Welcome. In this video, I will tell you about the state. It covers chapter six of the course book. I will first discuss the various economic roles of the state from regulator to tax receiver. Next, I will explain the basics of public finance, which are the accounts of the state. In social economics, the role of the state is quite extensive. First, the state should ensure equal opportunities in markets and it forces redistribution in the case of high inequalities. This is regarded as necessary, because of the inherent tendency of markets to generate inequalities. Second, the state is provide of public goods such as healthcare. Third, the state is regulated to keep the market in check. For example, through price controls, such as minimum wages or food subsidies, but government may fail in these tasks. In particular, when tax revenue is low. This may be due to a limited tax base in case of widespread poverty or because of a regressive tax system in which the poor pay relatively more taxes out of their income than the rich. And, of course, there may be widespread tax evasion. In institutional economics, the state is regarded as the foundation for the market. This is done through property rights protection. When the state does not guarantee property rights, transactions will be disputed leading to high transaction cost. Moreover, owners who fear that their property is taken away from them are not likely to invest in improvements of the resources. Think about a farmer who fears his farm will be taken away from him. He is not likely to invest in higher fertility of his land. The other main function of the state is to regulate the market just as socially economics. This is done through laws and social protection policies to reduce negative side effects of markets. But as a social economics, this state may fill also in the institutional prospective. This is understood as government capture which happens when the state is weak versus a powerful private sector interest group, such as a firm or investors. This makes the state vulnerable to rent-seeking through lobbying and corruption, and to moral hazard by large firms, and elites who shift their risks to the state. In post Keynesian economics, the state has an active role in the economic cycle. Helping the economy to reduce the disadvantages of economic cycles by dampening the economic cycle and through taking the lead in economic development as a real developmental state. Good examples of developmental states are the Asian Tiger economies. But first, I will explain budget policy. A key tool in post-Keynesian economics is anti-cyclical budgets. This implies that the stage runs budget deficits when the economic cycle is low in a recession and budget surpluses when the cycle is high, when the economy is booming. The government budget functions partially as an automatic stabilizer. This is when parts of spending and taxes smooth the business cycle, automatically. Think about public works projects or unemployment benefits. The spending on these budget items goes up automatically in times of recession stimulating the purchasing power of consumers. The government spending effect is strengthened by a multiplier. For example, if the government spends 1 million euro on public sector jobs, the incomes will be spent to consumer goods which need to be produce. Hence, there will be even more jobs created. The multiplier effect is defined as an accelerator on aggregated demand through an initial injection of government spending and its stimulating effects on other demand variables. The total economic effect maybe 2 or 3 times to 1 million euro spent by state. Let me now explain what the developmental state is. It's a state which guide the market on a long run economic development part with subsidies, investments and base absorption for foods. A good example from Brazil is the National Developments Bank, BNDES which undertakes large investments in infrastructure.and research and development. In United States, the Department of Defense has carried out research of which various innovations were later used by firms like Google and Apple. For example, search algorithms and touchscreens. This practice leads to the paradox of the strong state. The more dominant the role of the market, the stronger the state should be in order to lead the economy effectively. This is necessary against power accumulation by market parties and against increasing inequality emerging from unregulated marketing. In neoclassical economics, the state is regarded as a constraint to markets. And therefore, needs to be minimal. This is even furthered by privatization of state companies. Why? Because neoclassical economies believe that rationality of individual agents from consumers to firms is much better than political powers of decision-making of the state. In this theory, it's also believe that the self-adjusting power of markets is better estate planning as a consequence developed a state in the neoclassical economics is limited to the enforcement of property rights. Enforcing competition and recreation of new markets with new property rights. How does this state support markets, in a neoclassical perspective? Well, this is done through the elimination of price distortions because price regulation is regarded to discourage sufficient supply or demand of goods. When the government of Venezuela put a maximum on the price of paper, producers stopped producing paper. Shops, soon sold out everything from newspapers to toilet paper. In addition, the state is responsible for insuring good governance to support markets. This implies business-oriented policies. For example, by reducing bureaucracy. The rest of this video is about the state finances. Get ready for a few more economic symbols. Public finance is the study of government budgets. It's important to know how much money the government receives and spends on what? We use symbol G for government expenditures and T for tax revenue. A balanced budget, that means the G=T. If G is bigger than T, the government runs a deficit. Public debt is the total of accumulated budged deficit minus surpluses over time. Government expenditures can be divided up in different ways. We can distinguish, for example, between consumption which last less than a year, such as salaries of public servants and government investment, such as in parks which last longer than a year at least. That's what we hope. The [INAUDIBLE] of a year, by the way is an arbitrary choice by economists. We can also look at transfer payments which are the expenditures that the government pays directly to households and businesses and we can look at interest, and debt payments, and distinguish between domestic debt held in bonds, and foreign debt help by foreign banks, and institutions such as the World Bank. Debt service is the debt and interest payment on foreign debt as a percentage of export earnings. For some countries, around half of export earnings goes to the payment of foreign debt holders. The other side of the government balance shows tax revenue. It includes income taxes, profit taxes, value added taxes which is paid to consumer goods, import taxes. And finally, fees. Let me go a little deeper into the issue of bonds. These are fixed interest assets for a fixed period of time. For example, a ten-year bond at an interest rate of 5%, are government bonds risky to buy? What do you think? Well, theoretically not, because a country cannot go bankrupt. Economic growth makes debt as a percentage of GDP smaller over time and a government can always pay off old loans with new loans, which is cheap due to inflation. The old loans are registered in the old volume of money which is worth much less today than say, ten years ago. Practically, yes, government bonds are risky. There is a serious problem when a country can no longer pay back its debt. This may even result In a debt crisis. The government needs urgently money and borrow from the World Bank and other international lenders, but needs to reform its economy in return. What also sometimes happens is debt restructuring. This means cancellation of part of the debt. The bond holders are against this. They want to see all their money back. The next presentation goes in detail into the role of the state as provider of public goods. What's your position on this? Should the state provide free schooling? Only at primary level or also at university level and how can this be financed? Tough questions, but surprisingly easy answers. Find out for yourself in the next video.
