A Level Economics 70: The Impact of Government Failures on Economic Actors

Government intervention failures can have significant and varied effects on economic actors and citizens. Real-life examples illustrate how these failures impact various aspects of the economy and society:

1. Economic Inefficiency: In the 1970s, India implemented the License Raj system, requiring businesses to obtain licenses for various activities. This intervention led to bureaucratic red tape, delays, and corruption. The system stifled economic growth, discouraged entrepreneurship, and resulted in inefficient allocation of resources.

2. Reduced Economic Growth: In Venezuela, price controls were imposed on essential goods like food and medicine to address inflation. However, the price controls led to shortages, hoarding, and black markets, ultimately undermining the country's economic growth and exacerbating its economic crisis.

3. Higher Costs: The U.S. government's attempt to subsidize the ethanol industry for fuel production led to unintended consequences. Corn prices surged due to increased demand for ethanol production, affecting food prices and leading to higher costs for consumers.

4. Distorted Incentives: In some countries, agricultural subsidies intended to support farmers' incomes created incentives for overproduction, leading to surpluses and contributing to trade disputes on the international stage.

5. Unequal Outcomes: Government interventions in housing markets, such as rent control policies, can lead to housing shortages and unequal access to affordable housing for low-income citizens.

6. Diminished Investment: Uncertainty and frequent policy changes in a country's tax laws or regulations can discourage foreign and domestic investments, hampering economic growth and job creation.

7. Erosion of Trust: A series of government corruption scandals and ineffective responses to economic crises in certain countries have eroded public trust in government institutions and leadership, leading to social unrest and political instability.

8. Political Instability: The failure of the government to address issues of inequality and social discontent in some countries has resulted in political unrest and mass protests, leading to instability and disruption of economic activities.

9. Loss of Freedom: Restrictive government regulations on certain industries can limit individuals' and businesses' freedom to make choices and adapt to changing market conditions.

10. Disruptions to Social Programs: Inadequate implementation of social programs like healthcare and education can result in reduced access to essential services for citizens, particularly those in marginalized communities.

11. Wasted Resources: Inefficient government spending on large-scale infrastructure projects that yield little economic benefit or face significant delays can waste valuable resources.

12. Environmental Consequences: Government policies meant to address environmental issues may have unintended negative consequences. For instance, subsidizing fossil fuels to keep energy prices low can discourage investment in renewable energy sources and exacerbate climate change.

Conclusion: Government intervention failures can have far-reaching effects on economic actors and citizens, impacting economic growth, efficiency, individual freedoms, and overall societal well-being. Learning from past mistakes and adopting evidence-based policies is essential to avoid such failures and create effective interventions that address market failures without causing unnecessary harm to the economy and citizens. Regular evaluation, transparency, and responsiveness to feedback can help mitigate the negative effects of government intervention failures and promote better outcomes for all.

A Level Economics Essay 26: Evaluation of Government's role in an economy

The efficiency of resource allocation in an economy would be improved by a reduction in the amount of government intervention. Discuss. 

Macroeconomics focuses on the behavior of the economy as a whole, and government policies play a crucial role in shaping its performance. Government interventions are implemented through fiscal, monetary, exchange rate, and regulatory policies to influence key macroeconomic variables and promote stability, growth, and social welfare. However, there are differing perspectives on the role and extent of government intervention in the economy.

Proponents of free market principles argue that reducing government intervention can lead to improved efficiency and resource allocation. They contend that markets, left to their own devices, can efficiently allocate resources based on supply and demand. Free market advocates argue that government interventions, such as taxes and regulations, distort market signals and hinder the efficient functioning of the economy. They emphasize that reducing government interference can enhance competition, spur innovation, and promote economic growth.

On the other hand, those who support a more interventionist approach argue that government interventions are necessary to correct market failures and ensure desirable outcomes. Market failures, such as externalities, monopolies, and information asymmetries, can lead to inefficient resource allocation and social costs. Proponents of government intervention contend that regulations, subsidies, and public investments are needed to address these market failures, protect consumers, and promote social welfare.

