Proper Role of the Government in the Economy - Report Example

Proper Role of the Government in the Economy The proper role of government in the economy is a that has led toa lot of research. Generally, the role of the government is to offer the protection to voluntary exchange through the creation of rules of the game aiming to prevent coercion. The rules are meant to control property rights, competition, profits, and the scarcity indicating prices. The government also has the duty to protect the political institutions. The political institutions are supposed to have openness, autonomy, public-ness, and open-endedness. The political process has the pivotal stage of making policies. It is essential to understand how decisions are made so that we may be able to understand the public policy. The government agencies are the main players in the field of policy making (Barkai 245). The policies are made in two processes. The first process is the upward flow of demands and influence from the society while the second process is the downward flow of the decisions made by the government. The government is in charge of the structures that govern the legislatures and hence the economy. The structures include administrative agencies, courts, bureaucracies, and parliaments. The structures carry out functions that make the government capable of formulating, implementing, and enforcing its policies. There exist six forms of political structures. They are executives, legislatures, interest groups, courts, political parties, and bureaucracies. The formal organizations take part in the political activities. Some political structures, for instance, governing royal families or ruling military councils, are existent only in a few countries. The structures that are similar may play very different roles across political systems. The government also considers allocation of limited resources as stated in the rules that it formulates so that it may satisfy the desires of the society and the human wants (Fligsten 180). The government also plays the role of coordinating the knowledge of society for the purpose of achieving the objectives and goals of the society. The policymakers are required to focus on the restoration of the institutional role of governing for the purpose of restoring economic stability. The government can play the role of providing a stable environment for the growth of the economy during the time that it can be relied upon to maintain the currency stability, defend and enforce property rights, and avail oversight that gives the private citizens an assurance that their partners in transactions are held accountable in the marketplace. This will in turn allow the participants in the market to start putting the resources back to work in the sectors that they consider as most beneficial. This paper aims at considering the major roles of the government in the economic stability, with the inclusion of the government-run institutions (Sciabarra, Chris and Hayek 150). In the perspective of market failure, the government also has a role to play. The activities in the market, which comprise individual myriads in making decisions of the market, may result in inefficient outcomes. The government has the role of controlling the abuse of market power that may occur when a single seller or buyer exerts significant influence over output or prices. The externalities are also part of the government’s controlling part since the market should take into account the effects of its economic activities to its outsiders. For instance, the market may not take keen interest on the costs that a firm imposes on the outsiders through pollution of the environment. A stable economy must involve public goods. The public goods are availed by the government, for instance, national defense (Behdad 780). The main aspect here is the level of defense that could be available if it is left to the market. The government is responsible in availing complete, symmetric, and certain information to the market. Again, the government is responsible for controlling the bank. The bank supervises the financial plan, which is the monetary value of the production plan. It identifies the expenditures and receipts by categories and specifies both the contractual partners of the firm and the terms of exchange. Most of the transactions of firms are done through the bank. The bank controls the flow of expenditure and receipts of the firm, detects bottlenecks and miscalculations in the plans and alerts the responsible planning authorities. The bank serves as the watchdog in ensuring the objectives of leadership for the economy are pursued. Government deficits and government spending increase automatically when there are economic downturns that arise due to falling tax revenues and more demands on the social-safety-net provisions. Such spending can be helpful in attaining stability on the economy since it does not occur following legislative acts but automatically, and the money that is spent is usually needed most at the time of spending. Spending and borrowing for the purpose of economy stimulation by the use of legislative discretion is riskier since it is more difficult to wait for the right moment. The spending of the funds does not often take place until a long period has passed after the downturn occurs and has the ability of prolonging the downturn through crowding out the investments that are productive and spending that would have occurred otherwise (Fligsten 115).The economic downturns, though painful, avail the chance of rooting out the inefficient and waste spending in both the private and public sectors. The reason is that the opportunity of formulating basic reforms is lower in the period of downturns. The chance of reassessing the processes and undertaking reforms that lead to better utilization of resources should be used perfectly. The Deficits Matter Large deficits may have a greater contribution to price instability. If the deficit is financed by the government by the means of printing money, it may result in inflation through the depreciation of the currency, which in turn makes the foreign goods become more expensive. This therefore increases the pressure on the price level of the domestic country by increasing the price of imports. When the government issues debt, the competition with individuals and other businesses for investing their dollars results, and thereby increases the cost of borrowing to fund productive investments that are done in the private sector (Behdad 135).The ability of the government to avail the security of property rights can be weakened by a weak fiscal position. If the government is overleveraged, it becomes continually much harder to borrow in the challenge of an unforeseen catastrophe or a security crisis. Moreover, Behdad (787) articulates that the government may also end up losing its duty as the governing body that is credible or the overseer of the markets when it is an active player in the market. Careful oversights that are arms-length will also enable clarity, such that information that is reliable regarding goods and services is availed to the players who are selling and buying in the market, availing good signals of the price to be observed in the market system. This reduces distortions and makes the people able to come up with the best probable decisions regarding the expenditure in their budgets. The Worldwide Economy The government has the duty of controlling economy failure. It does so by controlling the resistance from unwilling players in the economy. It reduces the technological constraints, controlling the issues of re-training and re-education, working out the issues concerning budget deficit, availing the incentives that are compatible with