The role of the public sector in the economy

1. The role of thepublic sector in theeconomy Topic 1

2. Contents • Introduction • The role of thepublic sector in theeconomy • 19th century • 20th century: • The Great Depression • The New Deal • Public sector reformssince 1980: “marketfailures” • Theoriesaboutpublic sector growth

3. Introduction • Reviewthehistory of economicthought in thelast 150 years • Theclassicalperspective: individualist, liberal, laissez-faire 19th century • Thecollectivistperspective: planned, centralized, interventionist, protectionist 20th century • Since 1980  “Statefailures”

4. Public sector in theeconomy • The public sector is the set of administrative bodies through which the State complies, or enforces, the policy or will expressed in the laws of the country. • Organization in which individuals can collectively achieve goals that are not as easily attainable in other institutions, such as business, family or market (Albi). • Characteristics of the public organization are: -The obligation to be a member of it -Coercion capacity

5. The 19th century • Hegemony of the classical / liberal perspective -In France, Germany, United States and United Kingdom Theory • Real growth in the medium and long term is obtained through the accumulation of savings and their investment in capital goods and human capital • The role of the State is limited to maintaining the stability of the general price level, administering justice, and promoting social peace.

6. SP micro-economic policy in the classical perspective • Very limited role for the PS - correct some market failures - externalities, lack of public goods, lack of public education • Principle of neutrality at the microeconomic level - the SP should not distort the “market signals”

7. SP macro-economic policy in the classical perspective • Maintain the stability of the general price level through: 1-Budget discipline of the public sector. The state should not borrow 2-Gold Standard. Monetary system where a country's currency or paper money has a value directly linked to gold. With the GS, countries agreed to convert paper money into a fixed amount of gold. A country that uses the gold standard sets a fixed price for gold and buys and sells gold at that price. 

8. The Gold Standard • International FinanceInstitution • The main objective - price stability through the control of the amount of money in circulation in the economy • Countries with trade deficits with other countries solved the debt in gold a deflation of prices and wages theoretically improving the competitiveness of exports

9. The 20th century: thecollectivistperspective • Growth of the PS size, from around 10% of GDP in 1870, to 20% of GDP in 1920, to 28% of GDP in 1960 and to 42% of GDP in 1980. • Philosophy in favor of state intervention in the economy and society • Increased awareness of the failures of the classical perspective - inequality, macroeconomic crisis, lack of social security

10. The Great Depression: Origins in Prosperity • Credit and debt expansion during the 20s to buy sharesbubbles • Prosperity, butalsoinequality • Among social classes • Amongcountries -> trade balance imbalance • The Bankruptcy of the Wall Street Stock Exchange was the spark, not the cause

11. Concentration of income in families with greater resources

12. Contractive macroeconomic policy during the 1929 depression • The strict budgetary discipline of the time forced the states to reduce public expenditures to balance the public balance -The lack of public spending and social security aggravated the crisis • Central banks kept interest rates high to avoid capital flight and maintain the Gold Standard system -The lack of liquidity in the global financial system caused bankruptcy of commercial banks and also aggravated the crisis • Examples of “pro-cyclical” macroeconomic policies • Finally, the Gold Standard was unsustainable and disappeared at the beginning of the 1930s.

13. The New Deal • Set of fiscal and monetary interventions in the 1930s and 1940s in the US to overcome the economic crisis: -Counter-cyclical fiscal and monetary policy (increased public spending, reduced taxes and low interest rates during recessions) -Redistribution of income -Creation of social security programs

14. Production ExpansionPhase Slowdownphase(unemployment) Productionlevelwith full employment Time Counter-cyclicalmacroeconomicpolicy

15. The 80s: Statefailures • Inefficiency of publiccompanies • Public sector intervention distorts the microeconomic behavior of private companies, workers and consumers markets do not work properly  stagnation • Public sector Reforms • Privatizationof publiccompanies • Contractingwithprivatecompanies • Flexibilization of theemployentcontract • Lessregulation

16. Theoriesabout PS growthSupplyFactors

17. DemandFactors

18. Supply-DemandFactors Baumolanalysis

19. Organization of course • Course can be split into FOUR parts: • 1 How can govt. improve efficiency when private market is inefficient?  CH 2 & 3 • 2 What can govt. do if private market outcome is undesirable due to redistributionalconcerns -> CH 4 • Specific public expenditure programs  CH 6 & 7 • Specific sources of public sector REVENUE  CH 8 & 9