoyer, similar theories, showing signs of influence by Sismondi, were developed by Johann Karl Rodbertus. Periodic crises in capitalism formed the basis of the theory of Karl Marx, who further claimed that these crises were increasing in severity and, on the basis of which, he predicted a communist revolution.
Though only passing references in Das Kapital refer to crises, they were extensively discussed in Marx's posthumously published books in Theories of Surplus Value. In Progress and Poverty, Henry George focused on land's role in crises – land speculation – and proposed a single tax on land as a solution. In 1860 French economist Clément Juglar first identified economic cycles 7 to 11 years long, although he cautiously did not claim any rigid regularity. Economist Joseph Schumpeter argued that a Juglar cycle has four stages: Expansion Crisis Recession Recovery Schumpeter's Juglar model associates recovery and prosperity with increases in productivity, consumer confidence, aggregate demand, prices. In the 20th century and others proposed a typology of business cycles according to their periodicity, so that a number of particular cycles were named after their discoverers or proposers: The Kitchin inventory cycle of 3 to 5 years The Juglar fixed-investment cycle of 7 to 11 years (often identified as "the" business cycle The Kuznets infrastructural investment cycle of 15 to 25 years (after Simon Kuznets – called "building cycle" The Kondratiev wave or long technological cycle of 45 to 60 years Some say interest in the different typologies of cycles has waned since the development of modern macroeconomics, which gives little support to the idea of regular periodic cycles.
Others realize. Since 1960, World GDP has increased by fifty-nine times, these multiples have not kept up with annual inflation over the same period. Social Contract collapses for nations when incomes are not kept in balance with cost-of-living over the timeline of the monetary system cycle - until hardships/populism/revolution are always seen in late capitalism; the Bible and Hammurabi's Code both explain economic remediations for cyclic sixty-year recurring great depressions, via fiftieth-year Jubilee debt and wealth resets. Thirty major debt forgiveness events are recorded in history including the debt forgiveness given to most european nations in the 1930s to 1954. There were great increases in productivity, industrial production and real per capita product throughout the period from 1870 to 1890 that included the Long Depression and two other recessions. There were significant increases in productivity in the years leading up to the Great Depression. Both the Long and Great Depressions were characterized by market saturation.
Over the period since the Industrial Revolution, technological progress has had a much larger effect on the economy than any fluctuations in credit or debt, the primary exception being the Great Depression, which caused a multi-year steep economic decline. The effect of technological progress can be seen by the purchasing power of an average hour's work, which has grown from $3 in 1900 to $22 in 1990, measured in 2010 dollars. There were similar increases in real wages during the 19th century. A table of innovations and long
Protectionism is the economic policy of restricting imports from other countries through methods such as tariffs on imported goods, import quotas, a variety of other government regulations. Proponents claim that protectionist policies shield the producers and workers of the import-competing sector in the country from foreign competitors. However, they reduce trade and adversely affect consumers in general, harm the producers and workers in export sectors, both in the country implementing protectionist policies, in the countries protected against. There is a consensus among economists that protectionism has a negative effect on economic growth and economic welfare, while free trade and the reduction of trade barriers has a positive effect on economic growth; some scholars have implicated protectionism as the cause of some economic crises, most notably the Great Depression. However, trade liberalization can sometimes result in large and unequally distributed losses and gains, can, in the short run, cause significant economic dislocation of workers in import-competing sectors.
A variety of policies have been used to achieve protectionist goals. These include: Tariffs and import quotas are the most common types of protectionist policies. A tariff is an excise tax. Imposed to raise government revenue, modern tariffs are now more designed to protect domestic producers that compete with foreign importers. An import quota is a limit on the volume of a good that may be imported established through an import licensing regime. Protection of technologies, patents and scientific knowledge Restrictions on foreign direct investment, such as restrictions on the acquisition of domestic firms by foreign investors. Administrative barriers: Countries are sometimes accused of using their various administrative rules as a way to introduce barriers to imports. Anti-dumping legislation: "Dumping" is the practice of firms selling to export markets at lower prices than are charged in domestic markets. Supporters of anti-dumping laws argue that they prevent import of cheaper foreign goods that would cause local firms to close down.
However, in practice, anti-dumping laws are used to impose trade tariffs on foreign exporters. Direct subsidies: Government subsidies are sometimes given to local firms that cannot compete well against imports; these subsidies are purported to "protect" local jobs, to help local firms adjust to the world markets. Export subsidies: Export subsidies are used by governments to increase exports. Export subsidies have the opposite effect of export tariffs because exporters get payment, a percentage or proportion of the value of exported. Export subsidies increase the amount of trade, in a country with floating exchange rates, have effects similar to import subsidies. Exchange rate control: A government may intervene in the foreign exchange market to lower the value of its currency by selling its currency in the foreign exchange market. Doing so will raise the cost of imports and lower the cost of exports, leading to an improvement in its trade balance. However, such a policy is only effective in the short run, as it will lead to higher inflation in the country in the long run, which will in turn raise the real cost of exports, reduce the relative price of imports.
