The Role of Government in the United States Economy, Research Paper Example

Introduction

The role of government in the United States economy was always the topic of hot professional debate. While some political and economic professionals argued against any government participation in the country’s economic activity, others actively voted for the expansion of the government’s role in the national economy. Richard A. Musgrave was probably the first to delineate stabilization, allocation, and distribution as the three major functions of government in economy. In the history of the U.S. each of the three functions could potentially turn into the central element of the government’s involvement in economy. This paper will cover the basic premises of Musgrave’s vision of government and its role in economy. A brief historical analysis will be used to reconsider the relevance of all three government’s functions in the American economy. The Great Depression, the expansion of government, military challenges and the quest for security will be used to evaluate the three functions of government in economy, as proposed by Musgrave. Throughout its history, and depending on the economic climate, the American government chose to play one or several role that were assigned to it by Musgrave’s theory, and to say that the role of the government in the U.S. economy is limited to stabilization, allocation, or distribution means to forever limit the scope of influence, which the government has and should have on the American economy in general, and during crises, in particular.

Richard A. Musgrave: Review of the Basic Economic Theory

Whether the government’s involvement in the country’s economic affairs is justified remains the topic of a hot economic debate. When it comes to the role of government in the U.S. economy, society divides itself into the two opposing camps: the first one complains that government regulation of the economy is too little, while the second one is confident that too much regulation makes the scope of free market increasingly limited (Anonymous). Trying to define the best solution for the American economy, Richard A. Musgrave has created a new theory of government’s participation in economic processes. Musgrave argues that the best way to see what role governments can play in economy is by trying to divide their economic functions into the three major areas – stabilization, distribution, and allocation (Musgrave & Musgrave 9). As such, Musgrave’s theory also implies that the role of the free market mechanism in economy is limited to the extent, which makes government involvement important and critical to the survival of the state.

Distribution, stabilization, and allocation are the three major roles and functions of government in economy, as proposed by Musgrave (9). The allocation function is about the need for governments to provide for social goods, to allocate state resources between the goods that are public and those which are considered private (Musgrave & Musgrave 12). The distribution function of governments is about adjusting and distributing income/ wealth to make sure that society lives in the atmosphere of justice and fairness (Musgrave & Musgrave 12). Finally, that governments are called for to maintain high employment, to maintain reasonable stability of prices and an appropriate level of economic growth also shows governments as stabilizing agents in economy (Musgrave & Musgrave 12). As a result, Musgrave shows government as the critical component of all major economic processes in the country.

It is not rare that professionals in economic studies want to deny the meaning and significance of government involvement in economy, whereas the government participation in the major economic processes is reasonably justified. In terms of allocation, the market alone cannot provide for social goods to those in need simply because the market mechanism is well suited for the provision of private, not social goods (Musgrave & Musgrave 13). When it comes to distribution, the market without any government support adjusts principles of wealth distribution to the distribution of factor endowments, which is in no way fair or just (Musgrave & Musgrave 16). Effective and just distribution of income without a tax-transfer scheme, progressive taxation, and the combination of taxes on luxury goods (all of which are the products of the government intervention) is impossible (Musgrave & Musgrave 17). Finally, the achievement of stable economic growth, high employment, and reasonable price stability is always a matter of policy guidance, all of which are the results of the government’s stabilization attempts (Musgrave & Musgrave 18). Throughout the course of the 20^th century, and in the process of the historical evolution, the United States has proved all three functions of government to be effective, rational, and justified, and the slight shifts between them were always temporary and caused by the changes in domestic and external environments.

The Role of Government in U.S. Economy: Application of the Theory

Since the very beginnings of the American state, the role of government in economy and public affairs was rather vague. The tensions between various facets of the government’s economic responsibility reflected through the growing disagreements between the states, the government, and individuals; and to a large extent, those tensions were partially responsible for the outburst of the Civil War (Fishback 29). The Civil War and the Reconstruction that followed established a new vision of a strong government, further reinforced by the technological progress, urbanization, and rapid economic growth (Fishback 30). The latter also required that the government invested heavily in public education, infrastructure, domestic security and healthcare (Fishback 30). All those functions showed the role of the American government as of an allocating mechanism: the American society was waiting and requested the growing range of public goods, without which the prospects about steady economic growth would have to be postponed and thrown into oblivion. Natural gas, electricity, new police departments and medical emergency services were to confirm the limited role of the free market in the allocation of public and private goods in economy and society.

