GLOSSARY OF POLITICAL AND ECONOMIC TERMS
D - I
Debt: 1) Something owed to someone else.
2) On a national level, the sum total that the government owes
to the bearers of U.S. bonds. Not to be confused with the deficit,
which is only the yearly total added to the debt. In other words,
each year's deficit adds to the overall debt. (See also
deficit.)
Deficit: The amount of annual government
spending in excess of that year's tax receipts, which is paid
for by going into debt. Not to be confused with the debt, which
is the sum total of all deficits. Prior to the Great Depression,
deficits and unbalanced budgets were considered a moral shortcoming.
Keynes, however, proved that a certain amount of deficit spending
is actually helpful for promoting economic growth and climbing
out of recessions and depressions. In fact, the world has not
seen a depression in six decades thanks to this insight. (See
also debt; Keynesianism;
monetary policy.)
Democracy: A government in which supreme
power derives from the people. This power is exercised either
through direct democracy (in which the people vote directly on
legislation) or representative democracy (in which the people's
elected representatives vote on legislation). Representative democracies
are also known as "republics." So many governments have
described themselves as "democracies," however, that
the term has clearly become abused. For example, the former East
Germany described itself as the "German Democratic Republic,"
on the fiction that its dictators were ruling according to the
will of the people.
Depression: An especially severe
recession. Depressions suggest that fundamental corrections are
occurring in the economy, much more so than in the normal fluctuations
of the business cycle. Keynes believed that depressions were further
distinguished by what he called the "liquidity trap."
This occurred when people hoarded their money, refusing to spend,
no matter how much the central bank tried to expand the money
supply. In order to get the circulation of money moving again,
Keynes advocated that government should do what the people were
unwilling to do: spend. Economists widely credit the defense spending
of World War II for eliminating the Great Depression. (See also
business cycle;
recession;
fiscal policy;
monetary policy;
Keynesianism.)
Devolution: The conservative policy
of devolving power and transferring programs from the federal
government to the states, and from states to local governments,
with as many programs privatized along the way as possible.
Direct democracy: A form of democracy
in which citizens vote directly on the bills and legislation being
considered, without elected representatives or legislators. State
initiatives and referendums are an example of direct democracy.
Proponents claim it is the best way to circumvent corrupt politicians
to enact the true will of the people. Critics claim that the public
is not educated or informed enough to be voting on the nuts and
bolts of government policies. (See also democracy;
initiative; referendum;
republic.)
Effective tax rate: The "bottom
line" of what you pay in taxes. In other words, it is the
true percentage of total income paid in taxes, ignoring such things
as exemptions, credits, etc. More formally, it is the tax liability
that a person actually pays, divided by total stated income. (Compare
to marginal tax rates.)
Egalitarian society: a social system
which rewards everyone equally, despite their different talents
and inputs. Such systems are created by expanding the rules. (See
also meritocracy.)
Eminent domain: The government's right
to take private property for public use, reimbursing the previous
owner with the fair market value of the land. Eminent domain is
commonly used for building roads. Liberals argue that without
eminent domain, roads would be crooked or not even built at all,
due to the refusal of some private owners to part with their property,
even at any price. Libertarians argue that the market will determine
the best use of the land.
Entitlement: Any government benefit
paid to individuals, organizations or other governments that meet
eligibility requirements set by law. The largest entitlement program
in the U.S. is Social Security. Middle class entitlements comprise
the vast majority of the U.S. budget.
Executive branch: In a government
with separation of powers, this is the branch responsible for
"executing" (that is, applying, administering) the law.
That is, the legislative branch passes laws, and the executive
branch puts them into action through its many various agencies.
(See also judicial branch;
legislative branch.)
Externality: Also called the Spillover
Effect. This occurs when someone other than the buyer must share
the benefits or costs of a product. The classic example is pollution.
