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Why were industrial and agricultural surpluses a problem for the US economy? 
 
(i) The average American had limited funds to purchase these items. 
(ii) The United States did not have an efficient method of distributing goods to consumers. 
(iii) Consumers were more likely to buy products made by foreign competitors. 
(iv) The increase in production resulted in lower wages for workers.

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18 Mar 2020
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Case Study #3

TO WAL-MART OR NOT TO WAL-MART?

Wal-Mart is a $250-billion-a-year retailer. Eighty two percent of U.S. households made a

Wal-Mart purchase in 2002. It is the largest company in the world with a global

workforce of 1.4 million. Where Wal-Mart competes the average grocery prices are 14%

lower. In the past it was General Motors, IBM and other companies that were considered

to be the leaders in industry and the ones to watch. Now it is Wal-Mart that is being

studied in universities around the world.

At Wal-Mart, cost is king. Costs are kept low and this translates into goods being sold

for less. The entire organization is focused on reducing costs and passing those savings

on to the consumer. This allows poor people to buy food and other necessities that they

otherwise might not be able to afford. In the U.S. it dominates sales in a number of

categories : 32% of disposable diapers, 30% of hair products, 26% of toothpaste, 20% of

pet food and 13% of textiles.

Wal-Mart simply has developed the most efficient methods for operating their business.

Their inventory management, through a network of scanners, computers, and at-the-ready

suppliers, makes it the leader in successful turnover of inventory. How can we blame

Wal-Mart for being the efficient cost conscious giant that it is?

The Wal-Mart phenomenon has occurred at the same time that high-paying skilled jobs

are being lost in the manufacturing sector. When these jobs are lost, the alternative often

means being employed at Wal-Mart at a much lower pay scale with reduced benefits

such as medical insurance. Its labor costs are twenty percent less than those at

unionized supermarkets, and sales clerks make less, on average, than the federal poverty

level ($8.50 an hour).

Barbara Ehrenreich* has described the problems faced by the under class, such

as waitresses and Wal-Mart employees. They barely survive on a day-to-day basis, living

from hand to mouth, with no reserves, no safety net, no medical insurance and almost no

prospect of improving their positions in life.

The loss of manufacturing jobs has affected the lifestyles of many people. What they see

is the reality of reduced opportunity with a permanent reduction in wages and standards

of living. They are trapped in a new marketplace, with diminishing expectations and few

alternatives to shopping at Wal-Mart. This is a change in our American culture--the

dreams have now been down-sized.

Is Wal-Mart the hero or the culprit? After all, low prices, competition, and growth have

all been mantras that Americans have been chanting all of our lives. We were

told that if you built a better mouse trap, everyone would come to you. Well, Wal-Mart

has built a better mouse trap. Is there any logic in our looking at Wal-Mart as a

contributor to the loss of some our middle class or is it just jealousy and sour grapes?

For one thing, its hard line on costs has forced many factories to move overseas.

Wal-Mart imported most of the items it sells. Environmental standards

are lower in these countries where these goods are manufactured than they are in the

U.S. This probably results in increased health issues and costs. In addition, shipment of

goods many thousands of miles to their ultimate destinations, involve utilizing the

world’s limited oil resources. When you add up all this, the cost of the goods may be

greater than if they were produced in this country.

Another issue is that Wal-Mart is a non-union employer paying wages that are below the

poverty level, with minimal health insurance coverage. As many employees cannot

afford the co-payment required for doctors office visits, when a medical crisis occurs they

are forced to use the emergency room facilities of local hospitals. The result is that the

community bears the direct cost of their medical treatment and the indirect, as well as

ancillary costs such as diminished work capacity, child care, etc.

There are other economic ramifications to the Wal-Mart explosion. When Wal-Mart

arrives in a town, “main street” erodes. Neighborhood stores that used to provide goods,

services and paid their workers well, are eliminated, uprooting families and ways of life

in the process. The Wal-Mart decision to saturate Oklahoma City, resulted in the closure

of 30 supermarkets.

If Americans shop with price being the only factor that determines where they

purchase their goods, doesn’t this mean the permanent down-sizing of our standard of

living? How can the local retail establishment survive when they can’t compete with a

Wal-Mart? Look at what has happened to the local supermarket, bookstore, hardware

and clothing store. The demise of these small business constitutes the loss of a middle

class of society in a community. We need to think: As consumers are we better off

paying a little more to enable the local merchants and their families to survive in order to

preserve the character of our communities and society or should we concern ourselves

with price only?