entrepreneurial activities, controlling psychological factors, and reducing the ambiguity in the legal environment. This makes sound institutions to be more critical. In the economies whose competition is global, the creditability of the government is even more important. The creditability relies on the government’s fiscal responsibility. The IMF (International Monetary Fund) has been encouraging the fiscal restraint of establishing credit for the emerging economies. The strength of the financial institutions in the United States has contributed largely to the United States’ established credit. The United States should not abuse the greater fiscal flexibility it has in terms of debt, but should rather work for maintenance of the credit of the government of the United States (Boettke 231). Institutional Management Institutions run by the government must be under a good management system with the aim of guarding their credibility in the provision of a just system of the laws and enforcement. This may be not less true for the developed countries but starkly evident in the less-developed countries. According to Flynn (120), the importance of government institutions that are well-run is evident for the developed economies. Effective government institutions make sure that the people employed to work in the public sector work effectively, to attain the goal of offering support to the private sector, but not competing with it. Instead of borrowing money to create new programs and more layers of bureaucracy, the Administration and Congress is supposed to: reform the tax code, focus on the promises aired during election campaigns of streamlining agencies, focus on the financial regulatory reform, and signal their commitment to trade instead of protectionism. It should also exercise restraint in deficit projects that are rushed without the risk-return evaluation. Once it focuses on the restraint and the election campaign promises, it will exhibit its commitment to the fiscal responsibility and offer an opportunity of reviewing the objectives of agencies regarding the prevailing needs and the changing technology (Flynn 125). This will assist in increasing the level of accountability in the public and private sectors, as evaluations inform on how to carry out operations. Exhibiting fiscal responsibility also shows the commitment to supporting the country’s currency, which in turn reassures the country’s trading partners. Focusing on the financial regulatory reform will assist in restoring the country’s financial institutions. It may be past time trying to modernize the financial regulatory system of the country so that it can cope with the current challenges instead of reflecting on a market structure that is no longer in existence. The new system is supposed to be flexible and promote the form of innovation that has been helpful in the provision of low-cost financial services to many customers, while still availing the credit that is so crucial for economic growth (Prybyla 215). There is a great importance that the recent stabilization observed in the financial sector and the other legislative agendas don’t alter the priority of the efforts of reform. Reforming the tax code should aim at the transparency of the tax burden, simplification, lowering the overall rates, and broadening the tax base. Reducing the complexity and layers of the tax code increases the resources that the citizens may put to more beneficial use. Simplification of the tax code and also streamlining the process of collection would permit the taxpayers to save this money and time, hence offering them a more disposable income. An increment of disposable income can be helpful to people in building wealth. Investing in assets leads to building wealth (O’Neil 145). With no longer rapid appreciation of house prices, the asset investment that may be productive might be energy, infrastructure, health technology, or other future assets. Reduction of the marginal tax rates on the income both at individual and corporate levels increases the benefits that corporations and individuals get from the utilization of the resources that are scarce to earn income. The increased incentive to utilize resources in a productive manner leads to greater economic growth, higher living standards, and employment. Furthermore, economic growth leads to tax revenues that are higher that offers support to the governing institutions. The impact of this positive feedback is the major motivation for most countries to undertake basic reforms. Lavoie (450) argues that signaling the commitment to trade instead of protectionism calls for economic controls in the form of tariffs, quotas, or subsidies (implicit or explicit). Development economists have discredited the import substitution policies for a long time. An economy of a country may be weakened by being more closed off to the worldwide economy. The economy is hence forced to spend the resources it has on the provision of goods and services that could be bought at a cheaper price elsewhere and forgoing the production of products that could be sold abroad and fetch a higher profit than the domestic sales. This ultimately stifles the economic growth by raising the costs on everyone. Conclusion The citizens of a country get the value from the role of the government in making laws and enforcing them. These laws offer the citizens the opportunity of pursuing opportunities freely. The fact that the United States is considered as a developed economy does not imply that the government is not required to take measures for reforms. The Congress and the Administration are not supposed to waste the opportunity of ensuring that the government institutions of the United States in the 21st century continue providing a stable environment for the individuals to pursue the investments that help in increasing wealth freely. Having a governing body that is orderly enables the citizens to come up with long-term investment decisions regarding their personal resources. A governing body that is credible plays a role in the nation’s economic growth and avails the best opportunity of accomplishing its growth and national investment objectives through the citizens’ entrepreneurial spirit. Making the basic changes to the agencies and rules that are already opaque and outdated will avail economic stability and offer the potential entrepreneurs the assurance to work with the aim of meeting the needs of the society that are ever-changing. Work Cited Barkai, Avraham. Nazi Economics: Ideology, Theory, and Policy. Yale University Press (November 28, 1990), Pages 230 - 275 [  Sager  ] Filgstein, Neil. The Architecture of Markets: An Economic Sociology of Twenty-First-Century Capitalist Societies. Reprint ed. Princeton, NJ: Princeton University Press, 2001, Chapter 8. [Amna] Behdad, Sohrob, "A disputed Utopia: Islamic Economics in Revolutionary Iran," Comparative Studies in Society and History, Vol 36, No, 4 (October 1994), pp. 775-813. [Ahmad] Flynn, John. As We Go Marching, Free Life Editions (1944), Part 2 (Pages 117-165). [Rana ] Prybyla, Jan. The Political Economy of Development in Communist China: China and the Market, in Boettke, P. (ed) The Collapse of Development Planning, New York University Press, 1994.Print. Boettke, Peter. Why Perestroika Failed: The Politics and Economics of Socialist Transformation, Routledge, New York (1993). Chs. 5-6 Sciabarra, Chris A. Marx, Hayek, and Utopia, State University of New York Press (August 1995) Chapter 4, 5 and 6. Lavoie, Don. Glasnost and the Knowledge Problem: Rethinking Economic Democracy, Cato Journal Vol. 11, # 3 (Winter 1992), pp. 435-55. ONeil, Patrick H. Essentials of Comparative Politics. New York, N.Y: W.W. Norton & Co, 2007. Print. Read More