C hapter 29 Government Spending © 2002 South-Western

2 Economic Principles Public Goods Merit Goods Transfer Payments

3 Government Spending and Public Goods Public good A good whose benefits are not diminished even when additional people consume it and whose benefits cannot be withheld from anyone.

4 Government Spending and Public Goods 1. Which of the following offers the best example of a public good: a. Lift tickets sold at ski resorts. b. A network of street lights. c. Restaurant meals.

5 Government Spending and Public Goods 1. Which of the following offers the best example of a public good: b. A network of street lights.

6 Government Spending and Public Goods 2. What does the nonexclusiveness property of public goods mean? A private good, such as a lift ticket or a restaurant meal, is exclusively the property of the person who bought it. That person can prevent others from using the good.

7 Government Spending and Public Goods 2. What does the nonexclusiveness property of public goods mean? Public goods such as street lights are not exclusive, and nobody can be denied the benefits of the lighting.

8 Government Spending and Public Goods 3. What does the nonrival property of public goods mean? It means that use by one person does not subtract from what is available for others. Examples include street lights and public radio.

9 Government Spending and Merit Goods Merit good A good that market demand and supply do not produce enough of.

10 Government Spending and Merit Goods What are some examples of merit goods? Public-supported colleges and universities. Public-supported arts and health care. Libraries and museums.

11 EXHIBIT 1FEDERAL, STATE, AND LOCAL GOVERNMENT SPENDING: 2000 ($ BILLIONS) Source: Survey of Current Business (Washington, D.C.: U.S. Department of Commerce, October 2000).

12 Exhibit 1: Federal, State, and Local Government Spending: 2000 ($ Billions) 1. Which level of government (federal or state/local) is the largest purchaser of goods and services? State and local.

13 Exhibit 1: Federal, State, and Local Government Spending: 2000 ($ Billions) 2. In which category of government spending are Social Security contributions and benefits recorded? Transfer payments.

14 EXHIBIT 2GOVERNMENT SPENDING IN 1999, BY FUNCTION ($ BILLIONS) Source: Survey of Current Business (Washington, D.C.: U.S. Department of Commerce, October 2000).

15 Exhibit 2: Government Spending in 1999, By Function ($ Billions) 1. What is the largest single functional category of expenditure by the federal government? Income support, Social Security, and welfare.

16 Exhibit 2: Government Spending in 1999, By Function ($ Billions) 2. What is the largest single functional category of expenditure by state and local government? Education.

17 How Much Does Government Spend? Over the period , the annual rate of increase in government spending on elementary, secondary, and higher education, measured in constant dollars, was 3.28 percent.

18 EXHIBIT 3GOVERNMENT SPENDING ($ BILLIONS) ON SECURITY: 1999 Source: Survey of Current Business (Washington, D.C.: U.S. Department of Commerce, October 2000).

19 Exhibit 3: Government Spending on Security: 1999 Complete the sentence: The two largest security expenditure categories by state and local government were _____ and _____.

20 Exhibit 3: Government Spending on Security: 1999 Complete the sentence: The two largest security expenditure categories by state and local government were police and prisons.

21 Exhibit 3: Government Spending on Security: 1999 The burden of national defense spending exclusively falls upon the federal government.

22 How Much Does Government Spend? The budget for veterans’ benefits and services is dominated by disability and survivor compensation.

23 EXHIBIT 4FEDERAL, STATE, AND LOCAL GOVERNMENT SPENDING ON EDUCATION: 1999 ($ BILLIONS) Source: Survey of Current Business (Washington, D.C.: U.S. Department of Commerce, October 2000).

24 Exhibit 4: Federal, State, and Local Government Spending on Education: 1999 ($ Billions) 1. True or false: Total education spending is dominated by expenditures on elementary and secondary education. True. Elementary and secondary education consumes nearly three-quarters of the total education budget.

25 Exhibit 4: Federal, State, and Local Government Spending on Education: 1999 ($ Billions) 2. True or false: The federal government provides financial support for higher education, but not for primary or secondary education. False. The federal government provides some financial assistance at all levels.

26 How Much Does Government Spend? 1. What percentage of total government spending goes to international aid: a percent. b. 8.9 percent. c. Less than 1 percent.

27 How Much Does Government Spend? 2. Which of the following has the larger percentage of total government spending: a. International aid. b. Conservation and natural resources.

28 How Much Does Government Spend? 2. Which of the following has the larger percentage of total government spending: a. International aid.

29 How Much Does Government Spend? Other than telecommunications, there has been relatively little commercial motive for space travel. Federal spending on space exploration was $11.3 billion in 1996.

30 How Much Does Government Spend? 3. What common denominator is there for government spending on security, education, transportation, natural resources, energy, and space? For each of these, the target population of beneficiaries is everyone.

31 How Much Does Government Spend? In contrast, agricultural subsidies are targeted at benefiting farmers, and public assistance programs are targeted at benefiting the poor and needy.

32 How Much Does Government Spend? Welfare Government-provided assistance—cash payments and goods and services—to the poor, the elderly, and the disabled. Eligibility is based principally on income and size of family.

33 How Much Does Government Spend? Until recently, eligibility for welfare was linked to single- parent families (Aid to Families with Dependent Children, AFDC) and to the sick or disabled (Supplemental Security Income Program, SSI).