HERE IS YOUR DILEMMA:

You are the mayor of a small city in the West. You can’t worry about the 4,700 workers

at IBM and the other workers at technology companies who lost their jobs. Your problem

is a more local one.

A Wal-Mart representative has approached you about the possibility of building a super-

store within your city limits. The store would serve communities within a twenty-five mile

radius. The land that they intend to build upon would require new zoning. Wal-Mart

would expect a certain amount of property tax and other relief. If your city does not

want a super-store, you are certain that one of the other towns close-by would be happy

to accommodate their needs.

What studies would you require before deciding which way to vote? What ramifications

do you foresee with this new super-store? What would you ask of Wal-Mart before

agreeing to their request? How much input would you seek from the residents of your

city

1. Which of the following transactions would add to the value of the U.S. GDP?

A. A college student buys a used car.
B. A college student sells her used textbooks back to the bookstore.
C. A grocery store purchases new freezers made in the United States.

D. U.S. citizen buys a new television manufactured in Asia.

2. The growth rate of real GDP:
A. depends on which year is used as the base year.
B. depends on how quickly prices are rising.
C. is always equal to the rate of growth of nominal GDP. D. is always more than the rate of growth of nominal GDP.

3. Which statement is true about GDP?
A. GDP includes the values of all final and intermediate goods and services.
B. Only the products made by American workers are included in the calculation of the US GDP.

C. Sales of old houses and used cars are included in the calculation of GDP for the current year.

D. In the US, GDP is calculated both annually and quarterly.

4. Which statement is true about GDP growth?
A. The GDP deflator is a measure of economic growth.
B. If we want to compare GDP over time, we should always compare real GDP.
C. Most economists choose nominal GDP growth as a single indicator of economic performance.

D. The GDP deflator tells the quantity change of production.

5. Which of the following is a way to compute GDP?

A. add up the wages paid to all workers

B. add up the quantities of all final goods and services
C. add up the market value of all final goods and services

D. add up the rents paid by all tenants

6. A farmer produces oranges and sells them to Fresh Juice, which makes orange juice. The oranges produced by the farmer are called:
A. inventory goods
B. transitory goods

C. final goods
D. intermediate goods

7. Martin, a US citizen, travels to Mexico and buys a newly manufactured motorcycle there. His purchase is included in:

A. both Mexican GDP and US GDP.

B. Mexican GDP, but not in US GDP.

C. US GDP, but not in Mexican GDP.

D. neither Mexican GDP nor US GDP.

8. Which of the following is included in Singapore GDP?

A. The value of production by a Singaporean working in the US.
B. The value of production by an American working in Singapore.
C. The value of production by a Singaporean that crosses the order to work in Malaysia.

D. All of the above are correct.

9. In the equation Y = C + I + G + NX,
A. Y represents the economy's total expenditure.

B. C represents household on durable goods.
C. all of the variables are always positive numbers.

D. All of the above are correct.

10. Consumption consists of spending by households on goods and services, except

purchases of intangible services.

purchases of durable goods.

purchases of new houses.

spending on education.

11. Which of the following is included in government purchase?

A. unemployment benefits a state government pays

B. social security payments the US government makes
C. the services of a US government attorney valued at the cost of her salary

D. All of the above are correct.

12. Transfer payments are:

A. included in GDP because they represent income to individuals.
B. included in GDP because they eventually will be spent on consumption.
C. not included in GDP because they are not payments for currently produced goods or services.

D. not included in GDP because taxes will have to be raised to pay for them.

13. Net exports equal
A. exports plus imports

B. exports minus imports

C. imports minus exports

D.GDP minus imports

14. In the economy of TAMIU in 2015, exports were $200, GDP was $2000, government purchases were $200, imports were $270, and investment was $500. What was TAMIU's consumption in 2015?

A. $830

B. $1230

C. $1370

D. $1770

15. Nominal GDP will increase when

A. prices increase and output increases.
B. prices increase and output decreases.
C. prices decrease and output increases.

