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Flashcards in Economic Growth 12 - Government Deck (76)
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1
Q

What is one of the best ways to see how government can affect economic growth?

A

By looking at pairs of countries that are similar in every respect except their governments.

2
Q

What is the simplest way in which the government affects economic growth?

A

Through the channels of factor accumulation.

3
Q

How do governments affect the accumulation of physical capital directly?

A

Through investments in government capital (e.g., infrastructure such as roads) and indirectly through its budget (because budget deficits absorb savings that would otherwise be invested in physical capital).

4
Q

How do governments affect the accumulation of human capital directly?

A

In most countries, government pays for a large fraction of education. And government also influences population growth, through pro- or anti-natalist policies.

5
Q

Beyond factor accumulation, how can government policy can significantly affect the speed of technological progress?

A

Both through direct government funding of research, and through government administration of the patent system.

6
Q

The area in which government plays its most important role is efficiency. How so?

A

Through taxation, regulation, administration of laws, and a host of other tools, governments create the environment in which firms and workers go about their activities. By setting the “rules of the game” for the economy, government can profoundly affect economic development.

7
Q

What is the normative approach to government policy.

A

Analysis aimed at advising government on how it should act .

8
Q

What is the positive approach to government policy.

A

The attempt to describe rather than prescribe government actions.

9
Q

What are the 3 cases for government intervention in the economy?

A
  • Market failures
  • Public goods
  • Externalities
10
Q

What is market failure?

A

The idea that in some circumstances unfettered markets will not produce an efficient outcome.

11
Q

Although market failure can take many forms, we focus here on which four types?

A

public goods
externalities
monopoly
coordination failure.

12
Q

What are externalities?

A

the incidental results of some economic economic activity that affect people who do not control the activity and are not intentionally served by it.

13
Q

A third form of market failure that can motivate government economic policy is the existence of monopolies, single firms that are the sole suppliers of a particular commodity. How is an industry such as electricity transmission is often viewed as a natural monopoly?

A

Because it would be impractical for several companies to string electric wire to every house. In such a case, there is a role for government regulation to prevent the monopolist from charging an inefficiently high price.

14
Q

What is another motivation for government to take a hand in economic matters which concerns not the total quantity of output but rather the way that output is distributed among the citizens of a country?

A

Governments may view income redistribution—the transfer of income from rich to poor, from working-age adults to the elderly, or from the general population to members of some favored group—as one of their proper roles.

15
Q

The case against government intervention starts with which observation?

A

Although proper government policy can theoretically fix any market failure, in practice it often fails to achieve its goals. When government tries to take the place of private firms, the resulting enterprises tend to operate inefficiently because they lack the incentives (specifically, profit) that motivate private firms. Similarly, in cases in which industries are regulated as natural monopolies, often such regulation effectively preserves the absence of competition.

16
Q

What can happen when the ability and honesty of the officials entrusted to carry out a policy are lacking and what lesson emerges from these consequences?

A

The resulting government failure can be worse than any market failure that government policy was designed to correct. Recognizing the difficulty that governments have when they try to intervene in the economy suggests that, whenever possible, the role of government should be defined as narrowly as possible.

17
Q

What has been a trend parallel to increasing world wide privatization of previously government run industries?

A

The deregulation of industries.

18
Q

Which 3 particular aspects of government action affect growth?

A

-The maintenance of the rule of law
-The overall size of government
The practice of planning.

19
Q

How id the rule of law essential to economic growth? (3)

A
  • Firms that sign contracts with each other rely on the existence of courts that will enforce those contracts.
  • Inventors rely on the enforcement of patent laws.
  • Owners of private property depend on courts and police to enforce their ownership.
20
Q

What would we expect in an environment in which the rule of law is weak.

A

That factors of production would not be accumulated and that economic activity would be plagued by inefficiency. For both these reasons, output would decline.

21
Q

Does the rule of law affect mostly factor accumulation or productivity?

A

In both cases, there is a strong positive correlation, and the figures show that the channels of factor accumulation and productivity are of roughly equal importance in explaining the effect of the rule of law on income per capita.

22
Q

Why is it that one of the most important ways in which government affects the state of the economy is by its sheer size? Big government—that is, government that spends a lot of money—requires big government revenue. governments raise funds by taxing citizens and businesses. These taxes in turn affect the efficiency of economic activity.

A

Big government—that is, government that spends a lot of money—requires big government revenue. governments raise funds by taxing citizens and businesses. These taxes in turn affect the efficiency of economic activity.

23
Q

What did German social scientist Adolph Wagner theorized in 1883? Wagner’s Law

A

That the size of government would inevitably increase as countries became wealthier because a more developed economy requires more complex regulation and because many public goods provided by the government are of the type where desired spending rises more than proportionally with income.

