Proper Role of the Government in the Economy - Research Paper Example

Proper Role of the Government in the Economy The proper role of government in the economy is a that has led to a lot of research. 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. In the previous decades of lecturing countries that are developing on the ways to stimulate economic growth and emerge from economic crisis through strong government policies, some economists and U.S policymakers are discarding all the advice when subjected to the first test of major crisis. This is specifically true when taking advice regarding the accumulation of more debt (Shah, Rajiv, Zhijie, and Harini 85). For instance, the fiscal responsibility summit held by the U.S President Barack Obama last February disclosed that he knows the urgent requirement for fiscal responsibility. But the recent enactment of the Congress of the America Reinvestment and Recovery Act and the budget that was proposed by the government makes the objectives of a budget that is sustainable budget and it addresses the longer-term fiscal properties of the nation such as the entitlement liabilities, and even more elusive. 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 (Payson 78). 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 As it is the nature of economic life, trade-offs are always there. The government deficits usually have both negative and positive impacts. Debt is a strong tool that is able to magnify gains, but the leveraging power that it has is harmful since it also magnifies the losses. Debt should be used in financing the assets that produce income that can be used in return to repay the debt. The usage of debt to pay for unproductive or consumption assets may result to a sinkhole since the outflow of principal, and interest payments exceed the inflow of income. In the instance of the deficits of a small budget, the negative impacts are probable to be outweighed by the positive impacts. The negative impacts of this type of budget may be increased interest rates and risks. As the deficit increases, the positive impacts are slowly overwhelmed by the negative impacts of increment in the nation’s debt (Lo, Vai, and Mary 110). 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. 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. 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 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 (Diwan 115). The preservation of the United States’ credibility abroad is not a simple diplomatic practice. The larger deficits found in developed economies competes with the debt that is issued by the emerging economy, apart from crowding out investments in the private sector. When most of the developed economies offer debt successively, the availability and cost of funding for economies that are developing increases and the ability of the developing countries to get the external funding that is needed very much as they progress towards development of the economy is limited. The credible commitment to the reduction of the deficit and a sound fiscal policy will be helpful in keeping the United States a leader of the world and excellent citizens in the global economy. The danger of the approach of ‘Kitchen Sink’ There is a belief in many people that doing too little is dangerous. As a matter of fact, the danger arises when making attempts at doing a lot of different actions hoping that one of the actions will help in restoring economic growth. By taking too many actions, there is a greater probability that the impacts of the policy will offset one another, for instance, provision of tax cut on investments that offers people the incentive to invest, while in turn increasing the government investment that will raise the cost of investing (Sowell 97). Though the investment ambition is admirable, they can be attained through a decentralized way if once again the government focuses on the supportive role it plays in the provision of a solid economic foundation. Private individuals, given a stable foundation, can invest and produce the lively living standards that meet the ever-changing wants and needs of the society. 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. 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 (Niizawa, Hidenori, & Tōru 215). 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. 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 (Dieterle, David, & Kathleen 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. 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 (Lo, Vai, and Mary 105). The above five recommendations are the prescriptions that are given by the World Bank, IMF, and the developing countries have been offering to the emerging and developing economies for a very long time. The reason is that good macroeconomic policies increase the credibility of the government and makes the political institutions stronger. This credibility is crucial for the stability of the economy that is important in the formulation of long-term investment decisions. 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. Works Cited: Dieterle, David A, and Kathleen C. Simmons. Government and the Economy: An Encyclopedia. , 2014. Diwan, Ishac. Understanding the Political Economy of the Arab Uprisings. , 2014. Print. Lo, Vai I, and Mary E. Hiscock. The Rise of the Brics in the Global Political Economy: Changing Paradigms?, 2014. Print. Niizawa, Hidenori, and Tōru Morotomi. Governing Low-Carbon Development and the Economy. , 2014. Print. Payson, Steven. Public Economics in the United States: How the Federal Government Analyzes and Influences the Economy. , 2014. Print. Sandford, C T. Economics of Public Finance: An Economic Analysis of Government Expenditure and Revenue in the United Kingdom. Burlington: Elsevier Science, 2014. Shah, Rajiv, Zhijie Gao, and Harini Mittal. Innovation, Entrepreneurship, and the Economy in the Us, China, and India: Historical Perspectives and Future Trends. Burlington: Elsevier Science, 2014. Sowell, Thomas. Basic Economics: A Common Sense Guide to the Economy. New York: Basic Books, 2014. Read More