Macroeconomics the Legal Power of the Government

Macroeconomics

The legal power of the government to intervene in the economy is limited only by the Constitution, the willingness of Congress to pass laws, and the willingness of the executive branch to enforce them.

Public Provision

National defense, the criminal justice system, the public schools, the interstate highway system, air traffic control, and the national parks are all examples of goods or service that are directly provided by governments in the United States. Public provision is the remedy for market failure to provide collective consumption goods, but it is also often used in the interest of redistribution and other social goals.

Redistribution and Social Insurance Programs

Taxes and spending often are used to provide a distribution of income that is different from that generated by the private market. The redistribution is accomplished through the dispersal of collected tax and other moneys from economic or social group to another. These can include welfare payments, food stamp programs, aid to dependent children, etc. Additionally public scholarships, grants, some types of loan, farm subsidies are also forms of redistribution.

Proscriptive rules

Proscriptive rules take the form of laws, rules and regulations. They tell people and firms what they can and cannot do. Such rules require parents to send their children to school and to have them inoculated against measles and diphtheria. Laws that prohibit gambling and pornography attempt to enforce a particular moral code in the whole society. A particular component of these types of rules that directly intervene on the economy is the antitrust laws and policies.

Prescriptive rules

Prescriptive rules substitute the rule maker's judgment for the fir's or the household's judgment about such things as process charged, products produced, and methods of production. Prescriptive regulation tends to restrict private action more the proscriptive regulation because it replaces private decision making rather than simply limiting the set of acceptable private decisions. Regulation of public utilities is an important example of prescriptive regulation and goes far beyond the natural-monopoly regulation. A lot of economic regulation, especially regarding pollution control, safety, and health, comes in the form of prescriptive rules.

Taxation

Government's attempt to collect money from individuals, businesses and corporations is the most direct form of intervention. In order to have money for redistribution, national defense, farm subsidies, etc. The government needs a revenue source, and that is the taxpayer. Other forms of taxes include sales taxes, capitol gains taxes, property taxes, and excise taxes. Taxes have a direct effect on economic activity by influencing actions by "rational" actors. Tax avoidance, underreporting of income, finding alternative methods that avoid excise or sales taxes are all examples of how businesses and individuals might respond to taxes.