Fiscal policy plays a role in stabilizing the economy, as governments can adjust tax rates and spending levels to manage aggregate demand. Proponents of free markets argue for limited government spending and lower taxes, contending that this allows individuals and businesses to make better choices and promotes investment and entrepreneurship. However, critics of this approach suggest that during economic downturns, government spending can act as a stabilizing force by increasing aggregate demand and creating jobs.

Monetary policy, implemented by central banks, is another area where the role of government intervention is debated. Free market advocates argue for a rules-based monetary policy that allows market forces to determine interest rates and money supply. They contend that government manipulation of interest rates can lead to distortions and misallocation of resources. On the other hand, proponents of government intervention argue that central banks have a crucial role in managing inflation, stabilizing financial markets, and promoting economic stability.

Exchange rate policy also attracts differing views. Free market proponents argue for flexible exchange rates, as they allow market forces to determine the value of currencies based on supply and demand. They argue that government intervention in currency markets can lead to inefficiencies and distortions. However, proponents of intervention suggest that managing exchange rates can help countries promote export competitiveness or protect domestic industries from foreign competition.

Regulatory policies are seen by some as necessary to correct market failures, protect consumers, and maintain financial stability. Supporters of free markets argue for deregulation, emphasizing that excessive regulations can stifle innovation, deter investment, and create barriers to entry. However, proponents of government intervention believe that well-designed regulations are necessary to prevent abuses, ensure fair competition, and safeguard the public interest.

Achieving a balance between market mechanisms and government intervention is a key challenge in macroeconomic management. While excessive government intervention can lead to inefficiencies and unintended consequences, minimal intervention can also result in market failures and unequal outcomes. Finding the right level and design of government policies is crucial to address market failures, promote economic stability, and foster sustainable growth.

In conclusion, government policies play a significant role in macroeconomics, influencing key variables and promoting stability, growth, and social welfare. The perspectives of free market advocates highlight the importance of market mechanisms, competition, and limited government interference. However, proponents of government intervention argue for regulations, corrective measures, and public investments to address market failures, protect consumers, and promote social equity. Striking a balance between market mechanisms and appropriate government interventions is essential for effective macroeconomic management.

Welcome to the era of the bossy state

The relationship between governments and businesses is always changing. After 1945, many countries sought to rebuild society using firms that were state-owned and -managed. By the 1980s, faced with sclerosis in the West, the state retreated to become an umpire overseeing the rules for private firms to compete in a global market—a lesson learned, in a fashion, by the communist bloc. Now a new and turbulent phase is under way, as citizens demand action on problems, from social justice to the climate. In response, governments are directing firms to make society safer and fairer, but without controlling their shares or their boards. Instead of being the owner or umpire, the state has become the backseat driver. This bossy business interventionism is well-intentioned. But, ultimately, it is a mistake.
 
Signs of this approach are everywhere, as our special report explains. President Joe Biden is pursuing an agenda of soft protectionism, industrial subsidies and righteous regulation, aimed at making the home of free markets safe for the middle classes. In China Xi Jinping’s “Common Prosperity” crackdown is designed to curb the excesses of its freewheeling boom, and create a business scene that is more self-sufficient, tame and obedient. The European Union is drifting away from free markets to embrace industrial policy and “strategic autonomy”. As the biggest economies pivot, so do medium-sized ones such as Britain, India and Mexico. Crucially, in most democracies, the lure of intervention is bipartisan. Few politicians fancy fighting an election on a platform of open borders and free markets.

That is because many citizens fear that markets and their umpires are not up to the job. The financial crisis and slow recovery amplified anger about inequality. Other concerns are more recent. The world’s ten biggest tech companies are over twice as big as they were five years ago and sometimes seem to behave as if they are above the law. The geopolitical backdrop is a far cry from the 1990s, when the expansion of trade and democracy promised to go hand in hand, and from the cold war when the West and the Soviet Union had few business links. Now the West and totalitarian China are rivals but economically intertwined. Gummed-up supply chains are causing inflation, reinforcing the perception that globalisation is overextended. And climate change is an ever more pressing threat.

