Economics of Public Policy - Term Paper Example

 Economics of Public Policy Introduction The question of whether governments should interfere with the economy or leave it to its own vice is an old debate. This debate has led to the existence of two different views regard to what the government’s role should be in the economy. There are those who believe that the government should not have any business interfering with the economy. These economists believe in what is referred to as free market economy where government does not regulate the markets of the economy through policies such as fiscal or monetary policy. These are called classical economists and believe that the economy is a system that is able to regulate itself through the laws of demand and supply. On the other hand, others believe that the government should have a role in regulating the economy so as to steer it to the right course whenever it fails to follow the right course. These economics are students and followers of John Maynard Keynes, a 20th century economists who argued that the private sector has no way of controlling and regulating itself and therefore it is crucial that the government be able to regulate the economy. Both these sides have their merits and demerits and it is necessary for a comprehensive study to identify what the actual role of the governing in the economy is. Objectives The main purpose of the paper is to identify ways in which government polices interfere with the delivery of service to the public. This study will look at the ways in which poor government policies can hinder the delivery of goods and services to the people. To study how public policy affects the delivery of goods and services to the people and whether there is a way it can be improved. The study will also use real life examples, such as the recent economic recession, to understand the role of the government and government policy in bringing the recession and also the government’s role in solving the recession. It will also study the impacts of regulation and deregulation and the impact of these in the economy. In particular, the paper will investigate the role of deregulation in the American economy, and especially in the financial services industry in the United States, in bringing the recession. Other factors such as self regulation, privatization and role of private businesses will be seen as means of identifying any challenges of all these as well as look at any available alternatives. It obtains information about how government policies can be used to improve service delivery and whether it is better for the government to stop involving itself in the delivery of goods and services. In doing this research, it will also be necessary to pin point the reasons why the involvement of the government in service and goods delivery leads to inefficiencies. Aims of the study This study is carried with the aim to help in identifying the ways in which government policies can be used to enhance service delivery to the public and how the same can be used to enhance economic development. It aims to set the scores for public policy in its ability or inability to help in developing the economy and managing the economy. At the end of the study, it will be clear on whether governments should, through economic policies, participate in the delivery of public services to the public. This will create a good basis to understand whether privatization of public resources such as ports is economic and whether it helps in increasing service delivery and increasing the quality of life to the public. Literature review The American economy can be used as one of the best examples to illustrate how the role of government in service delivery affects the people. The economic recession that hit the nation in 2008 can be seen as a classic example of how deregulation or lack of government involvement in controlling the economy can be harmful to the economy (Nellis and Birdsall, 2005, p.98). Keynesian economics suggests that the government should at least have a control of the economy in order to regulate the economy. However, classic economists dispute these arguments and instead suggest that the private sector is able to regulate itself through competition and the laws of demand and supply. The recent economic crisis, in America and across the world especially in the industrialized countries such as the US and most of west European nations such as France, Italy and Greece, can be seen as a classic evidence of the reality of Keynesian economics (Baldwin and Cave, 1999, p.78). However, it is not wise to be excited about Keynesian economics on the basis of an indication that the recession was caused by lack of enough involvement of the government in the control of the economy. Literature does however indicate that the recent economic crisis was caused by lack of government regulation of the financial services sector. After the great economic recession in the United States in the e1930s, John Maynard Keynes, an economist from United Kingdom was hired as the economic consultant to the then president of the United States. Keynes suggested that the main problem with the economy was that there was not enough control by the government and suggests that the government should develop a number of economic policies to protect the economy and the public. The president took heed of his advice and this led to numerous fiscal and monetary economic policies. However, classical economists disagreed with this approach and started attacking Keynesian economics immediately. The attack of Keynesian economics went on until the classic economists had managed to strip off most of the regulation powers of the government. The recession of 2008 has been seen by many economists especially those leaning towards Keynesian economics to have been caused by this fact. A closer look at the events leading to the recession in the American economy in early 2008 can reveal that these Keynesian