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Politics and the economy





poly
How far do you guys think politics influence a country's economy?
I personally think that the government has less influence than most people might guess. Politics can definitely make it worse by raising taxes and spreading a "bad" mood, or if people lose trust because of blackmail and scandals, but can they really make it better?
If for example they lower taxes, the economy should improve, but the government has less money and cannot build much new stuff, which is an important part of our economy. People might loses trust too, and invest less, as they are scared by the deficit.
Consequently, I think the economy is pretty independent from politics, whereas it completely depends on the people acting in it, and that us.
Whta do you guys think, are politics one of the main factor?
loryl
Politics and economy can influence each other deeply. For instance, if the economy is in the slumps and companies find that they have to relieve a large number of people of their jobs, government will see an influx of the unemployed seeking welfare and may find themselves dishing out more money. As for government, look where they spend the most money. In the case of the United States -- US companies. Where does Boeing get their money from? From whom do you think David H. Brooks became rich from (never mind that he spent 10 million on his daughter's 13th birthday party)? Who makes up the laws that protects patents and trademarks? Government can help (and thus influence) economy significantly.

As for the our role, there isn't a whole lot an individual can do that will influence the economy. Economics doesn't depend on a "main factor". Rather, a bunch of factors can affect an economy in a developed world: natural disasters, rebellions in other countries (or in one's own country), discovery of something new, the flapping of a butterfly's wings...

Nothing is independent in the developed world.
richard270384
Here is my belief:

The role of politics is important in the economy. Most, if not all, of the decisions any government makes must consider the financial viability and the financial impacts of that decision.

Consider this: The government decides to invest $500 billion on an infrastructure project that is expected to take 5 years to complete. This results in designing the infrastructure (thus employing engineers), requiring materials (thus employing miners or importing goods from overseas) and finally building the infrastructure (thus employing builders). In addition, there are the many other support staff which would be employed (e.g. truck drivers). With all this employing going on, the labour market tightens, this increases the demand for workers so salaries increase, this means less people on governemnt funded welfare, this means that the government has a lower social security bill. At the same time, the additional people who are employed must pay tax on their earnings, and so the government recieves higher income from tax receipts. Higher salaries mean a higher disposable income. THis means that individuals will purchase a greater number of goods and services, this employs more people in sales, retail and factory positions. With more money changing hands, financial institutions must employ more people to handle the increased workload. The labour market tightens again.

So this all sounds good right? Plenty of people employed and earning lots of money and spending it. Wrong!

Heres what happens next: With more and more people earning more money and buying more goods and services, the price of goods and services increase since there is higher demand (the basic rules of supply and demand). Inflation rises and the economy begins to overheat. Some people begin to have trouble affording simple luxuries - they demand an increase in wages. But an increase in wages will just make the problem worse. The government will increase interest rates, this essentially gives the average person less money to spend, and so, demand for goods and services drops. THe prices of goods and services soon follow. But people are worried about the future of the economy and whether interest rates will rise even further so they avoid spending. Workers in factories and retail begin to be sacked since there is nothing for them to do. You can probably see that everything starts falling apart from here.


You can quite clearly see that the governemnts decision (without proper organisation) has really hurt the economy. Obviously they could have done more to prevent this happenning. Perhaps it would have been better to do smaller projects over a longer period of time that would havve ended up producing the same infrastructure in the end.

Now thats how things work on a domestic level. But how do things work on an international level. The local economy is pressured by international ecnomics andevents just as easily. If anything, the international pressures ar emuch harder to anticipate and control. World oil prices, wars, diplomatic aggreeements, the ecnomies of trading partners all influence the local economy.

Consider this: The governemnt of today announces a budget deficit of $600 million. In order to pay for this deficit, they must borrow funds from overseas or they will go broke. In doing this, investors in our country's currency become worried about the future economic success of our country. THese investors sell their interests in our currency and purchase other currencies around the world. THis decreases the value of our currency on the world market. Of particular interest, is the fact that our currency has dropped in value compared to that of our major trading partners. THis means that our exporters now recieve less money for the goods the export and our importers pay more for the goods that they import. This forces up the selling price to consumers of goods that have been imported - contributing to inflation (as in the example above high inflation is no good). Exporters who are now recieving less for the goods they send overseas must cut production costs here at home. Usually, this means sacking employees.


The two examples that I have given are very extreme, but they just go to show you how much the government does in fact influence the economy and vice versa.

