Table of Contents
The government plays an integral role in the operations of the economy to ensure the well-being of its citizens and achieve development. The relationship between resources and citizenry demands that the government plays a role in the acquisition and redistribution of income. The U.S social security system entails the pay-as-you-go scheme which is financed through compulsory and unfunded. As a result, it faces a major challenge in accomplishing the expected redistribution. The redistributive nature is expected to address the inequities in resources in the society, and this is achieved by taxing higher income earners more than low income earners. However, the U.S. social security system faces many financial challenges as the population is aging. According to social security administration projection, changes in social demographics indicate that retirement and Medicare cost will rise from 3.8% of GDP in 2003 to 5.5% by 2035. Life expectancy is also increasing while labor force is declining sharply. The Pay-as-you-go scheme may also affect the economy by constraining individual budgets and causing micro-economic shocks hence reducing the benefits of the redistributive system. Social security programs play an important role in wealth redistribution programs and are important in addressing poverty issues and inequalities. However, the federal government should put more emphasis on restructuring the economy to reflect the efforts of productive citizens. This means increasing the minimum wage and creating a maximum wage and nationalizing the sectors that the private sector cannot handle in a competent way, such as education, energy and health care.
Public Sector Economics
The nature of the public sphere has changed greatly in the recent past. Apart from microeconomic theory, policy and practice, public sector economy also has to account for political economy (Zerbe, 2001). The government plays an important role in ensuring the lives and welfare of its citizens in the face of current challenges facing people in modern, individualized and industrialized society.
Role of Government in Market Economy
The first and most important function of the government in public sector economics is to provide the economy with a legal structure without which an economy may collapse (Peter & Pierre, 2002). This function allows the government to ensure property rights, act as referee, provide enforcement of contracts and impose penalties where necessary. The government is able to accomplish this function by enacting legislations, regulations and means to ensure product quality, enforce contracts and define ownership rights.
The government is also expected to maintain healthy competition in the market by fighting non-competitive monopoly power. This is because competition is efficient and optimal mechanism to ensure that producers and resource suppliers respond to price signals and customer sovereignty. With regard to this, anti-monopoly laws have been enacted to regulate business behavior and encourage competition.
The other important role of the government is redistributing income among its citizens. It is the role of the government to ensure that the poor, handicapped, unemployed and the dependent are provided with relief (Barr, 2004). This is achieved through welfare, Medicare, Social Security programs and other programs that improve lives of the sick, elderly and the poor in the state. Price support programs such as the farm subsidy and interest reductions for needy students’ loans are also means of redistribution. These programs transfer resources from the high income groups to the low income ones through progressive taxes.
Additionally, the government is entrusted with the provision of public and quasi-public goods. When the market fails to provide or meet the required amount of certain goods or services, it is the responsibility of the government to fill the vacuum (Salamon, 2002). Such public goods are defense, security, police protection and the legal system. Health and education are examples of quasi-public goods that the market does not provide enough. The government should provide public goods, and then assist in provision of quasi-public goods.
Lastly, the government should promote macroeconomic growth and stability which includes fighting inflation, unemployment and increasing GDP (Salamon, 2002). This is achieved through changes in monetary and fiscal policies. Monetary policy signifies money supply, the use of interest rates, reserve requirements and other functions and is the responsibility of the Federal Reserve System. The fiscal policies deal with the use of taxes and spending, and these activities are mainly managed by the Treasury Department.
How property rights are defined plays an important role in determining the economic development of a country. The efficiency and liquidity of asset markets is enhanced by well defined property rights, a condition necessary for efficient economic development. Competing claims to property rights and the rules of institutions used to resolve conflicting claims also significantly affect the pace and pattern of economic investments (Guerin, 2003).
Evidence shows that secured property rights strongly influence the stability and prosperity of a country. On the other hand, insecure property rights retard growth and economic development. In addition, an efficient and corruption free legal system reduces time for pressing ownership of property (Guerin, 2003). The costs of defending property rights and resolving property rights issues are also greatly reduced by an efficient legal system. Successful economic development itself creates an economic environment conducive for revising how property rights are defined.
Positive and Normative Economics
Positive economics deal with value free descriptions of expectations or results about economic relationships and is relatively scientific. On the other hand, normative economics address with what should be rather than what is and normally deals with figures. Normative testaments often provoke equity debates in the society (Zerbe, 2001). For instance, the argument that wealth should be redistributed to the poor is normative. To achieve this, policies are required. These policies to assist in achieving the set goals represent positive economics.
The seller and the buyer bear the costs and benefits of production of goods and services in the market. However, some goods can also create externalities in their production and consumption. Positive externalities refer to the benefits enjoyed by third parties while negative externalities refer to negative effects borne by third parties (Ray, 2008). Externalities cannot be valued in the marketplace, and therefore it is difficult to determine the government intervention required to correct them.
