1. Individuals and Government
Chapter 1
Individuals and Government

2. Public Finance
Public finance is the field of economics that studies government activities and the alternative means of financing government expenditures.

3. Government
Governments are organizations formed to exercise authority over the actions of persons who live together in a society and to provide and finance essential services.

4. Political Institutions
Political Institutions are rules and generally accepted procedures that evolve for determining what government does and how government outlays are financed.

5. Examples of Political Institutions
Majority rule
Representative government

6. The Allocation between Private and Government Resources
Food
Housing
Cars
Clothing
Government
National Defense
Public Schools
Police

7. Figure 1.1 A Production-Possibility Frontier
Government Goods and
Services per Year
Private Goods and Services per Year C M G2 B X2 G1 A X1

8. Distribution of Government Goods and Services
Nonmarket rationing:
Prices and willingness to pay those prices are not applicable to goods like national defense.

9. The Mixed Economy: Markets and Politics
Pure Market Economy
Virtually all goods and services are supplied by for-profit private firms.
Supply and demand determine price.
Mixed Economy
A mixed economy is one in which government supplies a considerable amount of goods and services and regulates private economic activity.

10. Figure 1.2 Circular Flow in the Mixed Economy
Goods & Services
Goods & Services
Output
Market
Dollars
Dollars
Taxes, fees, charges
Government Services
Income Support
& Subsidies
Subsidies
Taxes, fees, charges
Government Services
Households
Government
Firms
Resources
Dollars
Dollars
Resources
Input
Market

11. Government Expenditures in the United States
Government purchases of
labor
land
capital
Government Transfer Payments
Welfare
Social Security

12. Growth in Government Expenditures
Growth in Government Expenditures
Table 1.1 (abbreviated)
Year
GDP
Federal Government
State
and Local Government
Total
Government
Percentage
of GDP
1930
91.3
2.5
7.5
10.0
10.95
1945
223.0
84.7
8.5
93.2
41.79
1960
527.4
85.8
34.1
119.9
22.73
1975
1635.2
345.4
152.1
497.5
30.42
2002
2073.9
1050.9
3124.8
29.93

13. International Comparisons
Country
Government Current Expenditures as a Percentage of GDP 2001
Denmark
49.1
France
48.8
Germany
45.1
United Kingdom
39.4
Japan
38.1
Canada
36.7
United States
31.9

14. Figure 1.3 Total Government Expenditure as a Percentage of GDP 1929-2002

15. Structure of Federal Government Expenditures
Purchases of Goods and Services
Transfer Payments
Grants in Aid to State and Local Governments
Net Interest Paid

16. Federal Expenditure by Category, 2002
Table 1.2
Category
Percentage of Total Federal Expenditures
Transfer Payments
44.9
Purchases
28.2
Interest
14.7
Grants to State and Local
10.0
Other
2.2

17. Figure 1.4 The Distribution of Federal Expenditure, 1966-2002

18. Federal Government Expenditures by Function

19. The Structure of State and Local Government Expenditures in the United States
Education
Civilian Safety
Transportation
Executive, Legislative, and Judicial
Income Security
Health and Hospitals
Recreational and Cultural Activities

20. State and Local Government Expenditures

21. Financing Government Expenditures in the US
Taxes:
Income (Corporate and Personal)
Payroll
Excise
Customs

22. Federal Revenues

23. State and Local Government Revenues

24. State Budget Crunch of 2002
37 states were forced to reduce their budgets.
Revenues were typically 10% less than anticipated.
States with the most severe deficits:
AK, AZ, CA, NY, NC, OK, OR, VA, and WA
Causes
Cuts in taxes on business and individuals in the 1990s
No sales tax collections on services
Growth in costs of Medicaid

25. Implications of a Graying America
Social Security
In 2008 baby-boomers start to retire and collect
The ratio of workers to retiree falls
Medicare
Health care inflation is substantially higher than overall inflation
Medicaid
Increased use of long-term care for baby-boomers

26. How Much Government is Enough?
The question of how much government is enough is an important one in any society. It is the tradeoff between public and private goods. When government gets bigger, its increased involvement comes at the expense of less private consumption.