Chapter 9Chapter 9Government’s Role in the Government’s Role in the

EconomyEconomy

What should the govt. What should the govt. provide?provide?• What are the characteristics of a free What are the characteristics of a free

market?market?

• How do we decide WHAT to produce in a How do we decide WHAT to produce in a free market?free market?

• What are the characteristics of a private What are the characteristics of a private good?good?

• Principle of ExclusionPrinciple of Exclusion– Not available to everybodyNot available to everybody– ““Pay to play”Pay to play”

Section ASection APublic Goods and ServicesPublic Goods and Services

Public GoodsPublic Goods

• Provided by govt. on an equal basisProvided by govt. on an equal basis• Examples?Examples?• Why doesn’t the private sector provide Why doesn’t the private sector provide

these goods?these goods?• What are the reasons for public goods?What are the reasons for public goods?

– ExternalitiesExternalities– Wealth RedistributionWealth Redistribution– Not profitable but valuable to societyNot profitable but valuable to society

ExternalitiesExternalities

• Effects (both good Effects (both good and bad) for and bad) for resources being resources being allocated incorrectly. allocated incorrectly. “External” “External” costscosts (unseen) to society.(unseen) to society.

• Examples? Positive Examples? Positive and Negativeand Negative

Positive ExternalityPositive Externality

Negative ExternalityNegative Externality

• Where is the Where is the negative negative externality?externality?

• Dead Weight Loss?Dead Weight Loss?

Redistribution of IncomeRedistribution of Income

• How does govt. redistribute income?How does govt. redistribute income?

• How much support should be given How much support should be given to the poor?to the poor?

Examples of RedistributionExamples of Redistribution

• Transfer Payments: Cash benefitsTransfer Payments: Cash benefits• Transfer in Kind: (Non-cash)Transfer in Kind: (Non-cash)

– Food StampsFood Stamps– Medical careMedical care– Low-cost housingLow-cost housing

• Payments to IndividualsPayments to Individuals– What is the most important thing What is the most important thing

revealed by chart on pg. 242?revealed by chart on pg. 242?

Payments to IndividualsPayments to Individuals

• Largest portion of budgetLargest portion of budget

• How much did it grow between 1960-How much did it grow between 1960-1970?1970?

• 1970-1980?1970-1980?

• Should we be worried?Should we be worried?

Section BSection BTaxes and the EconomyTaxes and the Economy

• Why are taxes necessary?Why are taxes necessary?• Two basic principlesTwo basic principles

– Benefits ReceivedBenefits Received•Those who use it, pay itThose who use it, pay it•Ex. Gas taxEx. Gas tax

– Ability-to-PayAbility-to-Pay•Richest should pay higher burdenRichest should pay higher burden•Progressive tax (Income Tax)Progressive tax (Income Tax)•How much of total taxes do the richest pay?How much of total taxes do the richest pay?

• Productivity principleProductivity principle– Tax laws that encourage efficiency and Tax laws that encourage efficiency and

productivity (corp. tax deductions for productivity (corp. tax deductions for equip.)equip.)

• Least Likely to Offend PrincipleLeast Likely to Offend Principle– Who can I tax and not lose votes?Who can I tax and not lose votes?

Burden of TaxationBurden of Taxation

• ProgressiveProgressive•How much of total taxes do the richest pay?How much of total taxes do the richest pay?

• Regressive taxRegressive tax– Poor hit hardest as percent of incomePoor hit hardest as percent of income

•Sin TaxesSin Taxes

• Proportional TaxProportional Tax– Flat Tax proposalsFlat Tax proposals– Same percentage across the board.Same percentage across the board.

Federal, State, and Local Federal, State, and Local TaxesTaxes

• FederalFederal– Personal Income 5-36%Personal Income 5-36%– Social InsuranceSocial Insurance

•Medical, Social SecurityMedical, Social Security

– Corporate IncomeCorporate Income•Tax on profitsTax on profits

– OthersOthers•Estate, TariffsEstate, Tariffs

State and Local RevenuesState and Local Revenues

• Sales TaxSales Tax

• Property TaxProperty Tax– Usually funds educationUsually funds education

• Income TaxIncome Tax

• License FeesLicense Fees

• Intergovernmental RevenueIntergovernmental Revenue

Section C: Government Section C: Government SpendingSpending

• Public Decision MakingPublic Decision Making– ContradictionsContradictions

•Good for people vs. ReelectionGood for people vs. Reelection

•Good politically vs. Good economicallyGood politically vs. Good economically

– Public also to blamePublic also to blame•““What have you done for me lately”What have you done for me lately”

– Programs Hard to Stop and FixPrograms Hard to Stop and Fix• Inefficiencies can go on and on.Inefficiencies can go on and on.

Writing the BudgetWriting the Budget

• President drafts spending billPresident drafts spending bill

• Congress passes billCongress passes bill– Compromise usually needed between Compromise usually needed between

conservatives and liberalsconservatives and liberals

• Pork Barrel LegislationPork Barrel Legislation– Spending used to gain votes in your Spending used to gain votes in your

districtdistrict

Section D:Section D:The Problem of the National The Problem of the National DebtDebt• Good or Bad?Good or Bad?

• Bad: Used only for consumptionBad: Used only for consumption– Trade off: Trade off:

•Future consumption vs. present consumptionFuture consumption vs. present consumption

•Hurts future economic growthHurts future economic growth

•causes high taxation.causes high taxation.

• Good: Used for future growthGood: Used for future growth– Present expenditure/borrowing can increase Present expenditure/borrowing can increase

future GDP/tax revenuefuture GDP/tax revenue

• GDP mattersGDP matters– How much is debt vs. income? How much is debt vs. income?

• Payment of debt as a percentage of Payment of debt as a percentage of BudgetBudget

National DebtNational Debt

How does this graph change How does this graph change the debt picture?the debt picture?

Foreign vs. Domestic DebtForeign vs. Domestic Debt

• Domestic Debt: Paid back to Domestic Debt: Paid back to American citizens.American citizens.

• Foreign Debt: Paid to foreign Foreign Debt: Paid to foreign countriescountries– May affect interest rates May affect interest rates

• If foreign countries charge high interestIf foreign countries charge high interest– Consumes more of the budgetConsumes more of the budget

How big is our true debt?How big is our true debt?

• Present debt : $15 TrillionPresent debt : $15 Trillion

• + future obligations/entitlements: + future obligations/entitlements: – $75 Trillion $75 Trillion

• Is this sustainable?Is this sustainable?

Social Security and Social Security and MedicareMedicare• A SUMMARY OF THE 2008 ANNUAL REPORTS A SUMMARY OF THE 2008 ANNUAL REPORTS

Social Security and Medicare Boards of TrusteesSocial Security and Medicare Boards of Trustees•

““The financial condition of the Social Security and The financial condition of the Social Security and Medicare programs remains problematic. Medicare programs remains problematic. Projected long run program costs are not Projected long run program costs are not sustainable under current financing sustainable under current financing arrangements. Social Security's current annual arrangements. Social Security's current annual surpluses of tax income over expenditures will surpluses of tax income over expenditures will begin to decline in 2011 and then turn into rapidly begin to decline in 2011 and then turn into rapidly growing deficits as the baby boom generation growing deficits as the baby boom generation retires. Medicare's financial status is even worse.”retires. Medicare's financial status is even worse.”