A classic case of negative externality borne by the society is pollution. The society bears the whole cost of environmental degradation, and there is no means established by producers and consumers to consider these societal costs. From a societal perspective, therefore, the good is overproduced and over consumed in the free market outcome (Ray, 2008). It does not mean that the good should not be consumed because it produces a negative externality, but its consumption should be reduced to the level that reflects its social costs to maximize social welfare.
When someone is vaccinated, this becomes a positive externality. The society benefits as a whole since that individual cannot contact the acquired disease and infect others. Society qualifies some social goals on the grounds that they produce positive externalities. Positive externalities increase economic growth while negative externalities retard economic development.
Economic Efficiency and Equity
Equity is used to describe the inequities or inequalities emanating from resource distribution in the society, and those changes that should be made to correct this situation. Citizens in a poor area bear the burden of higher taxes if the income level is low in order to provide for the public services similar to those in a wealthier community where taxes are lower (Engelmann & Martin, 2004). This imbalance is considered unfair for social justice, necessitating redistribution of tax revenues. Redistribution permits equal access of benefits in public spending and this rule is one of the most popular in public finance.
An Explanation of Government Regulation's Impact on the Economy, And an Evaluation of How Much Regulation Is Appropriate
The purpose of regulation is to provide social and economic benefits that otherwise would not occur naturally in the free market economy, as well as to avoid the costs not reflected by the economy (Harvey & Ted, 2010). The benefits of regulation may be real, such as the reduction of damage caused by pollution, disease, injury or the prevention of accidents. Subjective benefits also result from policies that change the distribution of wealth or resources by means of subsidies, price supports or transfer payments.
However, the benefits of regulation come with costs. Regulation of drugs may prevent introduction of harmful components, but it may also delay the availability of lifesaving products (David, 2002). The introduction of safety features in vehicles prevents accidents and the inspection of food prevents diseases, but they also increase the cost of transportation and food. These costs are a significant reason why the government should avoid overregulation.
The state, together with federal and local governments bear the costs of regulation in the form of business deductions for the cost of the capital adjustments and labor required to comply with the regulations. The other costs result from loss of tax revenues due to reductions in GDP and taxable incomes due to reductions in incentives of investments, savings and work (David, 2002). Though the burden of regulation is increasing, the benefits realized are enormous when the burden is lifted. However, the costs of regulations on the government and households require urgent regulatory reforms. The government also should be more cautious in enforcing new regulations and reduce the costs of compliance to the existing rules.
An Explanation of the U.S. Government's Redistributive Role in the Economy
The United States’ economy is driven by both a consumer-based society and a capital driven citizenry. The government therefore plays an integral role in the operations of this economy to ensure the well-being of its citizens and achieve development. The relationship between resources and citizenry demands that the government plays a role in the acquisition and redistribution of income ( Engelman & Martin, 2004). This is achieved through social programs or via economic safety net; the U.S. government terms its social assistance as welfare. This entails redistribution from higher income groups to the poor.
The United States government has continued to maintain a forward economy and has also strived to provide healthcare and educational systems. The government and the economy both depend on each other and economic prosperity is highly dependent on the way the government plays its role.
The government makes substantial efforts to mitigate socioeconomic inequalities in primary revenue distribution through secondary redistribution (Barr, 2004). This is achieved by government spending on social programs funded by tax expenditures and progressive income taxation. These tax reductions assist the government to reduce production costs for employers, mostly through pension, health and unemployment schemes. These programs also help in maintaining social peace through radical unionism within working environments, particularly via accident insurance as well as protection of private property from political radicalism in society. Redistribution programs by the government also secure equality of economic opportunity which is an important part of social peace and economic growth. By doing this, the government is able to improve lives of its citizens beyond political and civil equality by including the social dimension.
Redistribution in Education
The United States government has been providing redistribution of school funding for a long time. The State and the Federal government have been funding public schools for a long time, even before legal mandates for redistribution were established. The government has made substantial efforts in redistribution to mitigate the impacts of income inequality (Belfield & Levin, 2002). The aim of redistribution of education programs is to reduce the persistence of poverty in the society, since the constraint of investment of human capital is loosened in poor communities. The likelihood of a child raised in poor community ending up a poor adult is also significantly reduced through redistributive funding of education.
This redistribution program has enormous benefits to those who cannot afford good education. Redistribution of school funding has been shown to significantly reduce intergenerational income inequality (Belfield & Levin, 2002). Therefore, privatizing education is not advisable since it may benefit only those with higher incomes, hence generate greater social inequalities. Intergenerational persistence of inequalities in the society is developed by community factors, hence the importance of this government program.
However, efficiency in education has been considered the output rather than the inputs in terms of the amount of government funding that is provided in the provinces (Belfield & Levin, 2002). Student retention rates, graduation rates and more utility to educational programming are relatively high and the education redistribution program can be said to be efficient. The cost reductions and efficient utilization of resources in the public schools are also evidence of efficiency in the programs. To serve the public interest well, the government should develop policies to ensure that all publicly funded institutions provide the society with a human capital in an efficient and equitable manner.