Public Finance, Foldvary

Holcombe, Chapter 1, The Public Sector

Government spends 1/3 of national income for goods and services,

plus redistribution, plus taxes and regulations.

The Fed plans and controls the money supply and interest rates.

Hence a mixed economy.

Government policy can dominate.

But the market ultimately has the upper hand, but in a distorted way,

as bad policy results in depressions, inflation, and defaults.

The attempt by government to totally control the economy

produces an underground market.

Three aspects of public economics:

1. How government operates: budgeting, revenues, spending.

2. Optimal policy, including roles of government versus the market

3. Why optimal policy not done: how policy is made.

1800s: economics called political economy,

recognizing the strong role of government.

Then “economics” as an analysis of the market economy.

New branch of public choice, also called political economy.

Applies economics to political decision making.

p. 5-6 One impediment to efficient decision making is that while economic theories can assume that citizens have a certain demand for public goods, policy makers may have no good way of measuring that demand, so even if they wanted to produce the efficient amount of some public good, they may not have enough information to do so.

Solution: demand revelation

P. 6: Smaller groups with more concentrated gains contribute and lobby more than do consumers and taxpayers who bear the spread-out costs.

The activities of government

The USA is a federation of states.

Sovereign: no government above.

The federal and state governments have parallel sovereignty.

Also the Indian nations, with treaties. Bureau of Indian Affairs.

The U.S. Constitution is the supreme law of the land.

Counties and cities are not sovereign. Special districts.

Are individual persons sovereign? Yes, Constitutional rights. 9^th Amendment.

Chronic deficits.

1900, all government, 8 percent of GDP, federal 3%.

Now wore than 35 percent of the economy’s resources are allocated by governments.

$3 trillion, 300 million population: $10,000 per capita.

Does not include government-owned enterprises such as the USPS and utilities,

except for subsidies. USPS is off-budget.

Including government enterprises, govt is 36% of GDP.

Add the effect of regulations. Federal regulations $7000 per family.

Requiring firms to provide medical insurance, versus taxing.

Federal and Calif. governments have chronic deficits.

Federal spending: “human resources” category includes Social Security, half the budget.

There has been a large increase in Social Security and Medical services.

Chart, p. 15, growth of social insurance.

Decrease in corporate tax proportion.

(Appendix, indifference curves.)