PUBLIC ECONOMICS AND ECONOMIC HISTORY

Transcription

1 PUBLIC ECONOMICS AND ECONOMIC HISTORY Manuela Samek Lodovici LIUC Daniele Pozzi LIUC James Wickham Trinity College Dublin

2 Aim of the course The course is on the role of government in market economies. The aim of the course is to make you able to: understand the role of the government in modern economies assess the rationale for public intervention in different policy fields; understand the equity and efficiency effects of public intervention and the response of private agents to the governments actions; discuss the design of public programmes understand differences in government intervention across countries.

3 Course outline The course is organised into three interdisciplinary modules: PUBLIC ECONOMICS (Prof. Samek) EUROPEAN WLEFARE STATES (Prof. Wickham) THE DEVELOPMENT OF MODERN MARKET ECONOMIES: AN HISTORICAL PERSPECTIVE (Prof. Pozzi)

4 Timetable Economic History (Prof. Pozzi) : from Feb 25 to March 11. Midterm exam on April 1, 2014 Public Economics (Prof. Samek): from March 14 to May 23 European Welfare States (Prof. Wickham): March 26, 27 and 28

5 Exams and grading system The grade for each module will be based on an obligatory written examination and an optional part. The final grade for the course will be the weighted average of the grades of each module with the following weights: Public Economics 57% Economic History 30% Welfare States: 13% The intermediate exam on April 1 will relate to the Economic History module

6 Outline of the Economic History Module (Prof. Pozzi) The origins of market economy Development in historical perspective Evolution of the relationship market / State A historical perspective on: Market and natural environment Market and political freedom National cases of development UK, US, Germany, China

7 Module examination and references Students attending classes: written final exam based on the readings indicated in the syllabus and on the notes taken during classes. The instructor could indicate suggested readings for the students who would require it. The books from where the readings come from are available at the Library. All other students: not-attending students or students failing the test: could take a written exam on the book: K.G. Persson, An Economic History of Europe, Cambridge: CUP Chapters 1, 2, 8, 9 and 11 are not required for the exam.

8 Outline of the Public Economics module (Prof. Samek) 1 - An introduction to public economics: the economic role of government, the rationale and limits of public intervention according to economic theory, the efficiency and equity effects of government intervention 2 - Public expenditures: basic theory, application to some expenditure programmes: welfare policies, education policies, employment policies; 3 - Taxation: microeconomic and redistributive effects of fiscal policy and of the structure of taxation. 4- Application on Climate change and public policy Two seminars to be held on May 6 and 13 (Dr. A. Goria)

9 References for the Public Economics Module Lecture Slides Public Economics textbooks available in the library J. Gruber, Public Finance and Public Policy, Chapters 2, 5, 6, 7, 11, 12,13, 14,17, 18,19, 20 E. Stiglitz, Economics of the public sector, W.W. Norton & Company, 3rd edition, 2000, chapters 3,4,5, 6,7,8,9, 10,14, 15,16,17,19,20,26; or other textbooks in the library, such as H.S. Rosen, Public Finance. Irwin, Optional readings Salverda et al. (2009), The Oxford handbook of economic inequality, Oxford University Press ch.3, ch.4,ch.25, ch.26 EC (2012), Employment and Social Development, ch.3 and 4 pe=2&furtherpubs=no

10 Module Examination Written examination at the end of the course. Optional: short review paper (4-5 pages) and oral presentation on one/two articles (+ 0/2 points on the grade of the written exam). The list of articles will be made available by end of March, review papers to be handed in before the written exam.

11 Outline of the Welfare States module (Prof. Wickham) The European social model Varieties of welfare states and blocked societies Inequality and economic growth: Europe 2020

12 Readings and examination Suggested readings (the instructor will indicate the optional ones) Anthony Giddens, Europe in the Global Age, Cambridge: Polity Press, 2007, Chapters 1, 2, 3. James Wickham, Potential and weaknesses of the European Social Model, Employment Research Centre, Trinity College Dublin. Briefing paper for Infowork Project. Available at T.R. Reid, The European Social Model, Chapter 6 of The United States of Europe (2004). André Sapir (2005). Globalisation and the Reform of European Social Models, Brussels: Brugel Institute, Policy Briefs. Available at Palier, Bruno and Kathleen Thelen (2010). 'Institutionalising dualism: Complementarities and Change in France and Germany Politics and Soicety 38.1: Albert Alesina and Edward Glaeser (2004). Fighting Poverty in the US and Europe: A world of difference, Oxford UP, chapter 2. European Commission (2010), Europe 2020: A European strategy for smart, sustainable and inclusive growth. European Commission Written examination

13 1. Introduction: public intervention in the economy Public intervention is widespread and largely influence our daily life: The government provides goods and services (health, social assistance, education, defence, environment, infrastructures, etc.), it defines the rules for socio economic behaviour (legal structure and property rights, environmental regulation and protection of natural resources, safety regulations, employment regulations, etc.) it ensures a stable socio-economic environment (macroeconomic policies,..) it finances its activities with taxation and this affects income distribution, and production, consumption and saving decisions.