Factories can either treat pollution, which costs money, or dump
it for free into the air or water. If the latter, customers may
pay a reduced price for the product, but local citizens also pay
a price in higher mortality and disease rates, less fertile land,
environmental catastrophes, etc. Sometimes the spillover effect
is both positive and negative. An airport benefits its customers,
but it also subjects the local neighborhood to various externalities.
Positive ones include increased local business; negative ones
include noise pollution. The problem of negative externalities
is a significant one for those who believe in the efficacy of
free markets. The Coase theorem is an attempt to resolve it. (See
also Coase theorem.)
Fair Deal: Harry Truman's attempt to continue
the expansion of social programs begun under Roosevelt's New Deal.
He was not very successful, however, because of congressional
opposition.
Fairness Doctrine: A policy of the
Federal Communications Commission, spanning from 1949 to 1987,
that required radio and television stations to air all sides of
important or controversial issues, and give equal time to all
candidates. The Supreme Court upheld the Fairness Doctrine in
1969, in Red Lion Broadcasting v. FCC. In 1986, a federal
court of appeals ruled that the Fairness Doctrine was not law
and could be overturned without Congressional approval. Congress
responded by passing a bill in 1987 to establish the doctrine
as law. It received 3-1 support in the House and 2-1 support in
the Senate. The support was broadly bipartisan, with even Republicans
like Newt Gingrich and Jesse Helms voting in favor of it. But
Reagan vetoed it, and Congress did not override the veto. Reagan's
FCC -- which was staffed by former corporate media personnel hostile
to the Fairness Doctrine -- wasted no time abolishing it. Congress
attempted again in 1993 to resurrect the law. But the bill was
killed when Rush Limbaugh orchestrated a massive public relations
campaign against it, complaining that Congress was about to muzzle
him with the "Hush Rush Law." (Rush would not have been
censored; the stations would simply have had to give equal time
to liberals.) Conservatives argue that the doctrine violates a
station's freedom of speech. Liberals argue that the limitations
of the radio and television -- both in limited bandspace and the
growing corporate media monopoly -- are depriving liberals of
free speech on an entire medium.
Federal Reserve System: The central bank
of the United States, colloquially known as "the Fed."
Created in 1913, it is charged with managing the nation's credit
and monetary policy. The Federal Reserve Board consists of seven
governors, one of whom is Chairman. All are appointed by the President.
The Board oversees 12 Federal Reserve banks, each of which heads
it own district. Controlling the money supply is accomplished
mainly through three methods. The first and most important is
Open Market operations, where over $100 billion in securities
are traded each day. When the Fed buys securities on the Open
Market, the money it uses to pay for these sales expands the money
supply. Conversely, when it sells securities, the money it receives
from these sales contracts the money supply. The second method
is easing or tightening reserve requirements among member banks,
which affects how much a bank can loan. The third method is changes
in the prime lending rate, or the rate at which the Fed loans
money to member banks. This last method is used mostly to signal
the Fed's intentions to the markets. The Fed also has two other,
less-used methods: moral suasion (suggestions by the Fed which
private banks act on) and selective controls over stock purchase
margin requirements. (See also central bank;
monetary policy.)
Fiscal policy: The use of the government's
budget, through changes in taxation and spending levels, to manipulate
economic growth. Increased deficit spending tends to increase
growth, lower unemployment, and raise inflation. On the other
hand, reducing the deficit tends to slow growth, raise unemployment
and lower inflation. In times of recession, the typical government
response is to increase deficit spending. (See also
deficit;
Keynesianism;
monetary policy.)
Fiscal year: A yearly accounting period
that does not start or finish with the calendar year. For the
federal government, the fiscal year begins October 1 and ends
on September 30. The fiscal year is designated by the calendar
year in which it ends -- for example, a fiscal year that ends
on September 30, 1997 is called fiscal year 1997. Congress passes
its budgets in the calendar year that a fiscal year starts. For
example, the budget for fiscal year 1997 is passed in 1996. Note:
the dates for the fiscal year changed in 1977. Previously, they
had been from July 1 to June 30. In 1977, a "transition quarter"
was added to move back the start of the fiscal year; this can
be seen in government budget statistics under the designation
"TQ."