Governments are redesigning global capitalism to deal with these fears. But few politicians or voters want to go back to full-scale nationalisation. Not even Mr Xi is keen to reconstruct an empire of iron and steel plants run by chain-smoking commissars, while Mr Biden, despite his nostalgia for the 1960s, need only walk through America’s clogged West Coast ports to recall that public ownership can be shambolic. At the same time the pandemic has seen governments experiment with new policies that were unimaginable in December 2019, from perhaps $5trn or more of handouts and guarantees for firms to indicative guidance on optimal spacing of customers in shopping aisles.

This opening of the interventionist mind is coalescing around policies that fall short of ownership. One set of measures claims to enhance security, broadly defined. The class of industries in which government direction is legitimate on security grounds has expanded beyond defence to include energy and technology. In these areas governments are acting as de facto central planners, with research and development (r&d) spending to foster indigenous innovation and subsidies to redirect capital spending. In semiconductors America has proposed a $52bn subsidy scheme, one reason why Intel’s investment is forecast to double compared with five years ago. China is seeking self-sufficiency in semiconductors and Europe in batteries.

The definition of what is seen as strategic may well expand further to include vaccines, medical ingredients and minerals, for example. In the name of security, most big countries have tightened rules that screen incoming foreign investment. America’s mesh of punitive sanctions and technology export controls encompasses thousands of foreign individuals and firms.

The other set of measures aims to enhance stakeholderism. Shareholders and consumers no longer have uncontested primacy in the hierarchy of groups that firms serve. Managers must weigh the welfare of other constituents more heavily, including staff, suppliers and even competitors. The most visible part of this is voluntary, in the form of “esg” investing codes that score firms for, say, protecting biodiversity, local people or their own workers. But these wider obligations may become harder for firms to avoid. In China Alibaba has pledged a $15bn “donation” to the Common Prosperity cause. In the West stakeholderism may be enforced through the bureaucracy. Central banks and public pension funds may shun the securities of firms judged to be anti-social. America’s antitrust agency, which once safeguarded consumers alone, is mulling other aims such as helping small firms.

The ambition to confront economic and social problems is admirable. And so far, outside China at least, bossier government has not hurt business confidence. America’s main stockmarket index is over 40% higher than it was before the pandemic, while capital spending by the world’s largest 500-odd listed firms is up by 11%. Yet, in the longer term, three dangers loom.
High stakes

The first is that the state and business, faced by conflicting aims, will fail to find the best trade-offs. A fossil-fuel firm obliged to preserve good labour relations and jobs may be reluctant to shrink, hurting the climate. An antitrust policy that helps hundreds of thousands of small suppliers will hurt tens of millions of consumers who will end up paying higher prices. Boycotting China for its human-rights abuses might deprive the West of cheap supplies of solar technologies. Businesses and regulators focused on a single sector are often ill-equipped to cope with these dilemmas, and lack the democratic legitimacy to do so.

Diminished efficiency and innovation is the second danger. Duplicating global supply chains is extraordinarily expensive: multinational firms have $41trn of cross-border investments. More pernicious in the long run is a weakening of competition. Firms that gorge on subsidies become flabby, whereas those that are protected from foreign competition are more likely to treat customers shabbily. If you want to rein in Facebook, the most credible challenger is TikTok, from China. An economy in which politicians and big business manage the flow of subsidies according to orthodox thinking is not one in which entrepreneurs flourish.

The last problem is cronyism, which ends up contaminating business and politics alike. Firms seek advantage by attempting to manipulate government: already in America the boundary is blurred, with more corporate meddling in the electoral process. Meanwhile politicians and officials end up favouring particular firms, having sunk money and their hopes into them. The urge to intervene to soften every shock is habit-forming. In the past six weeks Britain, Germany and India have spent $7bn propping up two energy firms and a telecoms operator whose problems have nothing to do with the pandemic.

This newspaper believes that the state should intervene to make markets work better, through, for example, carbon taxes to shift capital towards climate-friendly technologies; r&d to fund science that firms will not; and a benefits system that protects workers and the poor. But the new style of bossy government goes far beyond this. Its adherents hope for prosperity, fairness and security. They are more likely to end up with inefficiency, vested interests and insularity.