14 The extent of public intervention The public intervention in the economy is very different across countries: In extent as shown for example by the ratio of public deficit and debt over GDP In the composition of spending In the structure and incidence of taxation The variance among countries is mainly explained by different choices concerning the distributive role of government.

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16 Government expenditure by function as a share of GDP in 2005 or closest year available- Source OECD

17 Public Deficit and Public Debt In most countries public expenditures are higher than revenues The public deficit is the difference between gvt spending and revenues coming from taxation during a particular year. The public debt is the total amount of money owed by the government to creditors due to the accumulation of past deficits. The crisis has increased the public deficit and debt in all OECD countries.

18 The ratio public Deficit/GDP in the EU = (TOTAL REVENUES TOTAL EXPENDITURES)/GDP Source: EC and Eurostat Austria Belgium Finland France Germany 1, Greece Ireland Italy Netherlands Portugal Spain United Kingdom EU United States

19 2) Ratio Public Debt/GDP Austria Belgium Denmark Finland France Germany Greece , Ireland Italy Netherlands Portugal Spain United Kingdom EU United States

20 Fundamentals of Public Economics Public economics studies: the role of the government in market economies, the rationale of its intervention and the economic and social effects in terms of the efficiency and equity trade offs. MAIN QUESTIONS: When should the government intervene in the economy (should the government intervene more or less than it does?) How might the government intervene (should it intervene differently?) What are the effects of public intervention? How social choices are made?

21 When should the government intervene in the economy? Roles and tools of Government intervention Behind public intervention in modern market economies is the need to correct actual or perceived market failures (efficiency goal) and to ensure an equitable distribution of resources (equity goal) The public sector has different roles in market economies: Allocation of resources (efficiency goal) Income (re)distribution (equity goal) Stabilisation of the economic cycle These roles interact with each other.

22 When and how to intervene? Allocation role (growth and efficiency) ALLOCATION ROLE: provide efficiently (increasing the size of the pie) goods and services when the market is not able to produce them efficiently (market failures) through: The production of public goods or the public financing of private provision: i.e. all those goods and services which are under (or not) produced by the market, due to market failures; The regulation of market activities to support market competition (property rights, legal system, restrictions ) Taxes and subsidies which change the market price of goods or services and affect the production and consumption decisions of economic agents.

23 When and how to intervene? Redistributive role (poverty reduction) The aim is to foster equity correcting the distribution of resources (how the pie is distributed) resulting from market mechanisms, by shifting resources from some groups in society to others and/or by changing initial endowments through: Monetary transfers (such as welfare benefits to support the income of the poor or the unemployed) Transfers in kind (provisions of public services such as education, health services, social services) Taxes/subsidies (for example with progressive taxation or exemptions or subsidies)

24 When and how to intervene? Cycle Stabilisation role Smoothing over the business cycle and external shocks, supporting full employment and controlling inflation through: Fiscal policy (transfers and taxation, automatic stabilizers, public expenditures) Support to productive activities

25 What are the effects of government intervention?: Government failures Behind public intervention in modern market economies is the need to correct actual or perceived market failures (efficiency goal) and to ensure an equitable distribution of resources (equity goal) However government intervention may also produce negative direct and/or indirect effects (government failures) due to: Limited information Limited control on private markets responses to public intervention Limited control over the public bureaucracy Limitations imposed by the political process

26 What are the effects of public intervention? Have to consider the timing (short vs long term effects) and direct and indirect effects of public intervention on individuals and markets: Direct effects : effects expected assuming that the behaviour of economic agents do not change as a consequence of government intervention Indirect effects: effects arising because economic agents change their behaviour in response of the intervention (for example increasing taxation may reduce labour supply) It is very difficult to measure effects (especially indirect and long term effects) and to establish causation: i.e. whether the effects we observe are due to the government intervention under analysis or not: impact evaluation and cost-benefits analysis (see Gruber ch.3)

27 How decisions are taken?the analysis of social choices Political economy studies how the political decision making process produces decisions that affect individuals and the economy. This part of public economics analyses how socially desirable goals are chosen Socially desirable goals relate to: - the capacity to support socio-economic growth, - the capacity to guarantee adequate living conditions to citizens, - the capacity to guarantee equality in opportunities for all.

28 Key economic issues in public economics Efficiency: What is produced, how it is produced and how much it is produced (public vs private goods/services): given available resources make the pie as large as possible Equity For whom it should be produced and who should pay for it: distribute the pie in the most equitable way How are decisions taken? Trade offs: an efficient outcome could be not equitable an equitable outcome could be inefficient

29 Theoretical tools at the basis of Public Economics (Stiglitz ch.3 and 5; Gruber ch.1, 2; Rosen ch. 1,2, 3 and 4) Consumer theory (constrained utility maximization) Production theory Equilibrium and social welfare theory