What role should German government play in business? As part of her efforts to combat the economic crisis, German Chancellor Angela Merkel is increasing the state’s influence in the market, buying holdings in banks and bailing out individual industries and companies. Considering these new course of the government, there arises the question what role should the German government play in business? On the one hand, if done correctly and in a limited way, government intervention can correct negative externalities like pollution, which impose a social cost on society.The German government implement this for example through eco taxes.
Eco taxes are one of the most effective measures to speed the crucial transition from finite, climate-changing fuels like oil and coal to renewable, climate-neutral ones. On the other hand, the government can help buffer the economy from demand shocks through stimulus programs and loose monetary policy. They do it for example by lowering interest rates or buying up government treasury bills, so-called open market operations. This can reduce the impact of recessions.
Finally government has an important and legitimate role to play in a growing economy. It should enforce contracts, create a level playing field for all businesses, and steadfastly promote the rule of law. On the flip side, there are many ways in which the government patently wrecks the economy. First, their techniques during recessions like stimulus programs, which are often put in place too late to have an impact. This can contribute not only to runaway government deficits, but also over-heating the economy.When the economy is already recovering from a recession and then the stimulus programs and monetary policy kick in with additional stimulus to growth, you risk creating a housing or asset bubble, in which assets are overpriced. Second, most subsidies, tax exemptions and things like that are no longer done to support small industries that need to get a foothold. They are massive giveaways to special interests that distort the marketplace, cost huge amounts of money and general wreak havoc.
Agricultural subsidies are a prime example of this. We subsidize the production of certain agricultural goods, which encourages over-production, at a cost to taxpayers. That overproduction results in falling prices for agricultural goods. To combat that, the government agrees to buy those excess goods, especially dairy products, and destroy them.
So you’re paying the farmer to grow the good, then paying them to buy the good, and then destroying it.The net effect is higher prices for food that impact all customers, a waste of taxpayer euros, and continued over-production of certain agricultural products. Furthermore a notably amount of goods is usually shipped to Third World nations in the form of “food aid”. This food aid is great for urban poor people, who get free or very cheap food. But it destroys agriculture in those Third World nations, since their farmers can`t compete with free or cheap food dumped into their economies by often well-meaning development professionals.Finally, where governments attempt to help industries, they are essentially “picking winners. ” This distorts the natural action of the marketplace and may result in more efficient, but less politically well-connected firms going under, while companies who have politicians as their friends, technical speaking “doing lobby work”, survive regardless of their efficiency. In Conclusion of course there is some truth in Adam Smith? often-cited theory of the “invisible hand”, which believes in an idea of free markets.
But it would be false to say, that any government intervention in the economy isn’t needed because the invisible hand is the best guide for the economy. In fact there are a lot of examples, where these “invisible hand” backfired. Since no family can survive on an income lower than the minimum wage, it is the job of government to mandate a minimum wage to keep people out of poverty.
The financial crisis showed us that there is the problem with giving the finance markets a free hand. There has been an unprecedented necessity for expensive and difficult government intervention to rescue the mistakes and disasters of unbridled free markets. In my opinion the government should conscientious weigh up, where it is unavoidable to intervene and in all other cases it should be the “job” of the free markets to rebalance themselves.