24
Q

Which striking fact does examining the size of government in poorer countries reveal?

A

Although these countries tend to have smaller governments than do the richest countries, their governments are much larger than were rich-country governments at a comparable stage of economic development.

25
Q

The increase in government spending has been funded by an equally large increase in the taxes that governments collect. Why are taxes relevant for economic growth?

A

Because they directly affect the efficiency with which output is produced.

26
Q

What is the tax base?

A

The quantity of the good that is purchased (and taxed).

27
Q

What is the total revenue collected by a tax?

A

The tax base multiplied by the per-unit tax.

28
Q

The larger is the gap between the price received by suppliers and the price paid by demanders—that is, the larger is the tax imposed in a given market—the smaller will be the number of transactions that will take place. In other words, raising the tax rate will lower the tax base. How is this the source of the inefficiency associated with taxes?

A

When taxes are high, some of the potential transactions between buyers and sellers will not take place, and these transactions would have made both groups better off. No tax will be collected on these forgone transactions, but by discouraging transactions, the tax made the potential buyers and sellers worse off. The size of this inefficiency grows with the size of the tax. Because higher taxes shrink the tax base, increases in revenue collected when tax rates rise are not proportional to increases in tax rates. Indeed, once tax rates are high enough, further increases in the tax rate will not raise any revenue at all, because they will be more than offset by reductions in the tax base.

29
Q

What were the results of one recent estimate for the United States is about the marginal dollar of government revenue?

A

The marginal dollar of government revenue is associated with one dollar’s worth of lost output. This means that the “cost” of one more dollar of government spending is actually two dollars: one dollar of taxation and one dollar of lost output.

30
Q

Why do we pay taxes if it leads to inefficiencies?

A

Governments provide public goods without which the economy could not function at all. These public goods are paid for by taxation. Thus, even if the government were solely concerned with maximizing GDP per capita, the optimal choice of public goods and taxation involves a tradeoff between the costs and benefits.

31
Q

When does economic planning occur?

A

When the government takes responsibility for some or all of the decision making in an economy.

32
Q

What are examples of economic planning and other industrial policies?

A
  • State enterprises
  • Government-owned banks
  • Marketing Boards
  • Trade Restrictions
33
Q

What are state enterprises?

A

Corporations owned by the government but functioning somewhat like private companies.

34
Q

What’s the purpose of government owned banks?

A

By directing the flow of investment, government-owned banks in theory have enormous leverage to overcome market failures—for example, steering funds to industries with large externalities or solving coordination problems. Control of banking also allows the government to accomplish social objectives such as distributing resources to underprivileged population groups or regions.

35
Q

Where are government owned banks highest?

A

Government ownership of banks is much higher in developing than developed countries.

36
Q

Although conducting business informally may be the best option available to many entrepreneurs, How may it leads to several sorts of inefficiencies?

A

Informal firms cannot sign legally enforceable contracts or receive financing from banks. Informal firms must remain small to avoid detection—so they cannot take advantage of economies of scale.

37
Q

What’s the first reason the lending policies of government-owned banks have rarely matched the theory which justified this policy?

A

Rather than being directed to sectors with large externality benefits, loans have often been used to swing key electoral constituencies or to reward political supporters.

38
Q

What’s the second reason the lending policies of government-owned banks have rarely matched the theory which justified this policy?

A

government-owned banks often provide an easy way for corrupt politicians to extract money from the government: The bank makes a loan to the politician, who then defaults on it, keeping the money for himself.

39
Q

What is a final problem with industrial policies?

A

In an economic environment dominated by state controls, private entrepreneurs found that the easiest way to make profits was by securing the favor of government bureaucrats who decide on the allocation of investment and imports. Rent seeking is an unproductive activity that reduces the efficiency of production.

40
Q

But in some cases, the economic effects of government arise not from a particular policy, but from struggles to control who will govern or from a complete absence of government. Conflicts such as civil wars reduce economic growth through which channels?

A

Wars are inevitably accompanied accompanied by looting, flight of refugees, destruction of capital, restriction of commerce, weakening of social capital, and a cutback of government’s role in supplying public goods (not to mention humanitarian costs that go far beyond economic damage). There is a massive reduction in investment, especially foreign investment, as well as trade.

41
Q

Although violence lowers a country’s income, poverty similarly increases the risk of violence through several channels. What’s the first such channel?

A

People in dire economic straits are easy recruits for revolution or banditry simply because their opportunity cost is so low.

42
Q

Although violence lowers a country’s income, poverty similarly increases the risk of violence through several channels. What’s the second such channel?

