eNo. 2316 September 17, 2009
The Economic Role of Government: Focus on Stability, Not Spending Karen A. Campbell, Ph.D.
Abstract: Is there a role for government in the economy? Yes, says Heritage analyst Karen Campbell—but the government must focus on maintaining economic stability. Fiscal responsibility is an important part of that stability. Government debt can quickly become a burden on the economy and weaken its foundations. Sound macroeconomic policies enhance the credibility of the government and strengthen the political institutions. This credibility is vital for economic stability and Americans’ long-term investment decisions that allow the U.S. economy to flourish. In order to restore economic stability, policymakers must focus on restoring the institutional role of governing. Government can provide a stable environment for economic growth when it can be depended upon to maintain the stability of the currency, enforce and defend property rights, and provide oversight that assures private citizens that their transaction partners in the marketplace are held accountable.1 This will allow market participants to begin putting their resources back to work in the areas where they are most beneficial.2 After decades of lecturing developing countries on how to emerge from economic crisis and stimulate economic growth through sound government policies, U.S. policymakers and some economists are throwing out all their advice during the first major crisis test. This is particularly true when it comes to advice on accumulating more and more debt.
• Government should contribute to the economic growth of a nation and provide the best entrepreneurial opportunities to its citizens.
• Economic downturns can provide an opportunity to reassess processes and undertake reforms that make better use of resources, for example, by eliminating unnecessary compliance costs that no longer aid transparency, and adapting rules and procedures to the new realities in technology and individual lifestyles.
• Policymakers must recognize that accumulating debt also accumulates risk by increasing the claims on yet unrealized future income.
• Creditors believe that the U.S. will be able to
produce enough GDP in the future to pay back the debt with interest. But as the debt becomes a larger percent of GDP, the ability to pay back bond holders and sustain the current population becomes increasingly difficult.
This paper, in its entirety, can be found at: www.heritage.org/Research/Economy/bg2316.cfm Produced by the Center for Data Analysis Published by The Heritage Foundation 214 Massachusetts Avenue, NE Washington, DC 20002–4999 (202) 546-4400 • heritage.org Nothing written here is to be construed as necessarily reflecting the views of The Heritage Foundation or as an attempt to aid or hinder the passage of any bill before Congress.
No. 2316 President Barack Obama’s fiscal responsibility summit3 last February indicated that he understands the urgent need for fiscal discipline. But Congress’s recent enactment of the American Recovery and Reinvestment Act and the President’s proposed budget makes the goals of a sustainable budget and addressing the nation’s longer-term fiscal priorities, such as entitlement liabilities, even more elusive. The Congressional Budget Office’s _________________________________________ Economic downturns, while painful, do afford an opportunity to root out waste and inefficient spending.
September 17, 2009 due to more demands on social-safety-net provisions and falling tax revenues. Such spending can have a stabilizing effect on the economy because it happens automatically rather than through legislative acts, and the money is spent at times it is needed most. Borrowing and spending to stimulate the economy using legislative discretion is much more difficult to time for the right moment, and is thus much riskier. The funds are often not spent until long after the downturn has taken place,...
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