economists are not entirely wrong. It became apparent that the financial services industry was too unregulated to and this allowed them to engage in malpractice. Privatization has been used by many governments as a way to increase service delivery to the public (Bortolotti and Perotti, 2007, p. 34). In many countries, governments have tried to privatize many sectors in the public service delivery as a way to aid in streamlining service delivery. According to Estrin et al (2009 p. 215), the argument behind privatization is that privatization is a way to bring competence to the service delivery. Those who argue for privatization argue that the profit motive of the private sector drives competency and leads to better and sometimes cheaper delivery of service to the people. However, the issue of privatization is not without controversy. While some economists support privatization, some have disputed the argument that privatization leads to better service delivery (Battaglio and Legge, 2009, p. 45). These economists argue that competence on public service delivery can be managed regardless of privatization (Hillman, 2009, p. 32). Those who argue against the privatization of public service delivery are not without evidence. This is because they cite countries where the government has not used privatization as a way to streamline service delivery. A good example is Germany and France where the delivery of service by the government is considered to be at par with international standards. For instance, in Germany, the delivery of education right from elementary level to university level is still under the government and Germany has the best education system in the world. The same scenario applies to the healthcare system in France. France has the best healthcare system that ensures that everybody gets the best healthcare in an affordable and efficient manner. Yet, the government has not outsources the delivery of these services to the private sector. However, there are cases in which privatization had been seen to save the ship and aided in improving service delivery. Regardless of this, debate about privatization continues to cause diverging views on the matter. Those who believe that the government should refrain from delivering public argue that the modern capitalist nature of economic activities make is impossible for governments to be able to increase efficiency in any sector of service delivery (Kikeri and Nellis, 2004 p. 87-118). As a result, they argue that the only way to increase efficiency is by privatization so as to allow the same factors that influence the private businesses to mould shape and improve service delivery in the public sector. One of the most famous arguments for this kind of private sector efficiency development is the paper that was written by Leonard Read in 1958. The paper tiled I, Pencil was written to illustrate the complex logistic that go into developing a pencil, which is exceedingly straightforward and economically humble product yet the product is produced efficiently and delivered to the end users at an extremely reasonable price. Read wanted to indicate is that the private environment leads to the development of efficiency in delivering goods or services to consumers. This was the most famous representation of the concept of free markets. Free markets means that the government should not try to control the way the private sector works became the economy has a natural way of controlling and regulating the environment t in which business takes place (Megginson and Netter, 2001, p.53). It is therefore not coincidental that those who support privatization are those who believe in the liberation of the markets, that is, free markets. The big question to answer with regard to privatization and the implementation of free markets then, is whether this can works for every sector of the economy. For instance, can privatization work in delivering the three basic services that the government provides to the people, that is, health, education and utilities? There is no definite answer to that and it is therefore necessary to make sure that this question is answered in a clear manner. The reality is that there is no government that has been able to implement privatization in all sectors. However, there are lessons that can be learnt from the governments that have tried privatization. One best place to look at is the United States and the delivery of health care service. One of the most controversial public sectors in the world is the United States of America’s health care sector (Gruber, 2008, p.573). There have been numerous attempts to revamp the delivery of healthcare to the public. Medicaid is healthcare insurance that was started to help the poor who cannot afford their own healthcare. However, although the government provides this, the delivery of the actual healthcare is done mostly by private hospitals and the hospital and the doctors are then paid from the insurance fund. The biggest controversy arises from the fact that it has been seen that Medicaid patients don’t receive as good healthcare from these hospitals and doctors as those with private insurance policies. Analysts argue that an average doctor may earn more by treating patients with private insurance and this means that the doctors are more interested to treat these patients as opposed to treating Medicaid patients. This scenario puts both the government (public delivery of service) and the private businesses (Privatization) at fault (Cullis and Jones, 2009, p23). First, it shows that the government can have immense challenges with regard to the delivery of services to the public. Secondly, it indicates that the private sector is not as efficient as it may be thought to be especially where delivery of equal service to all people across the economic divides is concerned. Privatization and deregulation is not the same thing, but they both ride the same cloud (Sloman, 2007, p.74). Both of these