Clearly analyze and answer .

What's the Best Amount of Government Intervention?

Are you a liberal or a conservative? We frequently hear these terms in reference to one's political philosophy, but do we know what they mean? Although these labels encompass politics and philosophy, we can understand much more about their meaning with what we've learned so far in economics.

Chapter 4 explains to us why we absolutely need government (command) involvement in our capitalist economy, despite the government's history of completing projects late, over budget and being rife with fraud and waste. A market economy is incapable of producing "(pure) public goods." And, despite the market economy's tendency to produce efficient results, it misallocates resources when there are externalities associated with the production or consumption of a good or service. In those cases of market failure, where the market's results are so inefficient that even the government can perform a better job, the government is justified in intervening. No rational person, not even the staunchest libertarian would argue against these rationales for government involvement.1 We can refer to these as the positive justifications for government intervention into the economy. In this context, the term "positive" is used in contrast to "normative" (not negative. Positive refer to what is, normative refers to whatshould be.

I can think of a few more positive justifications for government intervention that were not mentioned in chapter 4. The government must use its legislative body to define, and its executive body and court system to defend property rights. Market systems don't work well when you're not sure what you own and what you don't. The government must provide consumers with information in those cases where information required to make a rational consumer choice is difficult, expensive or impossible to ascertain. Examples would be the government requirement for labelling food, cigarettes, or prohibiting the sale of cribs with slats wider that 4 inches apart.2 The government must also enact and enforce policies that will help maintain competition. Markets don't work so efficiently when industries are monopolistic or highly concentrated. So, the government is justified in requiring firms to behave in this way or that through anti-trust legislation. The government must also enact policies to "fine-tune" the economy - that is, use its taxing and spending polices as well as the Federal Reserve System to mitigate inflation and unemployment.3

Even though the question still exists: to what degree should the government should implement these policies, there is a consensus among liberals and conservatives that government is needed to carry out these functions. Generally a conservative would say that a small amount is better. A liberal would be more in favor of government intervention.

But let's consider another set of issues that we are hearing more and more about in the media - the distribution of income. Specifically, what is thebest distribution of income? In the introductory essay entitle Market Efficiencies, we learned about the most efficient distribution of income - that which would motivate individuals to make the greatest contribution to society that they could. But, is the most efficient distribution of income the best, or fairest, distribution of income?

There is no objective way of determining the "fairest" distribution of income. I have my opinion, you have yours and neither one is better than the other. So, this brings us to the normative justifications for government intervention into the economy.

In considering this issue, let's first look at two exaggerated ways of distributing society's wealth. One way would be to make sure everyone would receive the same income, regardless of their productive contribution to society (as in the philosophy of a communist or a socialist system). The second, at the other end of the spectrum, is that everyone would receive an income that is precisely equal to the value of the productive contribution that they make to society - no more, no less (characteristic of a libertarian). It goes without saying that the second method would be the more efficient. That is, basing income on the value of one's productive contribution to society would motivate us to be a vital, productive member of society (assuming, of course, that we all wanted more and more wealth). The first method, on the other hand, would motivate us to shirk work and effort. Have you ever had a job where you income was not affected by how hard you worked? I have. And in those jobs, a successful day for me was determined by how much work I could avoid. When my income was determined by my productivity, a good day for me was determined by how much I got accomplished.

Although more efficient, how hard and fast would we want society to adhere to this rule? If a person's income was determine strictly by the amount of wealth he (or she) produced (as is the case in a pure market society - one that is unfettered by government intervention), what would the elderly, the mentally and physically disabled and the little children whose parents can't (or won't) take care of them do for subsistence? Clearly, we want government to step in and redistribute wealth from those who earn it to help support those who do not. We don't want babies, the disabled and (particularly) the elderly begging, starving and dying in the streets. It goes against our social norms.

Therefore, almost all of us would agree, there is a normative (as opposed to positive) role for government in our economy. Once again, let's remember the distinction between these two categories of justifications for government intervention into our market economy. The positive justifications exist when the government can actually do a better job of providing some good or service than the market. In those cases, it only makes sense to let government do it. Chapter 4 outlines a few of the positive justifications for government intervention. These would include such roles as providing "public goods," reallocating resources among industries as a result of "externalities." I also mentioned the government's role for protecting "property rights," and to provide a set of laws and a legal system that would maintain competition within industries.

It is the normative justifications, though, that we are interested in at this point. In contrast to the positive justifications, which exist when the market fails to produce an efficient outcome, the normative justifications exist when the market produces an efficient, but undesirable outcome. The question that arises is - how can an efficient outcome be undesirable? The answer - when it produces too much poverty! As we've seen above, distributing wealth based upon one's productive contribution to society, as it would be in a pure market economy, is highly efficient. But there is no argument that some people will be left behind. As a result, all developed capitalist societies choose to have government step in to take this harsh edge off of capitalism to one degree or another. Virtually all of us believe that a "social safety net" is needed, desirable and consistent with our social norms (hence the term "normative.").

But, to what degree do we want government to intervene for the purposes of redistributing income? As may already be clear, society bears a cost as it attempts to make incomes more equal. The problem is a basic economic principle: When you subsidize something, you get more of it and when you tax something, you get less of it. When we redistribute income by taxing those who earn it and giving it to those who do not, according to this basic tenet, we get less productive activity and more nonproductive activity. Society's resources, particularly its labor resources, become less productive, overall. Because society's resources are used less efficiently, its standard of living goes down. The cost of making incomes more equal is a reduction in economic efficiency.

The liberal argues that we are a rich nation - too rich to have anyone suffer the consequences of poverty. The rich can afford to subsidize the poor, so we should have policies designed to equalize incomes despite an individual's productive contribution to society. The conservative would say policies that punish ambition and success and subsidize and reward failure, poor judgement, bad choices, bad luck, and non-productive behavior will lower our living standards. We'll all have equal incomes, but we'll all be equally poor. What's your position?

Notes:

A libertarian is different from a liberal. A libertarian believes in the absolute minimal amount of government intervention into the market economy. A liberal, on the other hand, believes that there should be large, liberal doses of government tweaking the outcome of the market economy.

This may not be the exact distance....

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