How do “rules of the game” set by the government affect economic productivity and growth?
Since the Great Depression, the US government has operated on Keynesian economics philosophy more than classic free market principles. A free market implies that businesses set their own rules and then adjust accordingly to market activity. Keynesian philosophy, developed by British Depression-era economist John Maynard Keynes, emphasizes government intervention to stimulate markets and smooth out financial downturns.
Keynes's 1933 book The Means To Prosperity dramatically influenced newly elected US President Franklin D. Roosevelt and helped shape his "New Deal." The book viewed capitalism as cyclical, with boom and bust cycles driven by economic bubbles. The way to fix market collapses, according to Keynes, was government funding to businesses to help them grow staff sizing, productivity, and revenue.
The government bailouts of financial institutions in 2008 and 2009 gave companies more cash flow to invest in workers, equipment, and marketing. The Federal Reserve, which is not a government entity but is related since the US President appoints the chairman, sets interest rates based on economic conditions. Throughout the years following the financial collapse, the Fed kept the interest rate at zero, allowing big companies to borrow capital (through purchasing bonds) and then lend money to other companies for a profit based on interest.
Many companies bought back their own stock, as the stock market more than quadrupled over the next decade. Unemployment during this time frame fell from double digits to low single digits.
At the same time, corporate debt skyrocketed to over six trillion dollars. Even though the debt-to-cash ratio has climbed to eight dollars of debt for every one dollar in cash among corporations, this system has been an effective solution to creating jobs and revenue, at least for an extended recovery period. The Fed has since slowly started to increase interest rates.
Many elements of government policy can affect productivity and growth, some directly and some indirectly. In general, investment has a positive effect on both productivity and growth, as when a manufacturing firm builds a new state-of-the-art factory that allows the firm to produce more goods more efficiently.
First, governments set interest rates. While low interest rates enable companies to borrow cheaply and thus invest, which can stimulate growth, this can also give rise to inflation, which can increase costs. Any changes in monetary policy can affect growth and productivity.
Next, rule of law and property rights are important. Governments which are corrupt or which have rapidly changing laws and regulations have a negative impact on growth because companies cannot be assured of the stability of the business environment. Obviously, civic unrest and other political risks also discourage investment, which in turn may depress productivity. Enforcement of intellectual property rights also stimulates research and development, making it worthwhile to invest in, for example, discovering new drugs or new industrial materials.
Educational policy matters because a better-educated workforce is more productive than an uneducated one.
Finally, government policies can affect the ease of doing business. This can include anything from licensing, labor laws, and regulations affecting businesses to tariffs and taxes which can impede global supply chains. The harder it is to do business, the lower productivity will be, because a company will need to invest time and money in struggling with red tape rather than producing goods or services.
The “rules of the game” as set by the government, affect productivity and economic growth because they make it more or less easy for businesses to innovate.
The most common view is that rules that are set by the government tend to reduce productivity and retard economic growth. For example, when the government sets rules about giving workers frequent breaks or requiring them to take elaborate safety precautions in certain circumstances, it takes away from productivity. Workers spend more time doing things that do not produce anything. This reduces productivity and thereby makes it harder for an economy to grow.
However, there are things that the government can do that can actually help productivity and economic growth. One major example of this is the granting of patents. When the government grants and enforces patent rights, it encourages innovation. Innovation leads to greater productivity as people invent things that make work easier. This can lead to economic growth.
Therefore, we can see that the rules of the game can affect business in ways that are positive or negative in terms of productivity and economic growth.