International patent systems: There is an argument for viewing national patent systems as a cloak for protectionist trade policies at a national level. Two strands of this argument exist: one when patents held by one country form part of a system of exploitable relative advantage in trade negotiations against another, a second where adhering to a worldwide system of patents confers "good citizenship" status despite'de facto protectionism'. Peter Drahos explains that "States realized that patent systems could be used to cloak protectionist strategies. There were reputational advantages for states to be seen to be sticking to intellectual property systems. One could attend the various revisions of the Paris and Berne conventions, participate in the cosmopolitan moral dialogue about the need to protect the fruits of authorial labor and inventive genius...knowing all the while that one's domestic intellectual property system was a handy protectionist weapon." Political campaigns advocating domestic consumption Preferential governmental spending, such as the Buy American Act, federal legislation which called upon the United States government to prefer US-made products in its purchases.
In the modern trade arena many other initiatives besides tariffs have been called protectionist. For example, some commentators, such as Jagdish Bhagwati, see developed countries efforts in imposing their own labor or environmental standards as protectionism; the imposition of restrictive certification procedures on imports are seen in this light. Further, others point out that free trade agreements have protectionist provisions such as intellectual property and patent restrictions that benefit large corporations; these provisions restrict trade in music, pharmaceuticals and other manufactured items to high cost producers with quotas from low cost producers set to zero. Protectionism was associated with economic theories such as mercantilism, import substitution. In the 18th century, Adam Smith famously warned against the "interested sophistry" of industry
Government debt contrasts to the annual government budget deficit, a flow variable that equals the difference between government receipts and spending in a single year. The debt is a stock variable, measured at a specific point in time, it is the accumulation of all prior deficits. Government debt can be categorized as external debt. Another common division of government debt is by duration. Short term debt is considered to be for one year or less, long term debt is for more than ten years. Medium term debt falls between these two boundaries. A broader definition of government debt may consider all government liabilities, including future pension payments and payments for goods and services which the government has contracted but not yet paid. Governments create debt by issuing government bills. Less creditworthy countries sometimes borrow directly from a supranational organization or international financial institutions. Monetarily sovereign countries that issue debt denominated in their home currency can make payments on the interest or principal of government debt by creating money, although at the risk of higher inflation.
In this way their debt is different from that of households. Thus such government bonds are at least as safe as any other bonds denominated in the same currency. A central government with its own currency can pay for its nominal spending by creating money ex novo, although typical arrangements leave money creation to central banks. In this instance, a government issues securities to the public not to raise funds, but instead to remove excess bank reserves and'...create a shortage of reserves in the market so that the system as a whole must come to the Bank for liquidity.' During the Early Modern era, European monarchs would default on their loans or arbitrarily refuse to pay them back. This made financiers wary of lending to the king and the finances of countries that were at war remained volatile; the creation of the first central bank in England—an institution designed to lend to the government—was an expedient by William III of England for the financing of his war against France. He engaged a syndicate of city merchants to offer for sale an issue of government debt.
This syndicate soon evolved into the Bank of England financing the wars of the Duke of Marlborough and Imperial conquests. The establishment of the bank was devised by Charles Montagu, 1st Earl of Halifax, in 1694, to the plan, proposed by William Paterson three years before, but had not been acted upon, he proposed a loan of £1.2m to the government. The Royal Charter was granted on 27 July through the passage of the Tonnage Act 1694; the founding of the Bank of England revolutionised public finance and put an end to defaults such as the Great Stop of the Exchequer of 1672, when Charles II had suspended payments on his bills. From on, the British Government would never fail to repay its creditors. In the following centuries, other countries in Europe and around the world adopted similar financial institutions to manage their government debt. 1815, at the end of the Napoleonic Wars, British government debt reached a peak of more than 200% of GDP. A government bond is a bond issued by a national government.
Such bonds are most denominated in the country's domestic currency. Sovereigns can issue debt in foreign currencies: 70% of all debt in 2000 was denominated in US dollars. Government bonds are sometimes regarded as risk-free bonds, because national governments can if necessary create money de novo to redeem the bond in their own currency at maturity. Although many governments are prohibited by law from creating money directly, central banks may provide finance by buying government bonds, sometimes referred to as monetizing the debt. Government debt, synonymous to sovereign debt, can be issued either in domestic or foreign currencies. Investors in sovereign bonds denominated in foreign currency have exchange rate risk: the foreign currency might depreciate against the investor's local currency. Sovereigns issuing debt denominated in a foreign currency may furthermore be unable to obtain that foreign currency to service debt. In the 2010 Greek debt crisis, for example, the debt is held by Greece in Euros, one proposed solution is for Greece to go back to issuing its own drachma.
