Question

Consider what we learned this week regarding the interaction between government and the market in the United States. Even though the government is expected to have a limited role in our economy, our experience from the financial crisis in September 2008 suggests that government needs to play a larger role to keep our economy running smoothly. We clearly have a capitalist system in the United States, but we do not have an agreed upon role for government involvement in the market. We want some government (social security is popular), but we accept economically inefficient markets (health care) because of our reluctance to allow the government to be involved in markets.

What is government’s role in effectively shaping the complex United States economy?

Answer 1

Before the advent of the great depression of 1929, the role of government in economic activities was criticized by economists. They believed that government intervention in economic activities would create the only distortion in the economic system. But after the great depression of 1929, the market forces did not act swiftly to correct the disequilibrium in the economy.

Thus government action through the fiscal policy helped greatly to avert the further slowdown in the economy. Here, the role of the Government in economic activities changed fundamentally. Thus, now role of state has changed in USA. Now state is no longer considered as the police state. State is acting like welfare state and always stands ready to avert the potential slowdown in economy. The great recession of 2008 was also corrected with help of state intervention. Now state role has become of facilitator.