CHeers,
Richard Wink

Cheers,
Richard Wink
deStructuralized
poly wrote:
How far do you guys think politics influence a country's economy?
I personally think that the government has less influence than most people might guess. Politics can definitely make it worse by raising taxes and spreading a "bad" mood, or if people lose trust because of blackmail and scandals, but can they really make it better?
If for example they lower taxes, the economy should improve, but the government has less money and cannot build much new stuff, which is an important part of our economy. People might loses trust too, and invest less, as they are scared by the deficit.
Consequently, I think the economy is pretty independent from politics, whereas it completely depends on the people acting in it, and that us.
Whta do you guys think, are politics one of the main factor?

The scenarios you've outlined are examples of how politics can have huge effects on the rest of the economy.

First and foremost, the government usually constitutes a large portion of a nation's spending. By paying for public works services and bureaucracies, governments influence employee incomes just as much as a corporation might. Similarly, the corporation pays its employees to produce products, just as the government pays a bureaucrat for a service...both, in other words, influence output.

Second, the government influences spending indirectly through transfer payments and taxes. TR and TA affect the economy, but less so than plain old government spending--namely because neither directly boosts output, meaning you're missing a step in the multiplier process.

So, yes--an increase in taxes might decrease government spending or transfer payments as a result. But if the marginal propensity to consume is HUGE for those getting tax breaks, greater even than that of government employees or transfer payment recipients, then the net effect could still be a boost to the economy. Politicians decide how much to spend and how much to tax.

What's more, this doesn't even take into consideration the fact that political leaders are the ones who decide whether the country should import pharmaceuticals, whether steel imports should be heavily taxed, or whether agriculture should be subsidized. The political influence--and the economic ramifications that follow--are HUGE here.

Plus, this just describes fiscal and/or legal policy..government spending and taxation...monetary policy is considered an essential regulator of most modern economies, and for the most part the people who handle those operations are chosen by political leaders.
jmwarshay
I teach both general and international economics at the university level. I always tell my students that politics cannot be separated from economics. Economic theory is useful for explaining what happens and what might happen, but the actual choices are driven by politics. The US was founded on different interests, and how they work together and build coalitions decides what gets spent and taxed. The economy gains or loses as a result.

(By the way, a "special interest" is one that you do not agree with.)

Politicians try to build support for their programs by stating they are in the general interest of the country. Whether they are is another matter.

When we get to international economics, then politics is even more into play. The country's policy in a particular matter depends on various interests, then there are more politics on the international scene.
assee
i think politics is the backbone of any countrie's economy.
the first factor which any investor look after before investing his money is he sees the countries political situation.
if its instable he might not invest. we have personal experience of this . because the country where am living have a severe instablity . there are reasons behind this, Army and ineligibility o politicians etc. but now we are moving towards. hopefully we will get on some point.
badai
here, good article about how politician influence the economy of one's nation.

http://www.mindworkshop.com/alchemy/deficit.html
TomGrey
Earlier, Richard said:

Quote:
Of particular interest, is the fact that our currency has dropped in value compared to that of our major trading partners. THis means that our exporters now recieve less money for the goods the export and our importers pay more for the goods that they import. This forces up the selling price to consumers of goods that have been imported - contributing to inflation (as in the example above high inflation is no good). Exporters who are now recieving less for the goods they send overseas must cut production costs here at home. Usually, this means sacking employees.


While it is true that a lower exchange rate makes imported goods more expensive (in local $ rather than Euro, for instance), it is FALSE that exporters "must cut production costs" -- the lower currency has already done that task. It is FALSE FALSE that exporters must sack employees -- instead, the lower currency means the export sector has MORE employees.

Compare when MS XP is $100 or 100 Euro, (1 USD = 1 EUR) vs when 1 EUR = 1.3 USD, so that when MS XP sells for 100 Euro Microsoft gets $130. Or, more likely, they sell it for only 80 Euro (~$104) and sell MORE of it (lower prices means more quantity sold).

Note how the "anti-China" people want China to RAISE the renmimbi to USD exchange rate, so as to reduce the amount of stuff China sells to the US (by increasing the price US buyers pay).
(If you don't know the name of the Chinese currency, you need more education...)

Most gov't spending is on consumption, not investment, so is a "waste" -- unless it is the consumption that YOU want.

Lower taxes usually means higher investment and much higher output later.


The economy is mostly determined by people making peaceful, voluntary decisions about what to spend their limited amount of cash on (lower prices allows them to buy more).
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