When Government Involvement is Required

A main point of disagreement between the two parties is how much should government be involved. The Democrats want more the Republicans want less.

Jeffrey Sachs in his book The End of Poverty makes a compelling case on where the boundary should be placed.  Just to be clear, when Sachs uses the term poverty in the book, he's talking about extreme poverty, where an individual's survival is in jeopardy.  The main premise of the book is that the world is becoming rich enough to have the resources to completely end extreme poverty world wide with the right international politics.    Extreme poverty still exists, obviously, in Africa, parts of Asia and in other parts of the world.

Anyway, this is a direct (long) quote from the book that really hits home those areas where government has a role:

Why should government finance schools, clinics, and roads, rather than leave those to the private sector? There are five kinds of reasons, all compelling in the proper context. First, there are many kinds of infrastructure, especially networks like power grids, roads, and other transport facilities - airports and seaports - which are characterized by increasing returns to scale. If left to the private markets, these sectors would tend to be monopolized, so they are called natural monopolies. If such capital investments are left to the private sector, the privately owned monopolies would overcharge for their use, and the result would be too little utilization of this kind of capital. Potential users would be rationed out of the market. It is more efficient, therefore, for a public monopoly to provide network infrastructure and set an efficient price below the one that would be set by a private monopolist.

A second category of public provided capital goods include those that are nonrival, when the use of the capital by one citizen does not diminish its availability for use by others. A scientific discovery is a classic nonrival good. Once the structure of DNA has been discovered, the use of that wonderful knowledge by any individual in society does not limit the use of the same knowledge by others in society. Economic efficiency requires that the knowledge should be available for all, to maximize the social benefits of the knowledge. There should not be a fee for scientists, businesses, households, researchers, and others who want to utilize scientific knowledge of the structure of the DNA! But if there is no fee, who will invest in the discoveries in the first place? The best answer is the public, through publicly financed institutions like the National Institutes of Health (NIH) in the United States. Even the free-market United States invests $27 billion in publicly financed knowledge capital through the NIH.

Third, many social sectors exhibit strong spillovers (or externalities) in their effects. I want you to sleep under an antimalarial bed net so that a mosquito does not bite you and then transmit the disease to me! For a similar reason, I want you to be well educated so that you do not easily fall under the sway of a demagogue who would be harmful for me as well as you. When such spillovers exist, private markets tend to undersupply the goods and services in question. For just this reason, Adam Smith called for the public provision of education: "An instructed and intelligent people... are more disposed to examine, and more capable of seeing through, the interested complaints of faction and sedition..." Smith argued, therefore, that the whole society is at risk when any segment of society is poorly educated. Natural capital is another area where externalities loom large. Private actions - pollution, logging, overfishing, and the like - can lead to species extinction, deforestation, or other kinds of environmental degradation with serious adverse consequences for the whole society, or even the whole world. Governments therefore have a crucial role to play in conserving natural capital.

Fourth, societies around the world want to ensure everybody has an adequate level of access to key goods and services (health care, education, safe drinking water) as a matter of right and justice. Goods that should be available to everybody because of their vital importance to human well-being are called merit goods. The rights to these merit goods are not only an informal commitment of the world's governments, they are also enshrined in international law, most importantly the Universal Declaration of Human rights as follows:

• Everyone has a right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing  and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age, or lack of livelihood in circumstances beyond his control.
• Everyone has the right to education.  Education shall be free, at least in the elementary and fundamental stages.  Elementary education shall be compulsory.  Technical and professional education shall be made generally available and higher education shall be equally accessible to all on the bases of merit.

Moreover, according to Article 28 of the Universal Declaration, "Everyone is entitled to a social and international order in which the rights and freedoms set forth in this Declaration can be fully realized."  A follow-through on commitments to the Millennium Development Goals would mark a major practical application of that article.

Fifth, government will want to help the poorest of the poor not only by providing infrastructure and social investments, but also by providing productive inputs into private businesses if that, too, is required to help impoverished households get started in market-based activities.  Thus the government might want to provide subsidized fertilizers to subsistence farmers so that they can produce enough to eat or microcredits to rural women so that they can start microbusinesses.  Once these households successfully raise their incomes above subsistence, and begin to accumulate savings on their own, the government subsidies can be gradually withdrawn.

At the same time, except in the case of the poorest households, government generally should not provide the capital for private businesses.   Experience has shown that private entrepreneurs do a much better job of running businesses than governments.  When governments run businesses, they tend to do so for political rather than economic reasons.  State enterprises tend to overstaff their operations, since jobs equal votes for politicians, and layoffs can cost a politician the next election.  State-owned banks tend to make loans for political reasons, rather than on the basis of expected returns.  Factories are likely to be built in the district of powerful politicians, not where they can best serve the broader population.  Moreover, governments rarely have the in-house expertise to manage complex technologies, and they shouldn't, aside from sectors where the government's role is central, such as in defense, infrastructure, health, and education.