government and economic growth Flashcards
(14 cards)
what the the main points of the lecture
defining role of goverment
how goverment affects growth
industrial policy
inflation reduction act
what is the role of goverment
Goverments aim to intervene in markets to correct market failures like public good provision, externalities, natural monopolies, coordination failures and existence of infant industry
is goverment intervention risky as well?
Yes, goverment failure can take place,
1. lack of incentives/information for governments to operate efficiently
2.inefficent state enterprises,government owned banks
3.gov failure>market failure, privatization and de-regulation will occur
Leads to the equity-efficency tradeoff, increasing equity through social spending can lead to lower efficiency/bureaucratic costs.
What are the 4 ways governments affect growth
Rule of law, democracy, preventing civil conflict and macroeconomic stabilization.
How does rule of law promote economic growth
A reliable legal system should lead to higher factor accumulation, and subsequently higher productivity.
Rule of law matters because economic growth requires investment and investment only occurs when investors feel safe. No property rights means no investment, no contract enformcent means no trade/divison of labor. E.G property rights open to being seized arbitrarily if not
Goal-secure property rights and judicial independence/contract enforcement equals a safe investment field and long term planning/market exchange. Curruption/weak legal systems hidner growth by increasing transaction costs/uncertinity
how does democracy promote economic growth?
Political rights are greater in rich countries, although democracy may not always be good for growth.
- Positives: limits on the power of rulers avoid corruption, people are free to think and develop new ideas, established rule of law
- Negatives: prone to instability, changes in direction occur when politicians come into power. Polices often favor short-run gains then long run growth. Licensing of new investment projects, modernizing regulations, building infrastructure etc.
Acemoglu 2019 found that democracy increased GDP by 20% over 25 years through mechanisms like schooling, public goods, health systems, infrastructure and tax
How does preventing civil conflict promote economic growth
Civil conflict brings:
destruction of physical and human capital, institutional legitimacy, wars drop life expectancy and create brain drain while disrupting markets.
How does macroeconomic stabilziation promote economic growth
Establishing low, predictable inflation, interest rates, and debt is another channel that fosters growth .
For example, low and predictable inflation reduces variation in aggregate and relative prices, increases quality of signals that could be extracted from prices, enabling long term contracts, inflation favors borrowers.
so, what is the role for industrial policy
targeted suport and performance based protection can drive industrialization .
- Heavy industry drive of 1970s-1980s Korea: the government targeted heavy industry via subsidized credit, tariffs, state owned enterprises. Result was an increase in output via increase in inputs and labor productivity. Although, TFP did not improve, increase in misallocation , economy grew extensively not intensively
2.Johansz 2018: Napelonic wars
Britain blocked Europe during the Napelonic wars, Frances allies couldn’t import British industrial goods, forcing domestic production. Exposed regions had no choice but to industrilzie sooner, mechanized cotton spinning capacity went up, shielded from British competition.
Result, temporary protection allowed cotton industry to mature, develop ability to compete.
Implication: Can help countries catch up by shielding domestic industry
What is the Inflation Reduction Act?
One of several recent US laws aimed at reviving industrial policy, especially in green tech/manufacturing, with an impact on industry and climate policy
It offered tax credits and grants for carbon capture,ev production, solar/wind,0 emission transport, as well as support for disadvantaged communities in adopting clean energy
Was the IRA climate policy or protectionism?
- Pro industiral policy
clean tech undersupplied, innovation has positive spillovers, policy leads to jobs and climate policies, and a resliant domestic supply
2.Criticism
Only US production benefits
breaks free trade market allocation, can trigger a global subsidy war.
what is wagnars law?
as economy grows richer, size of goverment tends to increase. This is because more complex economies require more public services, citizens demand more public goods and better regulation, increase in expenditure leads to increase in taxes
what is the trade off between growth and taxes
increases in tax can lead to lower efficiency, distortionary taxes(income, corporation), can reduce economic efficiency by discouraging work, saving, investment
Key idea is that growth=bigger goverment=potential efficiency loss if tax poorly designed
Why poor countries have bad goverments
2 way causality, bad governence hinders growth, poverty limits state capacity.
Goverments are bad for growth because of:
- Self-preservation: new tech can redistribute economic profits, rising education may introduce destabilizing new ideas, trade carries ideas
- Corruption: waste of government revenue, lower efficiency of production, undertakes policies to generate more money, undermines the rule of law
