- Industry: Economy; Printing & publishing
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Cutting red tape. The process of removing legal or quasi-legal restrictions on the amount of competition, the sorts of business done, or the prices charged within a particular industry. During the last two decades of the 20th century, many governments committed to the free market pursued policies of liberalization based on substantial amounts of deregulation hand-in-hand with the privatization of industries owned by the state. The aim was to decrease the role of government in the economy and to increase competition. Even so, red tape is alive and well. In the United States, with some 60 federal agencies issuing more than 1,800 rules a year, in 1998 the Code of Federal Regulations was more than 130,000 pages thick. However, not all regulation is necessarily bad. According to estimates by the American Office of Management and Budget, the annual cost of these rules was $289 billion, but the annual benefits were $298 billion.
Industry:Economy
One of the two words economists use most, along with demand. These are the twin driving forces of the market economy. Supply is the amount of a good or service available at any particular price. The law of supply is that, other things remaining the same, the quantity supplied will increase as the price increases. The actual amount supplied will be determined, ultimately, by what the market price is, which depends on the amount demanded as well as what suppliers are willing to produce. What suppliers are willing to supply depends on several things:
* the cost of the factors of production;
* technology;
* the price of other goods and services (which, if high enough, might tempt the supplier to switch production to those products); and
* the ability of the supplier accurately to forecast demand and plan production to make the most of the opportunity.
Industry:Economy
Market failure? Not necessarily. Usually a queue reflects a price that is set too low, so that demand exceeds supply, so some customers have to wait to buy the product. But a queue may also be the result of deliberate rationing by a producer, perhaps to attract attention – by a restaurant that wants to appear popular, say. Customers may regard a queue, such as a waiting list for health treatment, as a fairer way to distribute the product than using the price mechanism.
Industry:Economy
When one buyer or seller in a market has the ability to exert significant influence over the quantity of goods and services traded or the price at which they are sold. Market power does not exist when there is perfect competition, but it does when there is a monopoly, monopsony or oligopoly.
Industry:Economy
A bad, depressingly prolonged recession in economic activity. The textbook definition of a recession is two consecutive quarters of declining output. A slump is where output falls by at least 10%; a depression is an even deeper and more prolonged slump. The most famous example is the Great Depression of the 1930s. After growing strongly during the “roaring 20s”, the American economy (among others) went into prolonged recession. Output fell by 30%. Unemployment soared and stayed high: in 1939 the jobless rate was still 17% of the workforce. Roughly half of the 25,000 banks in the United States failed. An attempt to stimulate growth, the New Deal, was the most far-reaching example of active fiscal policy then seen and greatly extended the role of the state in the American economy. However, the depression only ended with the onset of preparations to enter the second world war. Why did the Great Depression happen? It is not entirely clear, but forget the popular explanation: that it all went wrong with the Wall Street stock market crash of October 1929; that the slump persisted because policymakers just sat there; and that it took the New Deal to put things right. As early as 1928 the Federal Reserve, worried about financial speculation and inflated stock prices, began raising interest rates. In the spring of 1929, industrial production started to slow; the recession started in the summer, well before the stock market lost half of its value between October 24th and mid-November. Coming on top of a recession that had already begun, the crash set the scene for a severe contraction but not for the decade-long slump that ensued. So why did a bad downturn keep getting worse, year after year, not just in the United States but also around the globe? In 1929 most of the world was on the gold standard, which should have helped stabilize the American economy. As demand in the United States slowed its imports fell, its balance of payments moved further into surplus and gold should have flowed into the country, expanding the money supply and boosting the economy. But the Fed, which was still worried about easy credit and speculation, dampened the impact of this adjustment mechanism, and instead the money supply got tighter. Governments everywhere, hit by falling demand, tried to reduce imports through tariffs, causing international trade to collapse. Then American banks started to fail, and the Fed let them. As the crisis of confidence spread more banks failed, and as people rushed to turn bank deposits into cash the money supply collapsed. Bad monetary policy was abetted by bad fiscal policy. Taxes were raised in 1932 to help balance the budget and restore confidence. The New Deal brought deposit insurance and boosted government spending, but it also piled taxes on business and sought to prevent excessive competition. Price controls were brought in, along with other anti-business regulations. None of this stopped – and indeed may well have contributed to – the economy falling into recession again in 1937–38, after a brief recovery starting in 1935.
Industry:Economy
A graph of the relationship between the price of a good and the amount supplied at different prices. (See also demand curve. )
Industry:Economy
Essential to any market economy. To trade, it is essential to know that the person selling a good or service owns it and that ownership will pass to the buyer. The stronger and clearer property rights are, the more likely it is that trade will take place and that prices will be efficient. If there are no property rights over something there can be severe consequences. A solution to the costly externality of clean air being polluted may be to establish property rights over the air, so that the owner can charge the polluter to pump smoke into the atmosphere. Private property rights are often more economically efficient than common ownership. When people do not own something directly, they may have little incentive to look after it. (See the tragedy of the commons. ) Strikingly, in Russia after communism, the establishment of a well-functioning market economy proved difficult, partly because it was unclear who owned many of the country’s resources, and those property rights that did exist often counted for little. Businesses would often have their products stolen by criminal gangs or be forced to hand over most of their profits in protection money. It is no coincidence that an effective judicial system, as well as property rights for it to enforce, is a feature of all advanced market economies. That said, nowhere are property rights absolute. For instance, taxation is a clear example of the state infringing taxpayers’ ownership of their money. The economic cost of infringing property rights underlines how important it is that governments think carefully about the consequences for economic growth of their tax policies.
Industry:Economy
Shorthand for the pressures from buyers and sellers in a market, rather than those coming from a government planner or from regulation.
Industry:Economy
A fall in the value of an asset or a currency; the opposite of appreciation.
Industry:Economy
Increasing economic growth by making markets work more efficiently. In the 1980s, Ronald Reagan and Margaret Thatcher championed supply-side policies as they attacked Keynesian demand management. Pumping up demand without making markets work better would simply lead to higher inflation; economic growth would increase only when markets were able to operate more freely. Thus they pursued policies of deregulation, liberalization and privatization and encouraged free trade. To reduce unemployment, they tried to increase the efficiency of the jobs market by cutting the rate of income tax and attacking legal and other impediments to labor market flexibility. The results of these programs are much debated. In particular, the belief, apparently supported by the Laffer curve, that cutting tax rates would increase tax revenue did not always stand up well to real-world testing. Even so, it is now recognized that supply-side reforms are a crucial element in an effective economic policy.
Industry:Economy
