Economic Functions of Government

Economic Functions of Government

In the United States, where ownership of resources belongs with individuals rather than with the state, one of the primary responsibilities of government is to protect property rights. When people believe their property is secure, they are free to engage in other activities that include the voluntary exchange of goods and services. It also affords people the opportunity to specialize or become an expert at a particular skill.

Economic Functions of Government

Economic Functions of Government

Protection Think about nurses for a moment. Nurses have a very important job in our society, and they have to work hard to develop the skills necessary to be successful. How would nurses develop these skills if they had to spend their time guarding their personal property? Instead, they can leave their assets at home or in a bank without fear of them being stolen while they are learning or applying their skills. They trust the government to protect their property. As a result, they are able to become very skilled in a way that benefits both them and society as a whole.

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Protection (continued) While protection of property rights is a primary function of government in the United States, there are other important roles the government plays in a mixed market economy. One of those roles is to protect consumers and maintain competition. When protecting consumers, the government creates and enforces laws against hazardous practices, false advertising, and discrimination, among other things. It does this so that consumers are not harmed by businesses that seek to profit at the expense of others.

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Protection (continued) The government maintains competition by preventing monopolies from forming and regulating some pricing behavior designed to harm other firms. This can be complicated, but competition is an essential tool in ensuring products are priced fairly and responsive to consumer needs. The government may decide to create rules that ensure the market functions responsibly.

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Protection (continued) People who disagree with those rules may argue that the government is creating a burden that may discourage businesses from growing. Sometimes, these rules, or regulations, do result in a trade-off where they slow down growth, but a majority of Congress believes that is necessary to ensure the industry is responsible. An example helps to illustrate the difficult choices a society has to make about the role of government.

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Regulation In the early 1900s, air flight became an important mode of transportation in the United States. With this new industry came many reasons to be concerned about people’s safety. In 1938, legislation was passed that allowed the government to conduct safety inspections and investigations into airline accidents. This was an important protection for consumers who did not have the skill or time to inspect the planes on which they flew. This act created the Civil Aeronautics Board (CAB), and its duties included accident investigation and economic regulation of the airlines.

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Regulation (continued) Over time, concerns developed that the airline industry was not growing as fast as it could because the CAB had many difficult rules that led to inefficiency and higher costs. The CAB even played a role in setting fares. As a result, people began to argue for deregulation, or removing some of the rules. They argued that this would lead to more innovation, which would lead to greater competition among airlines. In turn, this would lead to better prices and services for consumers.

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Regulation (continued) As a result, the Airline Deregulation Act was passed in 1978. Like most deregulation, something was gained and something was given up. People did gain better prices. On the other hand, it became much harder for smaller airlines to operate, and many went out of business. This actually led to less competition. There is little doubt that large airlines were able to improve productivity by shifting resources to high need areas and focusing on routes that included the most passengers.

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Military Spending Government plays a large role in the production of goods and services. This is easily observed in the government’s role in providing a working military. The United States spends more on military spending (over $500 billion) than any other nation in the world. It employs well over a million people, both active duty and civilian. In fact, the United States spends three times more in military funding than China, the world’s most populous country and home of a fast growing military.

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Military Spending (continued) One can easily argue that the US military has a profound impact on the economy. The military budget funds goods, services, and personnel, including military planes, missiles, tanks, aircraft carriers, computers, soldiers, technicians, analysts, and much more. Everything required by the military in turn creates jobs and economic opportunity for businesses that contract with the government.

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GI Bill In 1944, the Servicemen’s Readjustment Act was passed. Informally referred to as the GI Bill, the program offered several benefits to soldiers as they resumed civilian life. These benefits included low-cost mortgages as well as tuition and living assistance for troops who enrolled in universities. The bill also offered returning servicemen low-interest loans to start businesses. To be eligible, a serviceman had to have served 90 days on active duty and not have been dishonorably discharged.

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GI Bill (continued) This was the first major federal legislation to assist American servicemen with the transition back to civilian life. Unlike the updates and revisions that followed, this particular act was focused on guiding and assisting servicemen through the transition from soldier to civilian, from combat to peacetime. The federal government understood that this investment in what is referred to as human capital would benefit the United States for generations to come. The GI Bill was a long-term investment in a particular population of the nation’s citizens. This was the first time the federal government used regulation to recognize the value the experience of its troops performing military service.

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Public Provisions Another role of government is to provide public goods and services. These types of services may be provided by the federal, state, or local governments. Some services are concerned with public safety, and include police officers, firefighters, and the military. Other services include those we use without thinking much about, like water treatment facilities and highways.

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Public Provisions (continued) The Federal-Aid Highway Act of 1956 established an interstate highway system in the United States. Before the interstate highway system, car travel across the nation was made on roads such as Route 66. Route 66 was built in 1929, and ran from Chicago to Los Angeles, directly through hundreds of towns. Some sections of this historic road have been preserved as “Historic Route 66.”

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Public Provisions (continued) In response to public pressure to improve roads, the Interstate Highway System was developed and within a few years, trucks replaced railroads as the major means of transportation. We’ve also decided, as a society, that there are certain things worth protecting, so we have public parks like the Grand Canyon National Park in Arizona. We also support government buildings, pieces of public art, and things that show our shared heritage, like the Capitol Building in Washington, DC. Though they may seem free, all of these public goods are paid for with our tax dollars.

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Equity and Balance Two final areas where the government plays a role include the redistribution of income and resolving market failures. While these are very different activities, they have something important in common—they can be very controversial. The redistribution of income involves taking money from one segment of the population and using it to benefit another segment. In doing this, many concerns develop over what is fair and reasonable in a market that is supposed to be free. This is an important and complex issue, and there are powerful arguments made for both sides. Exploring these sides is one of the most imperative responsibilities of a citizen.

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Equity and Balance (continued) It doesn’t seem like handling market failures would be controversial. After all, who wants a market to fail? When markets fail, people lose their jobs, companies go out of business, and investments are lost. However, the way the government chooses to prevent, or respond to, market failures can be quite controversial. Should the government help businesses when the market is slow, or should it prioritize individuals instead? How involved should the government be? Any additional responsibilities for the market that are assumed by the government will cost money, and so it will result in added expenses for taxpayers. After all, the government receives its revenue from the taxes it imposes on citizens. Those expenses have to be balanced against the benefits gained as a result of the government action.