Flat tax: A single tax rate which is
the same for everybody -- say, 20 percent -- regardless of how
much income they make. Conservatives praise this as a fair tax.
Liberals point out that it would give a huge tax break to the
rich, and that the loss of tax progressivity has historically
been associated with rising income inequality. (See also
progressive tax;
regressive tax.)
Fractals: A basic concept of chaos theory,
and a fundamental organizing principle of nature. Fractals are
self-repeating patterns on an ever diminishing scale. An example
is a tree: the trunk stems into larger branches, which stems into
smaller branches, which stems into twigs, which stems into leaves.
Despite this orderly process, however, the overall pattern is
still chaotic. Astronomy offers another example: galaxies have
arms rotating around a central mass; planets rotate around stars;
moons rotate around planets; electrons rotate around nuclei. Fractals
are found even in human society. An extremely common example is
organized hierarchy, such as government. National governments
oversee state governments, which oversee local governments, which
oversee individuals. The fractal organization of society strongly
suggests that anarchic, decentralized societies are impossible.
(See also chaos theory.)
Free market: The term "free market"
is difficult to define. A market, of course, is a place for buying
and selling, but no market is truly "free" -- all have
laws constraining their behavior. Some are fundamental, like laws
banning homicide, fraud, or breech of contract. Some are more
debatable, like laws banning unsafe products, pornography or sub-poverty
wages. Most arguments about the "free market" really
boil down to where on the spectrum of lawlessness and lawfulness
a market should be. However, libertarians (specifically, anarcho-capitalists)
present a unique second approach to this question. They argue
that government should be abolished, and law should be a commodity
bought and sold on the market, through private court systems and
law enforcement firms. Even if such an incongruous system could
work, however, one's actions on the market would still be constrained
by law. Ultimately, a "free market" means a "lawless
market." (See meritocracy.)
Free rider: A person who receives or
benefits from a public good, like national defense or street lighting,
without paying for it. The "free rider problem" presents
a challenge to those who would privatize the government's services,
for they must find ways of paying for public goods in a market
where people are free to decline paying for anything they want.
(See also public goods.)
Game theory: The mathematical theory of
competition and cooperation. Game theorists analyze the strategies
that rational actors use in trying to achieve their goals. Ultimately,
all tenets of game theory boil down to one principle: the side
with the most options has the ability to win the game. (See also
rational choice theory.)
GDP: See Gross Domestic Product.
Gini index: A standard economic measurement
of income inequality. A society that scores 0.0 on the Gini scale
has perfect equality. A score of 1.0 means that only one person
earns all the income. The higher the fraction between these two
numbers, the worse the inequality.
GNP: See Gross National Product.
Gold standard: A money system based on gold.
There are two types. Under a pure gold standard,
a government might declare that the fixed, unalterable
price of an ounce of gold is $800. And because the country has
gold stock of 1 million ounces, it's entire money supply is therefore
$800 million. Under a fractional reserve gold standard, the country
again has a fixed price on gold, but it may have only $800 million in gold
reserves, but $2 billion worth of money in circulation. Although this money is
convertible for gold, banks can get away with holding fractional reserves
because only a small percentage of paper money is converted on a regular basis.
Banks that issue money on fractional reserves are called "trusts," because
the public must trust them to have enough gold to meet conversion demands. The weakness of
trusts is that they cause bank panics when everyone tries to convert at the
same time. Under the pure gold standard, the only way to expand or contract
the money supply is to find or lose more gold. Prices will inflate
or deflate accordingly to the amount of available gold. Proponents
of the gold standard -- who are usually on the far right, and
irreverently known as "gold bugs" -- support this system
because it gets government out of the business of managing the
nation's money supply. Critics charge that it would rob the central
bank of monetary policies that have been successful in eliminating
depressions in the last six decades. (See
Keynesianism;
monetary policy.)
