Governments

Slide1: 

OVERVIEW Why do we need Governments ? Macroeconomic policy Microeconomic policy Non-market activities

What Governments Do: 

What Governments Do INSTRUMENTS tax spend redistribute money make rules (law, order, other forms of regulation) AIMS control inflation level playing fields for business correct economic externalities provide infrastructure promote growth and development stabilise macro-economy influence income distribution (equity-v-efficiency)

Historical Episodes of High Inflation: 

Historical Episodes of High Inflation Source: Journal of Economic Literature, Vol XL (Sept 2002) p.838

MACRO ECONOMIC POLICY: 

MACRO ECONOMIC POLICY Fiscal Adjust Government spending and tax rates, work through changes in T-G Monetary MPC adjusts interest rates to influence money holdings and thus demand and influence Exchange rates

Tax and Income Levels: 

Tax and Income Levels T = tax revenue as a % of GDP vs $ = GDP per capita, PPP around 2001, 33 countries, examples SAD Columbia T= 10% $7,000 Mexico T= 15% $9,000 MIDDLE UK = Germany T=36% $26,000 Italy T=42% $26,000 France T=45% $26,000 THE WINNER Norway T=45% $36,000 = highest Source: OECD

THE STABILITY AND GROWTH PACT: 

THE STABILITY AND GROWTH PACT The ideal fiscal rule (quadrant A) enables a country to achieve fiscal discipline over the medium term while allowing enough flexibility to smooth business cycle fluctuations over the short term. Medium-term fiscal discipline Short-term Fiscal flexibility Source: “Finance & Development”, June 2004, p23

Age Wars: 

Age Wars Across major industrial countries populations are aging In the EU, the share of the elderly (pop 65+/pop 15-64) will double by 2050 The share of the employed in the population will decline sharply Pay as you go pensions are a time bomb The growing number of elderly threatens to undermine the sustainability of the welfare state While boosting the political power of its main beneficiaries – all those wrinkly voters Source “Finance & Development”, June 2004, pp20-21

INFLATION: 

INFLATION Recent Causes Long Run : Printing Money Short Run : Cost Wages Demand Domestic Demand Raw Materials (e.g.. Oil) Exports ER Depreciation Monetary Expansion Consequences Nominal interest rates Inflation - adjustments Shoe Leather Costs Menu Costs Redistribution Uncertainty Cures Long Run : low money growth

EXCHANGE RATES: 

EXCHANGE RATES Fixed rates : Bretton Woods before 1971 Free Floats Dirty Floating : Intervention by buying or selling ERM and the Euro Pegging to the $

“Our currency, but your problem”: 

“Our currency, but your problem” The dollar, said John Connolly, treasury secretary to Richard Nixon, “is our currency, but your problem.” As issuer of the principal reserve currency, the US is also the world’s borrower of last resort. It is great being a reserve currency, you write cheques for the rest of the world which they never cash. Until, that is, they start to cash them. Paraphrased from speech (@ LSE, autumn 2004) by Denis Healey, Chancellor of the UK Exchequer during the 1970s. As the late Herbert Stein chairman of the council of economic advisors under President Richard Nixon, once famously remarked, what cannot go on forever will stop. Source (except Healey): “Our currency, but your problem: The dollar’s delicate balancing act” and “America’s rocketing external deficit faces a shortage of fuel”, by Martin Wolf, Financial Times, 1 March 2004, p15

MICROECONOMIC POLICIES: 

MICROECONOMIC POLICIES Competition : OFT, CC, Europe, Restrictive Practices Regulation of Natural Monopolies : OFGAS; OFWAT; OFTEL Infrastructure : Training/Education Industrial Policies : Subsidies, e.g. to attract FDI Patents Commercial Policies : tariffs, quotas, etc....

Slide12: 

NON-MARKET ACTIVITIES NOT PROFIT SEEKING ORGANISATIONS What Business Support Network RSPB Child Poverty Action Group British Mountaineering Council Sports Anti-Blood Sports Why not Markets ? Voluntary Exchange Nothing to exchange Public goods, e.g. clean air Free-riders e.g. street sweeping Merit goods e.g. education and health Don’t know what is needed

Slide13: 

Non-Market Activities : Who - Benefits The Producer decides ? providers are often monopolies demand often exceeds supply beneficiaries often lack power : £s, political run by professionals motivation : beliefs (religion, vegetarianism, anti-blood sports) Legal and Moral Requirements to Provide - v - Voluntary Exchange

Slide14: 

Not Profit Seeking Organisations : An Adapted Value Chain Getting Resources Producing Goods/Services Providing to Beneficiaries From : By : To : Donors Volunteers Famine Victims Volunteers Staff Patients Purchasers Teachers Audiences Sponsors Advisors Small Businesses Government Specialists On What Conditions ?

Slide15: 

Non-Market Activities Producing Efficiency : lowest possible cost curve (no slack, no waste) Other Goals ? employment creation allocating ‘free’ resources Sanctions laws conventional performance indicators funding crises complaints auditors

Slide16: 

Today: Government Not Profit Seeking Organisations Next Week: Strategy Process - getting and growing