Government Intervention in the Economy

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Government intervention on the economic outcome

In my opinion, government interventions have an overall positive effect. First, it allows for redistribution of wealth, leading to greater equality. The free market systems are inherently unequal in terms of income and opportunity since privilege largely determines the possibility of creating value. While such redistribution may seem unfair, the law of diminishing returns states that a negligible decrease in wealth of the high-income segment can result in a significant improvement of the low-income population. Besides, in the free market public goods will likely be underproduced. For instance, despite its obvious importance for the public good, maintaining law and order is an extremely unprofitable endeavor and is unlikely to be provided unless enforced by the government.

What are the best ways of reducing budget deficits?

Probably the best way of reducing budget deficits is economic growth. An enhanced economic development leads to an increase in the GDP percentage, which provides the government with an opportunity to increase tax revenues without the necessity to raise taxes. The downside of such an approach is the limited capacity for growth, which is especially apparent in developing countries, where it is constrained by the restrictive monetary policies and recession.

Another good option is to seek ways of reducing government spending. This is usually achieved through a review of the activities of existing departments. It should be noted, however, that the success of such a strategy depends on the state of the economy and thus is not always an option.

Using supply-demand analysis, briefly discuss the future of the real estate market in Los Angeles

The observed steady increase in the price of real estate in Los Angeles can be attributed at least in part to the growing gap between supply and demand. Specifically, the construction projects in the area were unsuccessful in providing housing at a rate that would satisfy the demand of the buyers. The main reason for that is the scarcity of land for building. While it is possible to address this limitation by capitalizing on high-density projects, such an approach is time-consuming due to political and regulatory constraints. Since such a setup inevitably affects disposable income, it is reasonable to consider the possibility of a bubble, which is going to burst once a sufficient number of people is unable to afford housing at current prices.

Why is unemployment so high in Europe?

The uneven economic, political, and social landscape of Europe creates several challenges for the job market. For instance, in comparison with the U.S., the European business environment is more risk-averse. Simply put, young individuals are less likely to consider founding their business, and when they do, face more challenges in funding their projects. Next, labor law in many European countries is relatively inflexible, discouraging the companies from hiring more employees. It can also be argued that free education creates less economic pressure and leads to poor educational choices. Finally, the complexity of bureaucratic systems in some European countries makes it difficult to facilitate economic growth.

US labor productivity

While it is difficult to predict the magnitude of labor productivity growth, it can be said with certainty that a growing trend will persist. The tightening of supply in the job market combined with the strength of a dollar creates a situation where corporations need to stimulate productivity without access to a bigger workforce. The same effect is expected to occur in response to declining profits. The recent surge in productivity observed during the financial crisis offers a good illustration of the effect. Finally, a strong national currency creates an even ground for companies, prompting them to seek opportunities for productivity improvement to gain a competitive advantage.

For decades economists have turned to gross domestic product (GDP) when they want an estimate of how well off people are. By how much are Americans better off than Indians, or than their parents’ generation?

In my opinion, GDP is a reasonable measure of economic growth and spending but not a good candidate for measuring living standards. First, GDP is strongly oriented towards factory production as its main area of interest, which can be explained by the focus on industrial growth at the time of its creation. In a contemporary economic environment, services and technological levels play a much greater role in economic development. Neither of these is properly reflected in GDP. Besides, the increasing globalization of production makes it difficult to assess production in terms of national boundaries. Finally, certain areas, such as energy consumption reduction, do not translate well into GDP metrics.

In your opinion, do you see a beneficial supply shock such as declining oil prices or an adverse supply shock such as rising oil prices?

The effect of a supply shock associated with changes in oil prices depends on its source. The most apparent positive effect of lowered oil prices is lowered inflation and, to a certain degree, reduced inflation expectations. Such setup eventually increases the demand for interest-sensitive goods. Another commonly cited benefit is the increased efficiency of the transportation sector in response to decreasing operating expenses. On the contrary, rising oil prices typically lead to rising prices of goods and costs of production and, by extension, lower GDP. Since the current situation is more consistent with the former description, I see a beneficial supply shock that results in lower prices and growing consumer spending.

What is the near future of the US economy? Do you see a robust, strong growth or another recession shortly?

I believe that while another recession is not a threat (at least shortly), it is equally unlikely to observe strong economic growth in the U.S. There are several reasons for this. First, productivity is among the strongest predictors of economic growth. Since the rate of productivity growth has been on a steady decline in recent years, it is reasonable to expect that the trend will persist, undermining economic development. Also, the current productivity growth does not lead to a respective increase in income, benefitting mostly the entities with the highest incomes. Finally, decreasing labor force participation creates a barrier that inhibits economic growth.

Do you think the FED did a good job fighting against the 2008 recession?

The actions of the FED during a 2008 recession are controversial. On the one hand, it is worth acknowledging that a passive tightening of monetary policy in response to the onset of the crisis prompted the corporate entities to limit their spending, complicating the economic outlook. However, it is necessary to understand that a decline in demand is an inevitable effect of an economy operating under its full potential.

In other words, the FED could not act differently under these circumstances. Also, the polarizing issue of reduction of short-term interests is more likely to prevent further recession than aggravate the existing situation (as portrayed by some critics). Thus, I believe that the FED’s efforts of preventing the recession are successful.

Do you think the economy is self-regulating?

While the classical view presents compelling arguments in favor of a self-regulating economy, certain gaps exist that undermine its validity. For instance, it is possible to view the regulations imposed in the early twentieth century as straying away from free-market principles. Nevertheless, the move was successful. On the other hand, the recent financial crisis can be at least partially attributed to the deregulatory trend that started in the 1970s. In other words, an increase in the amount of control leads to favorable results at least in some scenarios. Thus, I don’t think that economy is entirely self-regulated.

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