Capitalism and the Economy

The US economy is based upon a system of capitalism, in which the productive assets of society are both privately owned and controlled by individuals and firms. Further, the buyers and sellers in the market determine the prices for products and services, as well as the incomes and profits to individuals and firms. Capitalism is a system that by nature rewards productivity gains and economic growth to innovation and responsiveness to consumer preferences. Therefore, an exclusive and perpetual gain exists for those who succeed in the competitive marketplace. Due to its characteristics, capitalism has a tendency to produce substantial income and wealth inequalities. Imposing high taxes and providing unemployment and medical benefits are ways in which the government intervenes and acts against the inequalities that occur in society. The government can also intervene in the economy through the passage of legislation.

The current White House administration is attempting to stimulate the economy while also fueling long term growth through massive tax breaks and a substantial spending package. While it is generally the case that deficits tend to shrink during periods of economic stability, the current administration has decided to go in the opposite direction. Economists at J.P. Morgan believe the deficit will raise to 5.4% of the US’ GDP next year or roughly $1.2 trillion. By adding to the deficits, Trump has taken a fiscal policy experiment. These attempts at economic growth through the government’s undertaking of massive deficits is not without huge risks. For instance, larger deficits give the government less flexibility to cut taxes or increase spending in the future, should the economy sink in the next downturn.

The success of these plans is dependent on how the general populace reacts to these attempts at stimulating growth. The government can attempt to stimulate the economy, but at the end of the day a capitalist economy relies on consumers to participate in the marketplace. While the policies do bring certain risk they also bring major potential upsides. Trump’s focus on stronger growth follows a decade that shows what happens without it: trust in institutions suffers, inequality rises, and central banks face enormous pressures, as stated by Mohamed El-Erian, chief economic adviser at Allianz SE. Policy analyst Andy Laperriere has identified the problem being the deficits have not been handled by addressing the biggest driver of spending growth- Medicare and Social Security. Further, whether Trump’s plan succeeds is heavily dependent upon how fiscal policy interacts with the market.

https://www.wsj.com/articles/sizing-up-the-trumponomics-gamble-on-deficit-spending-1518374037

4 Responses to "Capitalism and the Economy"

Gwynna Ryan says:

February 12, 2018 at 1:58 pm

Paige,

This is a really interesting post. The economy, of course, is always one of the biggest talking points during major elections. I think the election of President Trump showed, if nothing else, that the American people hoped Trump would be able to strengthen the economy given his personal success as a business man. Barring the last few weeks, the stock market was rising at historic levels. This was a phenomenon that Trump and other politicians attributed directly to the 2016 election. The most recent decline of the stock market is interesting for precisely the same reason. If the success was due to politics, maybe the decline is as well. It would be interesting to consider the stock market in conjunction with your post about the fiscal policy of this administration in regards to deficit spending and the new tax plan.
Isabella Brown says:

February 12, 2018 at 11:25 pm

Dear Paige,

Your post was really interesting because it discusses the recent tax plan that was enacted by the Trump Administration this past December. Our government’s current federal budget deficit for 2018 is $440 billion, and our country’s national debt is over $20 trillion. However, instead of collecting more taxes and working towards paying off our debt, we have cut them further and arguably dug ourselves into a deeper hole. When facing the question of if cutting taxes will stimulate economic growth, one should look to Kansas for a cautionary tale. In 2012, Kansas enacted tax cuts that “slashed individual income tax rates and lowered to zero the tax on so-called pass-through business income, which usually comes from small businesses and partnerships.” While it was promised by their Governor to be a “shot of adrenaline into the heart” for his state’s economy, it basically was a failure as “State revenues plummeted by hundreds of millions of dollars and continued to miss projections for several years.” Kansas politicians argued that had the tax cuts been kept around for longer, then they would have eventually worked, but the damage had been done and in June of 2017 the tax cuts were voted to be reversed. While the cases between the Trump administration and Kansas’ tax cuts are different, there are striking similarities between the two that leave one to wonder if the recent bout of tax cuts was the correct direction to take our country in.

https://www.npr.org/2017/09/30/554506190/trump-s-tax-plan-has-echoes-of-the-kansas-tax-cut-experiment
James Hulbert says:

February 13, 2018 at 12:44 pm

Paige,

Thank you for your extremely relevant post to Chapter 4 and American society today. There is no hiding that income inequality still remains a major problem among the vast majority of American citizens. As we have learned in class, the top 10% in America took home more than 50% of all wages as recently as 2015. It is so imperative that there is more money that circulates to people of all economic standings. The budget deficits that Trump is proposing will likely never happen considering it is not yet law. The proposal has months to go and would need 60 votes in the senate before being approved. However, I think it definitely does have pros and cons. Coming from New York City, I have witnessed and interacted with many people on food stamps who are absolutely genuine people that need assistance. Cutting a quarter of the funding towards this community is both radical and dangerous. In terms of GDP, many economists think that Trump’s proposed tax breaks could set America up for a long term steady growth pattern. GDP would seemingly increase 2.5% to 3% for the foreseeable future. Again, I do not think that the majority of Trump’s budget plan has a legitimate chance of being passed in congress, but if it did it would have both positive and negative effects.
Sara Milano says:

February 13, 2018 at 3:19 pm

Paige,

Your pointing out the values and drawbacks associated with capitalism is very relevant to this discussion of wealth inequality and tax breaks. Capitalism allows for the market to function more or less freely, and for everyone to accumulate wealth according to their talents or efforts. This kind of system rewards those who are privileged to get good jobs, those who are highly educated, and people who know how to play the markets. However, people without these resources require a boost to achieve equal opportunity. The question is who should be financing the kind of government programs that provide relief and opportunity, and if anyone should be at all. While President Trump has managed to pass his tax bill, this bill in actuality mostly provides cuts for the those in the highest brackets as well as for corporations. Small businesses and middle class families (the very base that got President Trump elected) will not benefit from these cuts. While most republicans can get behind “lower taxes,” a more critical eye will reveal that the bill benefits the wealthy and large corporations. Whether or not the 1% should have to pay a high tax rate on their income is a moral question, but Americans should be clear on who is benefitting from the tax overhaul.

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