Introduction
The question of how much the political factor (which is primarily the federal government) can be present in the economy is controversial. This influence can be both positive and negative. Command of the economy with the help of directives results in the growth of the shadow economy, deficit, and loss of economic interest, which ultimately ends with the collapse of the social system. On the other hand, the state should maintain order and regularity of economic relations by means of policy and restrain negative manifestations of the market. Thus, the interaction of economics and politics plays a decisive role in the vector of social development.
Budget Plan Employment
The serious problems and negative consequences of a large public debt are that there may be a reduction in economic growth as private capital is forced out of the manufacturing sector of the economy to service debt. In addition, tax debt causes an increase in tax rates due to the need to pay interest on the debt, which leads to increased income inequality. Since the federal government has no relief or plans to deal with the problem, the welfare of future generations is expected to decrease due to debt repayment (Mankiw, 2020). In conditions of a decrease in effective demand and purchasing power of citizens, the inaction of the state can lead to a significant decline in the country’s economy.
An increase in the interest rate due to debt refinancing in the short term will lead to the displacement of investments and, in the long term – to a reduction in the country’s capital stock and production potential. The excessive interest of the federal government in loan operations contributes to a significant diversion of budget funds from the needs of economic and social development (Mankiw, 2020). In addition, with the excessive development of the public debt market, the government restricts investment opportunities in the national economy. Thus, the public debt turns into a serious macroeconomic problem.
New Tariffs & Quotas on Imports
As a result of the introduction of tariffs and quotas, imports are reduced. At the same time, domestic production of goods increases, and domestic consumption decreases. Domestic production is expanding because domestic producers do not pay the tariff and, therefore, can produce their goods at higher marginal costs than on the world market (Appelbaum, 2019). The tariff and import quotas thus protect low-efficiency domestic industries from foreign competition. At the same time, domestic consumers are generally reducing their purchases due to higher prices for both domestic and imported goods.
The net losses of consumers from the introduction of tariffs and quotas form an area that characterizes the reduction in the size of the consumer surplus. Part of the increased consumer payments now goes to domestic producers in the form of increased sales profits. Domestic firms in import-substituting industries now sell their initial output at increased prices and receive additional profit from the increase in the volume of production and sale of these products at a price with a tariff and quotas (Mankiw, 2020). In this case, there is a redistribution of consumer income in favor of producers, although certain groups of consumers who own shares of firms in import-substituting industries may receive increased income from the introduction of tariffs and quotas.
Loss of Confidence in Government Leadership
Social capital is people’s trust in leadership, their social connections, and the ability to cooperate for the common good, which is an important factor influencing economic development. The loss of trust has a negative impact on economic growth and financial development, and socioeconomic mobility, as well as on the work of individual markets (for example, job markets). The level of trust in society has another important economic effect – the effectiveness of job creation depends on it. This process is more effective in regions with higher trust indicators (Appelbaum, 2019). Thus, job creation indicators in states with a high level of trust in institutions react more strongly to monetary tightening than in regions with a low one, and the difference remains statistically significant for three quarters. The effect of interpersonal trust is qualitatively similar but more short-term.
The crisis of trust is not just a social phenomenon but the most important factor that determines many economic processes. The higher the level of trust in society, the more effective monetary policy (Mankiw, 2020). The erosion of people’s trust in institutions is forcing central banks to achieve inflation targets with tougher measures and worsening job creation indicators.
Taxes Decrement
The Federal government uses tax policy to generate revenue and places the burden where it thinks it will have the least effect. However, the theory of velcro taxation (the belief that the tax burden lies where the government places the tax) often turns out to be wrong (Appelbaum, 2019). Instead, there is a shift in taxes. A shift in the tax burden describes a situation where an economic reaction to a tax causes a change in prices and output in the economy, thereby shifting part of the burden to others. For example, in this case, the government imposes on those who are learning over $250,000 per year, assuming that the rich can afford to pay taxes and will not change their spending habits. However, the demand for some luxury goods (highly elastic goods or services) will decrease in industries such as the production of personal aircraft or yachts will suffer. Their manufacturers can claim an 86% decline in sales and thousands of lost jobs. That will result in a number of extreme layoffs in some important economic sectors.
Investment Level Decrement
A high level of trust in the country ensures an influx of investments and makes people richer, while a lack of trust provokes financial crises. This may be due to the lack of transparency of the business, as well as its weak social responsibility, which is the result of the disinterest of the business itself in increasing customer trust (Appelbaum, 2019). When companies and the population do not trust the economy, they feel less confident, invest and consume less, and are not inclined to act within the law (for example, in taxation). All this contributes to the decline of the economy, and the unstable dynamics of the economy, in turn, contribute to a decrease in confidence in politicians.
The influence of trust and economic development is always mutual. A lack of trust leads to major crises: both financial and economic. The most important role is played by trade in technological goods and services related to human capital, where the relationship between the two parties is based primarily on trust, which appears with reputation and recommendations (Mankiw, 2020). With a low level of trust, the efficiency of the organization of work decreases, which prevents achieving higher productivity.
Low Interest Rates
The key rate is one of the tools that allows the Federal Reserve to control the ruble exchange rate and influence the country’s economy. The consequences of a low-key rate include low interest rates on loans, bank deposits, and an increase in purchasing power. A low rate means that the dollar is affordable; as a result, companies and the population take loans more actively, and businesses and the economy start developing (Mankiw, 2020). The negative effect of such a policy can be an increase in inflation — money is cheap, so there are a lot of them.
With a low rate, the attractiveness of speculation is growing, so banks are actively buying up the foreign currency. This leads to a decline in the dollar, which is becoming a lot on the market. In response, Federal Reserve can also raise the rate, but if it does, as in this case. Without an increase in the Federal Reserve’s key rate, it is impossible to take control over inflation and reduce it (Mankiw, 2020). Currency trading does not become less profitable, speculators do not buy dollars from the market, and the exchange rate does not stabilize.
Summary
- Within the framework of the most important federal government, the economic interests of various groups intersect, causing acute, sometimes difficult, to resolve contradictions.
- The most important area of the relationship between the economy and the federal government is the fair distribution of public resources.
- People’s political interests are primarily determined by their economic interests.
- Economic instability and crises generate crises of trust in the government.
- The influence of the federal government is manifested in the implementation of its economic function.
References
Appelbaum, B. (2019). The economist’s hour: False prophets, free markets, and the fracture of society. Little, Brown & Company.
Mankiw, N. G. (2020). Principles of economics (9th ed.). Cengage.