D. All of the above are correct.

16. Changes in real GDP reflect:

A. only changes in prices.

B. only changes in the amounts being produced.
C. both changes in prices and changes in the amounts being produced.

D. neither changes in prices nor changes in the amounts being produced.

17. Which of the following is correct?
A. Nominal GDP is always less than real GDP.

B. Nominal GDP is always greater than real GDP.
C. Nominal GDP equals real GDP in the base year.
D. Nominal GDP equals real GDP in all years but the base year.

18. The GDP deflator is the ratio of:

A. real GDP to nominal GDP.

B. real GDP to the inflation rate.
C. real GDP to nominal GDP.
D. nominal GDP to the inflation rate.

19. In 2012 the nominal GDP was $18 billion and the GDP deflator was 120, what was real GDP?
A. $6.7 billion
B. $10 billion

C. $40 billion D. $100 billion

20. In the base year, the GDP deflator is always equal to A. -1
B. 0
C. 2

D. 1

21. GDP does not reflect:

A. the value of leisure.

B. the value of goods and services produced at home.

C. the quality of the environment.
D. All of the above are correct.

22. When economists talk about growth in the economy, they measure that growth as the:

A. absolute change in nominal GDP from one period to another.

B. percentage change in nominal GDP from one period to another.

C. absolute change in real GDP from one period to another.
D. percentage change in real GDP from one period to another.

23. The term economists use to describe a situation in which the economy’s overall price level is rising is:

A. economic growth

B. inflation
C. recession
D. business cycles

Use information from the Bureau of Economic Analysis (BEA) website, http://www.bea.gov/, answer question 24 and 25.

24. What is the real GDP growth rate in the 4th quarter of 2015 for the United States?

A. 1%
B. 2%
C. 3%

D. 4%

25. What is the value of real GDP in 1998 for the United States?

A. $11525.9 billion

B. $9089.2 billion

C. $11321.2 billion

D. $8889.7 billion

 
After reading the article, post substantive comments on the economic impact of the Tax Cuts and Jobs Act of 2017.
 
THE ECONOMIC IMPACT OF THE TRUMP TAX CUTS
April 25, 2018
The Economic Impact of the Trump Tax Cuts
By Hilary Schmidt, International Banker
 
On December 22, US President Donald Trump signed into law the Tax Cuts and Jobs Act of 2017. The legislation is one of the most radical changes to fiscal policy the United States has undertaken in decades, with sweeping amendments implemented across the entire breadth of the tax code. Indeed, in his State of the Union Address, Trump called it the biggest tax cuts and reforms in American history. As such, its impact is likely to be felt throughout the economy for quite some time to come.
 
It is arguably the cut in a corporate tax that forms the centrepiece of this new legislation, with the rate being cut from 35 to 21 per cent. That puts the new rate broadly in line with the worldwide average, which as measured by the Tax Foundation across 202 jurisdictions currently stands at 22.96 per cent or 29.41 per cent when weighted by gross domestic product (GDP). Corporations will also stop having to pay corporate tax on any income earned from foreign operations, while such money that is brought back home will be taxed between 8 and 15.5 per cent, significantly lower than the 35-per cent tax they are currently paying.
 
Republicans believe such substantial cuts will spur a massive influx of business investment that will eventually lead to higher average wages for Americans. For example, Texas Congressman Mike Conaway stated, It's in all of our best interest to have these tax cuts for corporations so that they will have more money to invest in their business and pay their workers. But much of the research conducted thus far suggests otherwise; the Center on Budget and Policy Priorities, for instance, recently concluded that workers would receive a maximum of only a quarter of the benefits from tax cuts; and even then, it is most likely to be the higher earners that would be the biggest beneficiaries.
 
Another piece of evidence to which analysts are pointing is data from S&P Dow Jones Indices, which shows that non-financial companies in the S&P 500 are already flush with cash at the moment, having between them an estimated $1.63 trillion. And despite this vast sum of cash, an investment boom has not transpired. Indeed, some top companies have made it explicitly clear that any tax relief they receive from the reforms will be primarily used to increase dividends and buy back stock to boost share prices. Amgen CEO Robert Bradway, for example, said We've been actively returning capital in the form of growing dividend and buyback, and expect us to continue that. And in terms of what businesses planned to do with any profit returned from abroad, a Bank of America Merrill Lynch survey of more than 300 CEOs found that paying down debt and stock buybacks were by far and away from the biggest priorities for businesses.
 