A

poor countries have bad roads and weak militaries and are therefore less able to put down insurgencies, especially in peripheral parts of the country.

43
Q

What is the conflict trap?

A

repeated cycles of violence and economic failure, which feed upon each other, can function as a trap (in the sense of an economy having multiple steady states).

44
Q

Poverty is not the only determinant of violent conflict, of course. What is another powerful driver of conflict in developing countries?

A

he presence of valuable natural resources, the rents from which make control of the government particularly lucrative. Countries that score poorly on the rule of law and corruption indices discussed previously are also more likely to fall into civil war.

45
Q

What is one of the most powerful predictors of whether a country will experience violence?

A

Whether it has done so in the recent past.

46
Q

Why is whether a country has experienced violence in the recent past one of the most powerful predictors of whether a country will experience violence?

A

Wars inevitably leave in their wake resentments and economic damage, not to mention stocks of weapons and well-trained fighters. Over time, wounds heal, weapons rust, soldiers age, the fabric of society is repaired, and thus the probability of a relapse into conflict decreases.

47
Q

What are the 3 reasons why governments sometimes do things that are bad for growth?

A
  • Some other goal
  • Corruption and Kleptocracy
  • Self Preservation
48
Q

One reason that governments do things that are harmful for growth is that they are pursuing some other goal. What are such goals?

A

Spending taxpayer money on national defense, the arts, or foreign aid, andpollution reduction regulation may lower economic growth (because of the distortionary effects of taxation) but can still be viewed as being in the national interest.

49
Q

Why would anti-pollution regulation lower economic efficiency?

A

Because anti-pollution regulations raise the amount of inputs used without raising the quantity of output produced. However, governments view this reduction in efficiency as a price worth paying for a cleaner environment.

50
Q

What is the most important example of a policy goal that may impede economic growth?

A

Income inequality. Governments that redistribute income from rich to poor face an equity-efficiency-trade-off.

51
Q

What is kleptocracy?

A

When corruption reaches to the highest levels of government, meaning “rule by thieves”.

52
Q

How did some economists argue that a certain amount of corruption could be beneficial?

A

In their view, Many government policies are themselves detrimental to economic growth, and corruption on the part of the officials who are supposed to carry out these policies could have a positive effect.

53
Q

Some economists argue that kleptocracy could be conducive to economic growth? What’s the first argument supporting such a view?

A

Even a ruler who has no interest in the country’s economy other than what can be stolen from it will still want the country to be as prosperous as possible, so that there is more to steal.

54
Q

Some economists argue that kleptocracy could be conducive to economic growth? What’s the second argument supporting such a view?

A

Such a ruler might even have a strong interest in suppressing any corruption at the lower levels of bureaucracy to make sure that there is more left over to take.

55
Q

Some economists argue that kleptocracy could be conducive to economic growth? What’s the third argument supporting such a view?

A

The stronger is the country’s economy, the more likely are the citizens to be content with a kleptocrat’s rule, and thus the more likely the ruler will be to remain in power and enjoy the spoils.

56
Q

Why has the World Bank identified corruption as “the single greatest obstacle to economic and social development”?

A

Because it weakens the institutional foundation on which economic growth depends.

57
Q

What are some links between corruption and economic growth?

A

Corruption directly wastes taxpayer’s money.

Governments undertake policies solely to generate more opportunities for bribery.

58
Q

Corruption undermines the rule of law, which as we saw previously is one of the most important public goods that government provides. How does it go about doing so?

A

Corrupt government officials have a strong interest in making sure there is not a strong judicial system to stand in their way. And firms that cannot be certain their contracts will be enforced (because judges respond to bribes rather than facts and law) will be reluctant to undertake investments.

59
Q

A final reason that governments do thing that are bad for growth is that this tactic is often the best way to keep themselves in power. How do many of the changes in social structure that invariably accompany economic growth pose a threat to power? (4)

A
  1. New technologies can redistribute economic power away from the groups that support the current ruler
  2. Rising education may introduce destabilizing new ideas
  3. The movement of population from farms to cities creates a potential revolutionary class
  4. Trade with the outside can carry with it dangerous foreign ideas.
60
Q

How can a lack of economic growth threaten an government’s survival?

A

Failure to grow may breed popular discontent and because a country that does not grow may be menaced by more advanced neighbors.

61
Q

A government faces a trade-off in choosing policies that affect growth, and the policies it chooses will depend on their circumstances. How will a government with a weak grip on power behave?

A

A government with a weak grip on power will be inclined to preserve the status quo, at the cost of forgoing growth.