Interpreting the Indian cabinet reshuffle

 

Coronavirus is our chance to completely rethink what the economy is for

The pandemic has revealed the danger of prizing ‘efficiency’ above all else. The recent slowdown in our lives points to another way of doing things. Malcolm Bull in The Guardian

 

Illustration: Matt Kenyon/The Guardian


There’s been a lot of argument about how best to handle the coronavirus pandemic, but if there are two things on which most people currently agree, it’s that governments should have been better prepared, and that everyone should get back to work as soon as it is safe to do so. After all, it seems more or less self-evident that you need to be ready for unexpected contingencies – and that it is better for the economy to function at full capacity. More PPE would have saved doctors’ and nurses’ lives; more work means less unemployment and more growth.

But there is a catch to this, and it has been at the heart of political debate since Machiavelli. It is impossible to achieve both goals at once. Contingency planning requires unused capacity, whereas exploiting every opportunity to the full means losing the flexibility needed to respond to sudden changes of fortune.

It wasn’t until the mid-20th century that economists started to realise that it might be better to leave a bit of slack in the economy to help cope with exogenous shocks. In the years after the Great Depression, governments saw the problem as “idle men, idle land, idle machines and idle money”. But there were also economists, such as the Englishman William Hutt, who went against the Keynesian consensus and pointed out that there were some things – fire extinguishers, for example – that were valuable precisely because they were never used. Having large stocks of PPE, underemployed nurses, or a lot of spare capacity in ICUs, falls into the same category. Idle resources are what you need in a crisis, so some degree of inefficiency isn’t necessarily a bad idea. 

Trying to manage a pandemic in a world of just-in-time production lines and precarious labour brings these issues into sharper focus. On the one hand, there weren’t enough idle resources for most countries to cope adequately with the spread of the virus. On the other, the enforced idleness of the lockdown leads to calls to get the economy moving again.

For Donald Trump, the prospect of a prolonged shutdown is particularly alarming because it threatens to undermine the competitiveness of the US economy relative to other nations (notably China) that have dealt with the crisis more efficiently. That’s an argument Machiavelli would have understood very well. One of his constant refrains was that idleness could lead to what he called corruption (the diversion of resources from the public good, which Trump equates with the Dow Jones Industrial Average) – and that corruption leads inevitably to defeat at the hands of your rivals.

For Machiavelli, the contagion of corruption was spread above all by Christianity, a “religion of idleness”. And it is true that the Judeo-Christian tradition, with its sabbaths, jubilees, feast days, and religious specialists devoted to a life of prayer and contemplation rather than martial virtue, built a lot of slack into the system. Machiavelli thought it should be squeezed out through laws that would prevent surplus becoming the pretext for idleness, rather in the way that later economists looked to the pressure mechanism of competition to do the same.

But there’s a contradiction in Machiavelli’s thinking here, because he also acknowledged that one of the things every polity needed was periodic renewal and reform, and that corruption was what preceded it. So you’re in a double bind: either you can squeeze out the slack and never experience renewal, or you can court corruption and create an opportunity to start over and make things better.

With hindsight it looks like that’s one of the problems the religions of idleness tried to address, by incorporating idleness into the calendar. In ancient Hebrew tradition, there were weekly sabbaths, and every seventh year was meant to be a year of release in which the land was left to lie fallow, debts were forgiven and slaves emancipated. The idea was picked up by the Chartist William Benbow, who in 1832 used it as the model for what he called a Grand National Holiday, in effect a month-long general strike that would allow a National Congress to reform society “to obtain for all at the least expense to all, the largest sum of happiness for all”.

Benbow’s plan came to nothing, but it provides an alternative model for how the lockdown might be viewed. The Italian philosopher Giorgio Agamben has complained that the lockdown is a state of exception with an increase in executive powers and a partial abrogation of the rule of law; but the flipside is that it is the closest thing to a Grand National Holiday that most of us have ever experienced. Despite all the suffering the pandemic has caused, for many it has also meant no work, debt relief, empty roads and a rare opportunity to live on free money from the government.

