Individuals and Government Chapter 1 Individuals and Government

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

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.

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

Examples of Political Institutions Majority rule Representative government

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

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

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

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.

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

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

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 10442.1 2073.9 1050.9 3124.8 29.93  

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

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

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

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

Figure 1.4 The Distribution of Federal Expenditure, 1966-2002

Federal Government Expenditures by Function

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

State and Local Government Expenditures

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

Federal Revenues

State and Local Government Revenues

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

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

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.