James d. Gwartney

Video:
Stimulus and Crony Capitalism
As explained in the two previous elements, economic analysis indicates there are cases
where markets will fail to allocate resources efficiently. But this is also true of the political
process. Put another way, there is government failure as well as market failure. Government
failure
(?)
is present when the incentives confronted by political participants encourage
counterproductive rather than productive use of resources. Like market failure, government

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failure reflects the situation where there is a conflict between what is best for individual
decision-makers and getting the most value out of resources.
After significantly liberalizing economic policy in Georgia, the framers of the Rose
Revolution were aware that even a democratic and liberal-oriented government might
undertake counterproductive actions. Thus, in 2010, the Constitution
(?)
 incorporated restraints
on the economic role of government. Article 94 specified what taxes were permissible (the
number of taxes, and their rates) and allocated the power to change tax rates or introduce new
taxes to the people, via referendum. Furthermore, by the organic law called “Liberty Act,” the
government budget deficit was restricted to less than 3 percent of GDP, and debt to no more
than 60 percent of GDP. However, as time passed and governments changed, the majority party
in Parliament initiated changes aiming to release the restriction and restore the power to initiate
new taxes and/or change existing rates. As we proceed, we will analyze in more detail the
operation of the democratic political process and consider modifications that might bring
government into greater harmony with economic growth and prosperity.
Read:
Politics and Foreign Trade by Dwight Lee

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