Generally speaking, exogenous threats like wars or natural disasters act as pressure mechanisms forcing us to redouble our efforts to combat them together. The benefit of contagion is that the only way to combat it is to do less rather than more. That has some demonstrable advantages. There has been a dramatic global fall in carbon emissions. The only comparable reduction in greenhouse gases during the past 30 years came as the result of the decline of industrial production in eastern Europe after the fall of communism. That was managed exceptionally badly because neoliberal economists thought that what post-communist states needed was the pressure of free market competition. Shock therapy would galvanise the economy.

The pandemic has been a shock alright, but its effect has been the opposite of galvanising. People everywhere had to stop whatever they were doing or planning to do in the future. That provides an altogether different model of political change. The philosopher Walter Benjamin once noted that while Karl Marx claimed that revolutions were the locomotives of world history, things might actually turn out to be rather different: “Perhaps revolutions are the human race … travelling in this train, reaching for the emergency brake.”

Everyone keeps saying that we are living through strange times, but what is strange about it is that because everything has come to a stop, it is as though we are living out of time. The emergency brake has been pulled and time is standing still. It feels uncanny, and there’s more slack in the world economy than there ever has been before. And that means, as both Benjamin and Machiavelli would have recognised, that there is also a once-in-a-lifetime opportunity for change and renewal.

For some, this might mean a shorter working week, or less air travel. For others, it might suggest the opportunity for a more fundamental remaking of our political system. A space of possibility has unexpectedly opened up, so although the lockdown may be coming to an end, perhaps the standstill should continue.

Reasons why the Green Party should not be allowed on TV debates

Mark Steel in The Independent

If the Green Party isn’t allowed into the TV election debates, there should be a compromise, such as its MP, Caroline Lucas, being allowed to present an episode of Top Gear.

She could zip through the Lake District, saying: “But while it HANDLES like a DREAM, the new Alfa Romeo 2.3 litre XL Deluxe has just one problem. It’s an UNBELIEVABLY inefficient way to use energy compared to a reasonably priced re-nationalised rail network.”

Or the leader of the Green Party, Natalie Bennett, could be offered a different slot, such as commentating on an international rugby match. “The New Zealand pack is absolutely immense,” she could say, adding: “But even if it rucked across Sussex for two months it wouldn’t endanger natural resources as much as fracking.”

The party might have to try this, because the debates proposed don’t include the Greens at all, despite some polls showing it ahead of the Liberal Democrats. The BBC explained this was because, “We take into account electoral results from past elections”, in which case there must be an argument for including the Whigs, which remained high in the polls up to 1850.

Its leader could promise to reduce the deficit by colonising Africa, before becoming involved in a heated discussion about immigration with a Saxon warlord, who had been invited as he was part of a coalition government throughout much of the 10th century.

The Liberal Democrats have agreed the Green Party shouldn’t be allowed to take part, although it came ahead of the Lib Dems in the European elections and many recent polls. Maybe party members feel there should be a different set of rules for who’s invited, depending on the number of letters in a party’s name. So the debate on Channel 4 should only include the Liberal Democrats and the Reclassify the Brontosaurus as a Type of Diplodocus Party.

You can understand the Liberal Democrats feeling jittery about the TV election debates. Because in the last ones the party leader persuaded many people to vote for him, by confirming his pledge to abolish tuition fees. But in all the stress of a live debate, he got the words abolish and treble mixed up.

And he harangued the Conservatives for planning to put up VAT to 20 per cent, which the party angrily denied. But happily a few weeks later they’d sorted out this disagreement, by both putting it up to 20 per cent together. It’s a heart-warming tale of friendship overcoming silly squabbles that should be made into a romcom with Clegg played by Jennifer Aniston.

The problem now is no sane person can believe anything Nick Clegg promises, pledges or vows again. So there’s no point in him being there at all, as he’s like the bloke in the pub who tells ridiculous stories no one listens to. Dimbleby can ask whether he’d renew Trident, and he could reply: “I know Ronnie O’Sullivan. I always beat him at snooker, only the Government doesn’t let me in the tournaments ‘cos I’ve been shagging Michele Obama.”

Despite this, no one would suggest Nick Clegg shouldn’t be allowed in the TV debates. But it might be best if he was given a separate slot, like the act that comes on half way through the Super Bowl. He can dance to his latest apology, maybe in a provocative dress, and that way he doesn’t make such a fool of himself but the honour of the democratic process is preserved.  