62
Q

A government faces a trade-off in choosing policies that affect growth, and the policies it chooses will depend on their circumstances.
How willl a government secure in power behave?

A

a government secure in power will be willing to tolerate the social dislocations that accompany rapid growth. Similarly, a government that faces threats from abroad will be inclined to take the risks associated with growth that would be avoided by a government that feels no foreign pressure.

63
Q

Define the “helping hand” view”.

A

Governments regulate the entry of new firms to protect consumers from low-quality producers and also to limit negative externalities such as pollution.

64
Q

Define the “grabbing hand” view”.

A

Regulation is imposed by governments to benefit either government bureaucrats themselves or those in the private sector who supply them with political or financial support.

65
Q

What does the data strongly suggest; the helping hand view or the grabbing hand view?

A

Grabbing hand view.
Countries with more regulation did not have less pollution, higher-quality consumer products, or better health than countries with fewer regulations.

66
Q

What does this finding indicates that regulation of the entry of new firms is not serving to protect consumers, as is posited in the helping hand view. Further, there is strong evidence to the degree to which government represents the interest of citizens. What is another practical way of stating this?

A

More democratic countries tend to have newer regulations, again indicating that the purpose of regulation is not to make citizens better off. Similarly governments that are judged as being more corrupt also have more regulations, a relationship suggesting that government officials create these regulations to increase the number of opportunities to collect bribes.

67
Q

Are countries poor because of their bad governments, or is bad government a symptom, rather than a cause? The argument that income primarily affects government quality, rather than the other way around, rests on which two observations?

A
  • That bad government is not always an impediment to economic growth.
  • That the quality of government often improves in response to growing income.
68
Q

Just as there is good evidence that bad government does not necessarily impede growth, there are many channels through which rising national income improves the quality of government. What’s the first, and simplest channel?

A

Richer countries can afford to pay their civil servants reasonable wages, thus shutting off one of the prime motivations for corruption.

69
Q

Just as there is good evidence that bad government does not necessarily impede growth, there are many channels through which rising national income improves the quality of government. What’s the second such channel?

A

When there is a larger (or growing) pie to split up, there is typically less of the destructive competition between interest groups that is often expressed in the form of government gridlock.

70
Q

Just as there is good evidence that bad government does not necessarily impede growth, there are many channels through which rising national income improves the quality of government. What’s the third and final such channel?

A

The sense of public spiritedness that can lead to honest government may be a “luxury good” affordable only to people in relatively wealthy countries.

71
Q

The data suggests that foreign investors clearly prefer the kind of stability associated with nondemocratic government to the uncertainty of democracy as investment inflows as a share of GDP were twice as high in China as in India. What did economist Robert Barro, studying data from a cross-section of countries, conclude?

A

That some democracy was good for economic growth but that beyond a moderate level, additional democracy was bad for growth.
Democracy, beyond a moderate level, is a luxury good that wealthy countries choose to consume even though it reduces their income.

72
Q

Economists who believe that bad government is primarily a cause rather than a symptom of economic underdevelopment principally base their views which abundant evidence?

A

The evidence of government’s ability to affect the economy. Given that government policies are so important in affecting growth, and that these policies differ so much more among countries, it is natural to conclude that variation in government policy explains a significant fraction of variations in income among countries.

73
Q

According to which argument that causality runs primarily from government quality to income claims to provide some obvious explanation for why the fact that some countries have bad governments that has nothing to do with their income.

A

That explanation is the legacy of colonialism. Most of the poorly governed countries in the world are former European colonies.

74
Q

Colonialism led to bad government through two channels. What’s the first?

A

In many former colonies, Colonial powers installed government systems that were explicitly designed to maximize the revenue that could be collected from the populace rather than to encourage economic or social development.

75
Q

When European colonizers departed (or were ejected), these extractive forms of government were left in place - and frequently the European colonizers were simply replaced by a local strongman or ruling native elite. Of course, Europeans did not leave behind bad governments in all of their ex-colonies. The United states, Canada, and Australia are all former colonies. What’s the difference between these former colonies and ones whose governments fell to ruin?

A

The difference is that in countries where large numbers of Europeans settled, they tended to establish governmental systems that mirrored those of Europe itself. But in the colonies where large numbers of Europeans did not settle - because of inhospitable climate and debilitating disease - institutions were created that later led to bad governments.

76
Q

Whats the second reason that former colonies often have bad governments?

A

Colonial rule created states with ethnic mixes that made good government difficult. European colonizers often drew the boundaries between colonies (which would later become the borders between states) without regard to the ethnic composition of the population. Further, colonial powers often played one ethnic group off against another as part of a “divide-and-rule” strategy that allowed a small group of Europeans to maintain control.

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