Economists generally desire a minimalist role for governments. Thus, even as the body of the global economic recession is still warm, it is not surprising to see more calls for governments to take drastic actions, the sooner the better, to eliminate their budget deficits. Buttressing these demands is the “threat” that if governments do not balance their budgets, they will hit the debt wall, and consequently will be squeezed out of the bond markets.

But, as we saw in the 1990s when a number of governments generated budget surpluses, the critics of government will only move on to demand tax cuts and reductions in the outstanding debts. The real goal is to continually downsize governments.

The critics of governments and government debts have no difficulty when a private equity firm borrows $36 billion to finance a $40 billion acquisition, which likely would not produce any economic benefits other than enriching a handful of investors who engage in financial engineering. Nor was there anything wrong when millions of people borrowed hundreds of billions of dollars to buy homes, which many could not afford.

The critics also object to most forms of government regulations and attack any proposals to refine and strengthen the existing system of rules and regulations.

Nevertheless, economists reluctantly recognize that governments can and do play important roles. These roles stem, in part from market failures and the provision of public goods, which might require some degree of government involvement.

But governments play even more critical roles in establishing and enforcing the rules of the game for the functioning of markets. Markets do not exist in a vacuum. They are or should be circumscribed by rules. While markets can exist without governments – for example, Somalia; markets established and organized by government rules function much more effectively and efficiently.

There can be no debate that rules and the regulation of markets are needed. What is debatable is the best set of rules and what degree of regulation are best at any point in time and for each country. I suspect that there is no single set of rules and regulations which are best for every country and for all time.

History, culture, language and technology all play key roles, and while markets operating under one set of rules might appear to produce outcomes superior to those in other market environments, there is no assurance that one set of rules could be imposed in another time and place and generate similar outcomes. Further, there is no assurance that the set of rules which seem to contribute to superior outcomes today might continue to be the best set in the future. Consider the economic events during the past few years.

Similarly, there are many areas where government spending plays a key role. Instead of succumbing to the pressures of neo-Conservatives, we need to discuss the areas where governments should be actively involved, and how much they should be spending/investing in these areas (e.g. healthcare, education, the judicial system, national defense, infrastructure, income support, etc.). An important part of the discussion should involve how the governments should spend the money – through private, for-profit companies; government agencies or government-owned companies; not-for-profit companies or NGOs; etc. There will be differences across countries and over time.

Once we have figured out where, how and how much governments should be spending, then we know how much they need to raise in taxes, and how much they should borrow. The next stage of the discussion would involve the tax system – the types of taxes (income, consumption, commodity) and the tax rates.

Spending and borrowing are not all bad. Rules and regulations are essential. Governments are important!

The opinions expressed in this blog are personal and do not reflect the views of Global Brief or the Glendon School of Public and International Affairs.