This proposal would only address future debt issuance, leaving substantial existing debts denominated in what would be a foreign currency doubling their cost Public debt is the total of all borrowing of a government, minus repayments denominated in a country's home currency. CIA's World Factbook lists only the percentages of GDP. A debt to GDP ratio is one of the most accepted ways of assessing the significance of a nation's debt. For example, one of the criteria of admission to the European Union's euro currency is that an applicant country's debt should not exceed 60% of that countr
In American public finance, discretionary spending is government spending implemented through an appropriations bill. This spending is an optional part of fiscal policy, in contrast to entitlement programs for which funding is mandatory and determined by the number of eligible recipients; some examples of areas funded by discretionary spending are national defense, foreign aid and transportation. In the United States, discretionary spending refers to optional spending set by appropriation levels each year, at the discretion of Congress. During the budget process, Congress issues a budget resolution which includes levels of discretionary spending, deficit projections, instructions for changing entitlement programs and tax policy. After setting discretionary spending levels, both the House Appropriations Committee and Senate Appropriations Committee divide the agreed-upon amount of discretionary spending into twelve suballocations for each of their twelve subcommittees; these subcommittees produce twelve annual appropriation bills for the next fiscal year.
While these bills are subject to revision as they move through hearings, Floor consideration, conference, the level of discretionary spending remains constrained by the budget resolution. These twelve bills must be approved by the full Appropriations Committee, followed by both Houses of Congress. Once passed, the president either signs them, vetoes them, or allows them to become law by not signing them within ten days. In 2016, the U. S. federal government spent $1.2 trillion on U. S. discretionary spending. Of this $1.2 trillion, nearly half was spent on national defense. The rest of U. S. discretionary spending was allocated for education, training and social services, as well as transportation, veterans' benefits and services, income security, administration of justice, international affairs, other areas related to natural resources, the environment, science and technology. In 1962, U. S. discretionary spending made up 47.2% of total U. S. spending, remaining the largest component of federal spending until the mid-1970s.
From this time forward, discretionary spending levels as a share of total federal spending has decreased significantly. This is due to the rapid growth of entitlement spending known as mandatory spending; as more participants become eligible for entitlement programs, mandatory spending automatically increases. This trend is projected to continue in the future. In fact, according to the Congressional Research Service, over the next decade, mandatory spending is projected to reach 14% of GDP, while discretionary spending is projected to continue getting smaller reaching 5% of GDP. By 2022, the Congressional Research Service projects that discretionary spending's share of the economy "will be equal to or less than spending in each of the two largest categories of mandatory programs, Social Security and Major Health Programs." Budget process Mandatory spending Appropriations bill
In economics, the monetary base in a country is the total amount of bank notes and coins circulating in the economy. This includes: the total currency circulating in the public, plus the currency, physically held in the vaults of commercial banks, plus the commercial banks' reserves held in the central bank; the monetary base should not be confused with the money supply, which consists of the total currency circulating in the public plus certain types of non-bank deposits with commercial banks. Open market operations are monetary policy tools which directly expand or contract the monetary base; the monetary base is manipulated during the conduct of monetary policy by a finance ministry or the central bank. These institutions change the monetary base through open market transactions: the buying and selling of government bonds. For example, if they buy government bonds from commercial banks, they pay for them by adding new amounts to the banks’ reserve deposits at the central bank, the latter being a component of the monetary base.
A central bank can influence banking activities by manipulating interest rates and setting reserve requirements. Interest rates on federal funds, are themselves influenced by open market operations; the monetary base has traditionally been considered high-powered because its increase will result in a much larger increase in the supply of demand deposits through banks' loan-making. If a country’s gross domestic product is declining or growing sluggishly, monetary policy can offset this with open market purchases of bonds, which expand the monetary base; this expansion of the base in turn leads to expansion of the money supply and to downward pressure on interest rates, which makes it less expensive for consumers to buy consumer goods and for companies to purchase new physical capital. On the other hand, if gross domestic product is growing at an unsustainably high rate, threatening to cause an increase in the inflation rate, contractionary open market operations can be used to slow the economy down.
As of February 2019, the monetary base in the United States was about USD $3,353,484,000,000, up from about $832,999,000,000 in March 2008. Money creation Monetary reform Fractional reserve banking Credit theory of money Karl. "High-powered money and the monetary base". In Newman, Peter K.. The New Palgrave Dictionary of Economics. New York: Macmillan. Doi:10.1057/9780230226203.2726. ISBN 0-935859-10-1. Retrieved 8 February 2011. Goodhart, Charles. "Monetary base". In Newman, Peter K.. The New Palgrave Dictionary of Economics. New York: Macmillan. Doi:10.1057/9780230226203.3102. ISBN 0-935859-10-1. Retrieved 8 February 2011. Cagan, Phillip. "High-Powered Money". Determinants and Effects of Changes in the Stock of Money, 1875-1960. Cambridge, Massachusetts: National Bureau of Economic Research. Pp. 45–117. ISBN 0-87014-097-3. Retrieved 8 February 2011. Aggregate Reserves Of Depository Institutions And The Monetary Base