The twentieth century set the new stage for the expansion of government activity in the U.S. The emergence and growth of various interest groups made it possible to negotiate the roles of government in the American economy, but it was due to the crisis that the role of government in the U.S. was expanded and changed to turn stabilization into its basic function. The period between the two wars was well-known for the “cooperation between the government and business groups to mobilize industries for war effort, […] and Roosevelt brought the role of the government one step further by creating welfare states of the United States” (Denny 6). For the first time in history, the government assumed the responsibility for the welfare of the state; as a result, during crises the U.S. government would have to play a role of the major economic stabilizer by encouraging economic growth, preserving and enhancing the level of employment, and by controlling inflation and the level of prices.

The Great Depression became a test to the new “stabilizing” role of the American government and substantially expanded its functions in the American economy. However, even at times of crises, and even as the central economic stabilizer, the government did not and could not give up its allocation roles. Even at times of crises, people still needed education, health care, emergency support, and domestic security. Even more than ever, at times of crises, the American economy and the American society needed other social goods including welfare support, which would help the U.S. to live through the times of high unemployment and the growing inflation. The threats of the new world war and the growing political complexity in the world also required that the American government invested in national defense and social insurance programs, which would help the population avoid or at least minimize various adverse outcomes (Fishback 29). As a result, the Great Depression became the turning point in the development of the new government’s vision in economy by adding a new government’s function – stabilization.

After the Great Depression and the Second World War, and with the new promising prospects for economic growth, the U.S. government again had to concentrate on the need for allocating the limited economic resources which, as the level of income and the standards of living gradually increased, was impossible without wisely distributing resources and income among different population and interest groups. As such, the new age of economic development granted the U.S. government a new “distribution” function. Denny writes that “in the 1970s, the US government adopted a new type of regulations on civil rights, environmental protection, consumer protection, and good workplace for labors” (7), and those changes would have been impossible without a wisely developed taxation system and without the government successfully fulfilling its distribution role. The new emphasis on the equality of life was another driver of the distribution impulses in the American government (Denny 8). The post-war prosperity in the U.S., the new system of bureaucracy, and the changes in public assistance and welfare programs required that the American state shifted its attention from the quantity of material things to the quality of life in the country (Denny 8), and to promote the quality of life also meant to promote justice and fairness in the distribution of income and providing interest groups and vulnerable populations with reasonable social support.

As a result, the role of government in the U.S. economy is that of stabilization, distribution, and allocation. However, while allocation and distribution require constant government’s attention, the stabilization function becomes relevant at times of the major economic crises and political uncertainty. The role of government in economy usually changes under the influence of the three major variables: ideology, the pressure of interest groups, and the situation in the world economy (Denny 9-10). The U.S. history confirms that economic crises and the deteriorating economic stability in the world usually result in the expansion of the government role in economy and shift the balance of functions toward stabilization. In relatively peaceful times, the U.S. government successfully fulfills the functions of distribution and allocation, and even if the ideology requires minimal government’s intervention into economy, allocation and distribution work through budgeting policies, social support, and taxes, which never lose their relevance, regardless of whether the Democratic or the Republican party is ruling.

Conclusion

Whether government should participate in economy was always a matter of hot debate. While some professionals and groups argue against any government involvement in economy, others are confident that only through government can countries guarantee their economic and social stability. Musgrave’s theory is probably one of the most comprehensive and the most realistic in its explanation of government functions in economy. Stabilization, allocation and distribution – all are equally important when it comes to stability. I believe, and I think that in this paper I was able to prove that none of the three discussed roles is predominant. Although, under the influence of various factors, the role of government in the American economy can change, these changes are temporary and are justified by the need to stabilize economy during crises.

Works Cited

Anonymous. “The Role of Government.” 2008. America.gov. 12 December 2009. http://www.america.gov/st/econ-english/2008/April/20080415223308eaifas0.4951441.html

Denny, J.A. The Role of Government in Economy and Business. Pelangi Aksara, 2006.

Fishback, P.M. Government & The American Economy: A New History. University of Chicago Press, 2007.

Musgrave, R.A. & Musgrave, P.B. “Fiscal Functions: An Overview.” In P. Peretz, The Politics of American Economic Policy Making, M.E. Sharpe, 1996, pp. 8-21.