Great Society: The domestic policies of
Lyndon Johnson during the 1960s, which addressed the twin problems
of discrimination and poverty. Accordingly, Johnson introduced
the Civil Rights Act, affirmative action, and the War on Poverty
(increased social spending). (See also
War on Poverty.)
Gross Domestic Product (GDP): The value of
the total final output of goods and services produced by a nation
within a given period, usually a year, not including that produced
by its domestic firms in foreign countries. In recent years GDP
has become more commonly used than GNP, to get a truer picture
of how a geographical nation is doing.
Gross National Product (GNP): The value
of the total final output of goods and services produced by a
nation within a given period, usually a year. This figure includes
goods and services produced by domestic firms in foreign countries.
Head Start: A public social intervention
program for needy children, aged three to five. Head Start covers
six areas: early childhood education, health screening and referral,
mental health services, nutrition education and hot meals, social
services for the children and their families, and parent involvement.
Imperfect competition: Any situation
where a monopoly or oligopoly controls the market for a certain
product. The lack of competition raises prices, lowers quality,
slows down innovation and exploits customers. (See
market failure;
monopoly;
natural monopoly;
oligopoly.)
Inalienable rights: According to
conservatives, rights derived from natural law, which cannot be
taken away or transferred. (See also natural law.)
Individualism: The principles
of individual freedom and self-reliance.
Inflation: A gradual, sustained
increase in the economy's prices. For example, inflation occurs
when a loaf of bread that cost $2.00 last year now costs $2.25
this year. But your wages have probably gone up by the same percentage,
so nothing real has changed; you are still exchanging the same
amount of your labor for a loaf of bread. Inflation is undesirable
for several reasons. It transfers wealth from loaners to borrowers,
makes financial planning difficult, alters investment decisions,
erodes fixed incomes, devalues savings, leads to more barter transactions,
and costs individuals time and effort by keeping more of their
money in interest-accruing bank accounts rather than on hand.
Information asymmetry: A difference
in information between two parties. Many economists rely on economic
models that assume both parties in a transaction have perfect
information. But information in the real market is often asymmetric.
Economist George Akerlof introduced the concept in his classic
paper, "The Market for 'Lemons.'" (As in used cars,
not citrus fruit.) In the used-car market, the seller's information
is based on sales that he conducts every day, but the buyer's
information is based on a purchase conducted only a few times
in his life. The information is therefore highly unequal, and
the resulting unfair exchange is often an inefficient allocation
of resources, or market failure. (See also
adverse selection;
market failure.)
Infrastructure: A society's basic
installations, communications and transportation facilities. National
infrastructure, like highways, is almost always publicly funded
or built.
Initiative: A procedure of direct
democracy that allows the public, not their elected representatives,
to propose and vote upon new laws. Initiatives are placed on the
ballot after a signature drive collects a certain percentage of
voter signatures (usually 5 to 15 percent). There are two types
of initiatives: direct and indirect. A direct initiative goes
straight to the ballot for voter approval or rejection. An indirect
initiative first goes to the legislature for a vote; if rejected,
it then goes to the ballot anyway. In the U.S., initiatives are
only possible at the local and state level. They are barred at
the federal level by Article I of the constitution, which bars
Congress from delegating its legislative responsibilities. (Compare
to referendum.)
Invisible hand: Coined by 18th century
Scottish economist Adam Smith, the "invisible hand"
refers to the unintended common good caused by individuals seeking
their own self-interest. For example, a baker will seek his own
self-interest and wealth by baking bread for hundreds of people
each day, and thus be led by an "invisible hand" to
achieve the common good, though that was not part of his intention.
Conservatives claim the invisible hand proves that free markets
have social utility. Liberals point out that robbery is also done
out of self-interest, and does not result in the common good.
The critical question is where to draw the line between the legal
and illegal self-interest.
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