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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