concepts are centered towards the argument that the government is not and cannot be able to deliver high quality services. With regard to privatization, there are those who believe that it should be done partially while others believe that it should be done fully. Those who argue that it should be done partially are those who believe that there are some elements of public service that are not easy or possible to privatize, such as health care and education. They argue that the government should privatize areas that affect the private sector in a direct way such as sea and airports (Baldwin and Cave, 1999, p 217). Such resources affect the private sector in extremely direct way because private businesses depend on these ports for logistics, communications and transport of human labor from one point to the other. Conversely, deregulation refers to the view that the government should refrain from creating economic policies that are geared towards managing the economy and regulation the business environment that the private sector works in. According to Baldwin (2005, p.495), the law must balance the power between public authorities and the private businesses in order to aid in making sure that the authority keeps their word and that the private businesses are willing to work with them. This argument comes from the notion that the private sector does not need regulating and the economy is like an ecosystem that operates and regulates itself naturally. So far, there is no definite evidence for or against these two principles. However, it is becoming apparent that the debate about whether the government should be involved in delivery of goods and services will continue to gain heat as time goes by. However, a closer look at most governments around the world indicates that there is no one formula to public service delivery that can be used for all economies. A number of factors come together to affect the way each of the approach used and how efficient it is going to be. This means that what may work for one government may not necessarily work for another economy and therefore it is increasingly relevant to identify the various ways in which any government should be able to increase the services it offers to the public. This indicates that whether the government wants to use privatization or deregulation, it must be able to identify the various factors that will play a role in how well the service delivery will be developed. Leadership is one of the major factors that affect how the government is able to contribute to economic development and as Wallis and Dollery (1999, p 161) point out, local government employees are supposed to engage in continuous professional development. The question of the role of government in delivery of service can therefore be stripped down to one question, what are the factors that the government that will need to take consideration before implementing a service delivery platform. In most cases, government are seeing themselves having to use a hybrid system where the government provides the delivery of some services while leaving some to be delivered by the private sector. However, some still argue that government contracting is the best way t deliver quality service, despite the fact that history and data seems to indicate otherwise (Sclar, 2001, p.155). At the same time, the role of economic policies is changing and the way the modern governments are applying economic policies is quite different from the earlier methods. According to Barr (2004, p.234) the biggest support for privatization is the argument that when the government involves itself in delivery of essentials services, what emanates is a welfare state. Those who argue in this way say that the government’s involvement in delivering services leads to an economic system that is unhealthy because the people end up depending too much on welfare from the government and this leads to inefficiency from the government. Some argue that the real danger of government engaging too much in service delivery and creating welfare services to the people is not the economic risk but the political risk (Le Grand and Smith, 2008, p.45). The argument is that is the government is the principal provider and the welfare provider, it leads to a social order where the government becomes the centre of power and the democratic space is affected and altered. As this happens, the economic system is also affected. Some authors have used the monolithic societies to give this example and say that if this kind of a situation is not taken care of, it can take humanity to the dark times of feudalism. The development of a welfare nation is dangerous to the economic and the political system because it offers the government too much control and too much control. When the government owns and controls all the means of economic production, it becomes the center of power and it is easier to control people and the private businesses as well. Conclusion It is evident that both neither privatization not the involvement of the government in the delivery of public services can manage to solely develop a system that is perfect in the way it aids in the delivery of the same. A look at the various economies in the world shows that privatization can fail or be successful, depending on a number of factors. These factors are also dependent on the kind of government in place. As a result, although privatization seems to promise good results, it fails to be able to work uniformly in all economies. At the same time, the impact of the participation of the government in the delivery of services to the public is also not absolute ad it also depends on the kind of government. This means that there is no perfect answer on whether the government should or should not is involved in the delivery of public services and goods. The kind of system that should be used in any economy will be dependent on the structure of the economy and the resources it has. It