The other major pillar of the reform is the cuts that have been enacted for individual income earners, with middle-class taxpayers earning between $19,050 and $77,400 per year receiving a cut in tax from 15 to 12 per cent. Higher-bracket earners, meanwhile, will see their tax rates go from 25 to 22 percent (for incomes between $77,400 and $165,000); 33 to 24 percent ($165,000 to $315,000); and 39.6 to 35 percent ($400,000 to $600,000). And as far as analysis from the Tax Center is concerned, after-tax income will increase by an average of 2.2 per cent across all groups. However, all of this changes after a few years, due to official budget rules that limit the cost of the bill to $1.5 trillion in total which therefore means that to make the corporate tax cuts permanent, the individual tax relief will expire by 2025. As such, a tax increase will likely result by 2027, which, according to projections by the Tax Policy Center, will impact 53 per cent of Americans.
 
Whether the overall impact will be a net positive or negative for the US economy remains to be seen at this stage, therefore. While most analysis produced to date agrees that economic growth will receive a boost in the short-term, the predictions that have so far come in have been decidedly more mixed and less sure for longer time horizons. The non-partisan Joint Committee on Taxation of the US Congress expects the gross domestic product to be 0.8 per cent higher on average each year during the next 10 years than baseline forecasts, thanks mainly to an expected increase in labour supply and business investment. According to the independent non-profit research organisation the Tax Foundation, meanwhile, the plan will primarily reduce marginal tax rates and the cost of capital. In turn, this will lead to a 1.7-per cent rise in GDP over the long-term, a 1.5-per cent increase in wages and a further 339,000 full-time equivalent jobs. This year, moreover, will see GDP growth being posted at 2.45 per cent, compared to baseline growth of 2.01 per cent.
 
But most analysts see the economic benefits tapering off much sooner than the 10 years asserted by the Joint Committee on Taxation. Goldman Sachs, for example, believes the tax cuts will only slightly boost growth in the short-term before fading quickly. Alec Phillips and Blake Taylor, analysts on Goldman's US economic-analysis team, stated in December that the bank's estimate of the growth effects of the legislation in 2018 and 2019 would be 0.3 per cent per year, before dropping off. Indeed, Phillips and Taylor warn that the legislation may end up damaging the economy in the long run: We note that the effect in 2020 and beyond looks minimal and could be slightly negative.
 
Some also point to the fact that the cuts will drastically deepen the national debt, with Maya MacGuineas of the Committee for a Responsible Federal Budget estimating an additional $1.5 trillion will be added to the $10 trillion already forecast for the next decade. As she explained, Instead of trickling down economic growth, the House plan will unleash a tidal wave of debt that will ultimately slow wage growth and hurt the economy. She seems to have a point the debt today is 77 per cent of GDP, much higher than the 31 per cent in place when the 2001 Bush tax cuts were passed, and the highest it has ever been save for the period just after World War II. What's more, given that interest rates could well rise faster than expected as a result of the likely ballooning of the debt, it may well dampen the expected boost to business-capital expenditure, consumer spending and wage growth.
 
Indeed, the arbiter of monetary policy itself, the Federal Reserve, has indicated that it remains somewhat unsure of the overall impact of the tax cuts. According to the released minutes of the central bank's December meeting, growth will only modestly be boosted, with members of the Fed's board and presidents of its member regional banks saying they expect real GDP growth of just 2.2-2.6 per cent and a median expectation of 2.5 per cent growth for this year. The comparatively tempered projections are reflective of the debate within the Fed over just how much of a boost business investment and consumer spending will receive from the tax cuts.
 
According to the minutes, Many participants judged that the proposed changes in business taxes, if enacted, would likely provide a modest boost to capital spending, although the magnitude of the effects was uncertain. While they are highly likely to have a positive effect on economic growth, the Fed also warned that much of the extra cash that is generated is more likely to be utilised for mergers and acquisitions or debt reduction and stock buybacks. Moreover, the boost to consumer spending may have already occurred in part on the back of realised future tax-cut expectations.
 
Ultimately, it may be too soon to make any firm conclusions about how impactful the tax cuts will eventually be; but given that the US economy is already experiencing strong economic growth, and given that virtually all the signs point to an economy operating at full employment and therefore, at full capacity such sweeping reforms that have been at least partly designed as an economic stimulus could well be dangerous. The impact on inflation and debt may well force the Fed to hike rates more than the three times that back in December it had projected for 2018. Time will tell.

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