Chapter 10 the role of government

"...Total federal expenditures are too large..." Lyndon B. Johnson, 1968.

"I put the restraining of federal expenditures at the top of the list of economic policies for 1973. Spending proposals must be looked at..." Richard M. Nixon, 1973.

"We must slow the growth of federal spending." Gerald R. Ford, 1976.

"We will manage federal budget expenditures care­fully and prudently...reducing the share of our national output devoted to federal spending." Jimmy Carter, 1978.

"One of my principal goals when I came to Wash­ington was to reverse the dramatic growth of feder­al spending..." Ronald Reagan, 1984.

"There is still more than enough federal spending." George Bush, 1990.

"We have to cut the deficit because the more we spend paying off the debt, the less tax dollars we have to invest in jobs and education and the future of this country." Bill Clinton, 1993.

These statements have several of things in common:

• The speaker was a President of the United States;

• Each statement was part of a speech delivered to ajoint session of Congress;

• Each said that government spending was too high and suggested that something should be done about it.

Table 10-1 describes what the presidents were talking about. It shows that despite presidential con­cern, government spending continued to grow. In fact, government purchases of goods and services (in current dollars) have more than doubled in the last 15 years. While many Americans feel that govern­ment has grown far too large, Table 10-1 also shows that government expenditures as a percent of GDP have been fairly stable for the last 30 years.

This chapter discusses the important and sometimes controversial roles government plays in the U.S. eco­nomic system, the reasons for government growth, and its impact on Americans' lives. It will also explain and describe the different taxes govern­ments use to raise the funds they need.

10.1. Government and the American Economy

The American economy often is described as a mar­ket system, in which individual buyers and sellers answer the What, How, and Who questions accord­ing to the laws of supply and demand. But govern­ment plays such an important role in the U.S. eco­nomic system that government policies influence how buyers and sellers answer these questions. This explains why economists describe the American sys­tem as a mixed economy. It is mixed because it com­bines elements of free enterprise with limited government participation and control.

You may remember from Chapter 2 that U.S. gov­ernment has several roles and responsibilities.

• Safeguarding the market system,

• Providing public goods and services,

• Dealing with externalities,

• Assisting those in need and helping specific groups, and

• Stabilizing the economy.

Safeguarding the Market System. The free enterprise system, and the laws of supply and demand that govern it, depend on competition. Government promotes and protects competition by 1) establishing and enforcing "rules of the game"; 2) furnishing the public with information about market conditions and the state of the economy; and 3) helping to settle disputes.

Providing Public Goods and Services. Public goods and services benefit large numbers of people. They would not, or could not, be provided by private enterprise. Public schools, roads, police and fire pro­tection, and national defense are examples of public goods and services.

Dealing with Externalities. Smoke and exhaust fumes pollute the air; fast food packaging litters our highways; and airplane noise from airports is harm­ful to the quality of life and personal health. But the market system does not assign cleanup or health­care costs to those who caused the problem.

In the market system there is little or no incentive for oil and automobile companies or motorists to pay for reducing air pollution. Nor do fast food companies have an incentive to clean up their customers' litter. Government, then, must limit the effects of these harmful externalities. (Externalities, as Chapter 2 states, occur outside the market system.) Such gov­ernment measures generally fall into the categories of persuasion, taxation, subsidy, and regulation.

• Persuasion is sometimes used to stop people from behaving in ways that harm others. Government-sponsored advertising campaigns, for example, urge people not to drive when they have been drinking or not to litter.

• Taxation can be used to limit harmful externali­ties. Government can levy taxes on firms that dump wastes into the oceans or fill the sky with smoke. By taxing the quantity of pollutants, gov­ernment can encourage a firm to "clean up its act."

• Subsidies are government payments to individu­als or companies. Subsidies have been used to encourage economic activities that generate bene­ficial externalities. For example, farmers have been paid subsidies to plant in ways that save the soil rather than deplete it.

• Regulation can be used to set safety standards for harmful externalities or make them illegal. For example, to control smoke, most cities and towns have banned burning garbage. And federal and state laws set safety standards in factories and make it illegal to dump hazardous wastes in waterways.

Assisting Those in Need and Helping Specific Groups. Every modern society helps its low-income citizens, and the United States is no exception. Gov­ernment programs to relieve poverty redistribute income from those earning enough to live on to those in need. But low-income people are not the only ones who receive payments from the government. For example, Social Security benefits are paid to all eli­gible retirees, and certain agricultural price support payments are made to eligible farmers.

Government expenditures paid directly to individu­als, and for which no goods or services are produced, are known as transfer payments. Transfer payments have accounted for almost one-half of federal spending in recent years. Social Security, welfare, veterans, and Medicare benefits are examples of transfer payments.

Government-mandated transfer payments to indi­viduals-Social Security, Welfare, Food Stamps, and Unemployment Compensation-are known as enti­tlement programs.

Stabilizing the Economy. Business conditions change, particularly in market economies. When the swings become severe, unemployment can rise, busi­ness failures can increase, and the population in general can suffer. Government attempts to limit the effects of these swings. This is the subject of Chapter 12.

In most cases, fulfilling all of these roles requires money-money which comes from taxes. And even people who agree on government's roles and respon­sibilities disagree on how much money should be devoted to building highways, atomic submarines, or national parks. Nor do they always agree on strate­gies for reducing pollution, providing health care, or collecting taxes. Nations and governments, just like families and individuals, have needs and wants, and sometimes it is difficult to define them clearly. In fact, most political arguments are about doing just that.