has also been clear that while some areas can easily be privatized; there are some sectors where the government should be able to deliver on its own. These are the areas that are considered to be essential services where the forces of demand and supply should not affect the way the delivery of service to the public. The government can use a hybrid system that will tend to use both privatization and economic policy to try and mange ht economy. It is crucial that the government identify ways in which it can increase efficiencies in the delivery of public service because in most cases the government does not operate under the economic environment that makes private firms to adjust themselves and come up with ways in which to increase their efficiencies. In this regard, the government should learn from the private segment as a means of developing the ways through which will help in managing the economy. The very nature of the government and the mandate given to it by the people mean that it is not possible to privatize every sector because this would make the government redundant. However, there are some areas that may benefit from privatization and it is good for the government to identify these areas and carry out due diligence on ways in which it can competently identify these areas and come up with ways in which efficient privatization can be achieved. In doing this government will have the opportunity to outsource the management of assets in areas where it does not have the competency to manage the resources. This means that the government can and will only privatize resources and services that it cannot manage competently. However, in those areas where the government cannot afford to expose the delivery of services to the harsh economic forces of competition, such as education and healthcare and utility services such as water and electricity, the government may need to retain these areas. This will help in protecting the public, especially the low income earners from being affected by the laws of demand and supply. Recommendations It is clear that there is no one economics system that is correct for all the governments in the world. Whether it is deregulated economy or an economy whose sectors are privatized, there will always be other factors that will affect the way the means of production are handled in the economy. Neither privatization nor deregulation can help in wholly streamlining the delivery of goods and services. In this kind of a situation, it is vital for both policy makers and other stakeholders such as businesses people to be involved in making sure that there are good systems that are used to deliver services to the people. Literature seems to indicate that there is no one government in the world that has been able to privatize its service delivery. This shows how difficult or impossible it is for any government to privatize, especially the essential services. At the same time, it is apparent that the government can educate itself from the private sector especially with regard to increasing efficiency and reducing costs while at the same time increasing the quality of service delivery. Governments should come up with ways in which to increase delivery of service in terms of quality, efficiency and managing the cost of service delivery. This would mean working closely with the private sector to identify the necessary ways in which to manage this. At the same time, it will be beneficial for the government to be able to deliver ways in which to create an environment that encourages and supports this. As discussed, one of the factors that makes it harder for the government to increase efficiency, especially quality and cost management. Reference List: Baldwin, R. (2005) Is better regulation smarter regulation? Public Law , 485-511. Baldwin, R. and Cave, M. (1999) Understanding regulation: theory, strategy and practice, Oxford: OUP. [2011 edition on order] Cullis, J. and Jones, P. (2009) Public finance and public choice, 3rd ed, Oxford. Gruber, J. (2008) Covering the uninsured in the United States, Journal of Economic Literature, 46, 3, 571-606. Le Grand, J., Propper, C. and Smith, S. (2008) The economics of social problems, 4th ed, Basingstoke: MacMillan. Sloman, J. (2007) Essentials of economics, 4th ed, Prentice Hall. Chapter on market failures and government policy. Barr, N. (2004) The economics of the welfare state, 4th ed, Oxford: OUP. Part 2. Battaglio, R. and Legge, J. (2009) Self-interest, ideological/symbolic politics, and citizen characteristics: a cross-national analysis of support for privatisation, Public Administration Review, vol 697-709. Bortolotti, B. And Perotti, E. (2007) From government to regulatory governance: Privatization and the residual role of the state, World Bank Research Observer, 22(1), 53-66. Estrin, S., Hanousek, J., Kocenda, E., and Svejnar, J. (2009) The effects of privatization and ownership in transition economies, Journal of Economic Literature, 47, 3, 699-728. Hillman, A. (2009) Public finance and public policy: responsibilities and limitations of government, 2 nd ed, Cambridge. Kikeri, S. and Nellis, J. (2004) An assessment of privatisation, World Bank Research Observer, vol 19, no 1, 87-118. Lane, J-E (2000) New public management, London: Routledge. Part II Le Grand, J., Propper, C. and Smith, S. (2008) The economics of social problems, 3rd ed, Basingstoke: MacMillan. Megginson, W. and Netter, J. (2001) From state to market: A survey of empirical studies of privatization, Journal of Economic Literature, 321-389. Mueller, D. (2003) Public Choice III, Cambridge: CUP. Nellis, J. and Birdsall, N. (2005) Reality check: the distributional impact of privatization in developing countries, Center for Global Development. Sclar, E. (2001) You don’t always get what you pay for: the economics of privatization, Cornell. Wallis, J. and Dollery, B. (1999) Market failure, government failure, leadership and public policy, Macmillan. Read More