Chapter 2 – Theories of Economic Development – (p 29)

Role of Government in Economic Development – Some questions

• Does government help sustain growth or inhibit vibrant economies?
• Experts disagree on the role of government
• Should it assist producers
• Or should it assist consumers
  • Tax and regulate or
  • Lower taxes and less regulation
• Should it target declining communities with lower income groups
• Or should it throw dollars at those with the greatest ability to succeed
• Should it be neutral and force everyone to compete under the same rules or give special assistance to pet projects – Solyndra (Social Engineering)

Economic Models – Not much a lone EDP can do about them

Laissez Faire

• Government is not the solution government is the problem (Newt, Jack Kemp)
• The era of big government is over (Bill Clinton)
• Government is best that governs least
• Protect citizens against dangers of concentrated power, Checks and balances, separation of powers, federalism – James Madison
• Adam Smith Wealth of Nations Baron de Montesquieu
• Government Controls harmful to the economy
• No restrictions brings about sales at lowest prices
• But profits are kept to a minimum by competition
• High prices sees new entry into markets driving down prices
• Price too low and firms go out of business
• State should only be bothered with defense, administration of justice and public works only

Mixed-Market Model of Economic Development (P 32)

Market failure occurs when the pursuit of private interest leads to an inefficient use of society’s resources or unacceptable distribution of society’s goods

So what are society’s goods?

Collective Goods:

Or public goods not provided by the market as cannot enforce exclusivity

Non Excludable – cannot exclude users

• Cannot be restricted to paying customers only
• Markets have no incentive to provide these goods
• A lighthouse, fishing in the sea
• Example the Army
• Cost of charging fee would be prohibitive
• Charging ship-owners a lighthouse fee?

Individual

• Possible to charge user for the consumption of
• Food
• Clothing
• Automobiles
• Housing
• Free market – consumers demand goods, entrepreneurs recognize the demand, provide the goods and sell them
• Government intervention can include labelling, product safety etc.

Government provided goods (Jointly consumed)

• National Defense
• Air pollution control
• Mosquito abatement
• Public Roads, Highways and parks

Some individual Goods provided by the public

• Immunization against communicable diseases
• Can we charge? Yes
• Do we refuse to provide those who cannot pay?
• What are the consequences to the public at large?

Go to Page 36:

Government Activism in the United States

• Early days of the republic economic regulation and development undertaken mostly by the States – Public infrastructure/rail/roads
• 1887 Congress passes the Interstate Commerce Act to protect small farm owners from discriminatory charges by the powerful railroad Industry
• Sherman Anti Trust Act of 1890 prohibited attempts to monopolize industries and rejected pure Laissez Faire policies – John Rockafeller and Standard Oil
• 1901-17 Saw the introduction of Consumer protections such as the Food and Drug Act of 1906
• Following Great Depression Franklin Roosevelt and the New Deal
• 2008/09 Troubled Asset Relief Program (Tarp) Chrysler, GM
• Introduction of worthy goods regardless of consumer’s ability to pay such as education, housing, medical,
• Expanding today to cost of drugs, day-care, terrorism protection and many other protections from life’s uncertainties
• What is next? College education, contraception?

De-regulation and Regulation:

• De-regulation Airline Industry, trucking, natural gas, banking
• Regulation – Cell Phone Antenna’s
• Legalization – Casinos
• Privatization – Refuse collection, prisons
• A balance of Public and Private interests
• Conditions change over time

Supply-side Demand- side Economics

Top Down – the Supply Side – Reaganomics

• Assist producers and the market – then reward efficient producers
• Remove impediments to factors of production – Labor, land, Capital
• High tax is disincentive to both workers and investors
• Lowering tax will increase after tax returns, investors more therefore more willing to invest
• Remove restrictions and regulations
• Should not prop up failing businesses

Bottom-up

• Stimulate demand from consumers in the belief that as lower wage earners earn more they will spend more
• However gap between rich and poor is still on the increase
• Occupy Movement – the 1% vs the 99%
• Strategy includes helping local business find markets
• Helping entrepreneurs create new business
• Helping business expand
• Bottom up approach is to identify opportunities that the private sector may decline to pursue
• Subsidies:
  • Mortgage deductions
  • Education subsidies,
  • child care deductions
  • Food Stamps
  • Education Vouchers
• Laws of supply and demand or government intervention because of market failure – Summary P 51