Another reason given for excluding the Greens is that once you have five people in a debate, it becomes too unmanageable. And you can see how it might become difficult for the viewer to even remember who was who. When there are just four white men between 40 and 50 in suits and ties, it’s easy to tell everyone apart. But the Green Party leader is an Australian woman, and if you add her in, people watching at home would get her mixed up with Nigel Farage, or become confused and think they were watching an old episode of Neighbours.

There’s another reason why the Greens could spoil the evening. If the debates are just between the four leaders, there will be a soothing pattern to the discussion. For example, on immigration each leader in turn will say: “I deny we’ll let in more immigrants and that swe like immigrants and accuse all of you of liking immigrants, and you say you hate immigrants but we really hate immigrants and we’ll ban immigrants from eating biscuits until they’ve been here three years, and won’t let them into doctors’ surgeries unless they drink a tin of paint for the amusement of other patients.”

So if someone answers by suggesting immigration isn’t the main problem, it will ruin the whole event, like if someone turned up for a game of cards and insisted on playing tag-team wrestling instead.

You can understand why the three old parties are worried about letting in anyone from outside, as they seem honestly to believe they’re the main, proper, real parties and everyone else is still “others”. Their most persuasive argument against voting for anyone else is “they can’t win”, or “don’t all vote for them, they’re unelectable”.

The answer could be to allow the five leaders to take part in the debates, but allow each one to nominate a programme the others have to appear in, starting with David Cameron on Made in Chelsea, spending the whole show saying “Sorry, do I know you?” as he pretended not to know all his old mates

I am The Markets

I am The Markets and I'm sick of people telling me how I feel

People keep saying I'm 'concerned' and 'confused'. It's not like I'm the one to blame for everything going tits up

• The Markets
• guardian.co.uk, Wednesday 20 June 2012 14.28 BST

'I'm not the one who created a whole array of inherently flawed financial instruments that no one properly understood.' Photograph: Andrea Comas/Reuters

Two quotes from yesterday's Guardian got me. "Markets have become increasingly concerned that the austerity programmes in the eurozone are causing a vicious circle of recession", and "Markets were confused by mixed messages from European capitals". I have only one word of reply. Bollocks. Did anyone phone me to ask how I, The Markets, was feeling about these subjects? Did they hell?

So let me get things straight. I am not in the slightest bit concerned about the austerity programmes in the eurozone. I am entirely indifferent to whether Greece and Spain get bailed out, go bankrupt or both. Just as I'm not at all bothered if Germany gets any of its money back.

I existed long before someone invented the eurozone and I will be around long after it has ceased to exist. I'm not in the caring business. I'm a trader. Someone has something they want to sell, someone has something they want to buy. End of. Whether people are flogging something of value or billions of pounds of worthless debt is entirely irrelevant to me. I'm just a mechanism for other people's greed and inefficiency. Neither am I in any way confused. Quite the opposite. I see everything with a steely-eyed clarity. The confusion is all yours.

But while we're on the subject of me, let me tell you how I really am feeling. As you might have gathered, I am pretty damned pissed off. I am sick and tired of everyone making judgments about my emotional state of mind without making any effort to talk to me, think sensibly about me or hack my phone. It's both lazy and insulting, but I've rather got used to it as it goes with the territory. What annoys me most is the way all this talk of me being concerned and confused makes it sounds like I'm implicated in the business of everything going tits up.

I will not be the fall guy. I have done nothing wrong. I am merely the blank canvas for other people's incompetence. I'm not the one who created a whole array of inherently flawed financial instruments that no one properly understood. I'm not the idiot who decided property prices were going to go up for ever and ever and that every country could max out its credit card. I'm not the out-of-my-depth chancellor of the exchequer trying to convince both myself and the country that I have the situation in hand and that I know what I'm doing.

None of that is anything to do with me. If anyone had wanted to set up a more straightforward and fairer market, I would have been OK with that. So, a final word to the wise. Remember who the real culprits are. It's they who are concerned and confused. Though not on your behalf. What they are concerned and confused about is how to get you to pay for the decisions they shouldn't have made in the first place.

As told to John Crace