Question

laissee-faire, Keynesian economics, mandatory spending vs. discretionary spending. Define each of these terms but also discuss and paint a picture of what these terms actually meant for our country.

Answer 1

a. Laissez-faire is an economic theory from the 18th century that opposed any government intervention in business affairs. The driving principle behind laissez-faire, a French term that translates as "leave alone" (literally, "let you do"), is that the less the government is involved in the economy, the better off business will be – and by extension, society as a whole. Laissez-faire economics are a key part of free market capitalism.

In the 18th century, French economists became upset with taxes and subsidies that were being imposed on their businesses. They believed that governments should leave the individual businesses alone, except when social liberties were infringed upon. In the 19th century, this philosophy became mainstream in the U.S. It wasn't long after this that the 'free market' approach started to display problems, such as large gaps in distribution of wealth, poor treatment of workers, and lack of safety in the workplace. By the mid-19th century, governments in most advanced countries became more involved in protecting and representing the safety and concerns of workers and the general population. This was the beginning of many of the factory laws and consumer protection laws that are being established and modified today.

b. Keynesian economics is an economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed by the British economist John Maynard Keynes during the 1930s in an attempt to understand the Great Depression. Keynes advocated for increased government expenditures and lower taxes to stimulate demand and pull the global economy out of the depression.

A key concept in the Keynesian theory is the idea of a multiplier: both private sector demand and production grow faster than state expenditures. It also takes into account the propensity of households to save. If the level of savings falls, consumer expenditures rise, resulting in economic growth. Inflation also contributes to increased spending. The higher the inflation, the less sense it makes to save – which again leads to more consumption. This theory’s popularity waned in the 1970s, but today governments are beginning to make use of it again.

c. Mandatory spending is also known as entitlement spending and goes to programs like Social Security, Medicare and Medicaid. Discretionary spending must be approved by the Congress every year in the appropriations process and, unlike most mandatory spending, is subject to a predetermined limit each year.

Mandatory spending is simply all spending that does not take place through appropriations legislation. Mandatory spending includes entitlement programs, such as Social Security, Medicare, and required interest spending on the federal debt. Mandatory spending accounts for about two-thirds of all federal spending. In most cases, but not all, mandatory spending is ongoing; it occurs each year absent a change in an underlying law that provides the funding. Discretionary spending, on the other hand, will not occur unless Congress acts each year to provide the funding through an appropriations bill. Tax legislation is treated as mandatory spending in many areas of the Congressional budget process.