34 How Much Does Government Spend? Eligibility for AFDC and SSI meant entitlement, with no time limit specified.

35 How Much Does Government Spend? 4. What new welfare program was created in 1996 and abolished AFDC? Temporary Assistance for Needy Families (TANF).

36 How Much Does Government Spend? The new TANF program is not an entitlement. Welfare recipients must participate in work activities within two years of receiving welfare or risk losing it.

37 How Much Does Government Spend? In addition, a family is only eligible for a lifetime total of five years of welfare benefits.

38 How Much Does Government Spend? Food stamp program An aid program that provides low-income people with stamps that can be redeemed for food and related items.

39 How Much Does Government Spend? Medicaid A health care program administered through Social Security that is applicable to low- income and disabled people.

40 How Much Does Government Spend? Social Security A social insurance program that provides benefits, subject to eligibility, to the elderly, disabled, and their dependents.

41 How Much Does Government Spend? 5. Which of the following are true about Social Security: a. It is compulsory. b. Everyone receives the same level of benefits. c. Your contributions are saved in an individual account that you can invest in stocks or bonds.

42 How Much Does Government Spend? 5. Which of the following are true about Social Security: a. It is compulsory. True. b. Everyone receives the same level of benefits. False. c. Your contributions are saved in an individual account that you can invest in stocks or bonds. False.

43 How Much Does Government Spend? 6. What is the purpose of Medicare? Its purpose is to reduce the financial burden of illness on the elderly.

44 How Much Does Government Spend? 7. How are Social Security and Medicaid funded? Social Security and Medicaid are pay-as- you-go programs that are financed through payroll taxes. The revenues go in to a trust fund from which benefits are paid out.

45 How Much Does Government Spend? 8. With the proportion of elderly in the U.S. population growing, what are the future prospects for Social Security and Medicaid? As pay-as-you-go programs financed through payroll taxes, they are at risk because benefit demands are growing relative to the pool of working-age people paying the taxes to support the programs.

46 Welfare Reform and Low-Skilled Employment Welfare reform was based on the premise that welfare recipients choose not to work because benefits with no time limits provide a disincentive to find work and leave welfare.

47 Welfare Reform and Low-Skilled Employment Cutting off welfare after a fixed length of time is supposed to serve as a much-needed “kick in the pants” to get easily employable people into jobs.

48 Welfare Reform and Low-Skilled Employment A 1992 survey found that 44 percent of mothers on welfare (AFDC) had not completed high school. Another survey found that most AFDC recipients are at the lowest two levels of literacy.

49 Welfare Reform and Low-Skilled Employment Consequently the problem is that there is a huge gap between the skills that most welfare recipients have and the skills that most employers require.

50 EXHIBIT 5SOCIAL SECURITY EXPENDITURES AS A PERCENTAGE OF GDP FOR SELECTED ECONOMIES: 1996 Source: World Labour Report 2000 (Geneva: ILO, 2000), p. 313.

51 Exhibit 5: Social Security Benefits as a Percentage of GDP for Selected Economies: Among the other rich industrialized countries listed in Exhibit 6, how does the U.S. rank in terms of Social Security benefits as a percentage of GDP? Social Security as a percentage of GDP is 2nd lowest (among those listed) in the U.S.

52 Exhibit 5: Social Security Benefits as a Percentage of GDP for Selected Economies: What conclusions might one draw from Exhibit 6? Social Security is much less of a burden on the U.S. economy relative to many comparable industrialized countries.

53 How Much Does Government Spend? 9. How much does the U.S. spend each year as interest on the national debt, and how did this figure change during the 1980s? As of 1996 the U.S. paid $277.1 billion in interest on the national debt.

54 How Much Does Government Spend? 9. How much does the U.S. spend each year as interest on the national debt, and how did this figure change during the 1980s? Both the size of the national debt and the annual interest payments it creates grew considerably in the 1980s.

55 Is the Level of Government Spending Too High? After learning about the different elements of government budgets, it becomes evident that wholesale cuts in government spending are difficult to advocate.

56 EXHIBIT 6GOVERNMENT SPENDING: 1970–99 ($ BILLIONS) Source: Economic Report of the President, 1997 (Washington, D.C.: U.S. Department of Commerce, 2000).

57 Exhibit 6: Government Spending: ($ Billions) What has been the trend in the ratio of total government spending to GDP since 1970? The ratio of total government spending to GDP grew steadily until 1990, then went down.

58 Exhibit 6: Government Spending: ($ Billions) What has been the trend in the ratio of total government spending to GDP since 1970? The ratio of total government spending to GDP was in 1998.

59 EXHIBIT 7GOVERNMENT SPENDING AS A PERCENTAGE OF GDP: 1981–99 Source: Organisation for Economic Co-operation and Development, calendar year data.

60 Exhibit 7: Government Spending as a Percentage of GDP 1. Of the countries shown in Exhibit 7, what has happened to the percentage of government spending to GDP since 1993? All have gone down slightly.

61 Government Spending and Resource Allocation A key distinction between government spending and transfer payments is that government spending takes resources away from production of private goods.

62 Government Spending and Resource Allocation In contrast, transfer payments shift spending from one group of people to another, and do not take resources away from production of private goods.

63 Government Spending and Resource Allocation The purchase of private goods and services funded by transfer payments substitutes for the taxpayers’ purchase of private goods and services.

64 Government Spending and Resource Allocation Aside from transfer payments, government spending represents approximately 15.5 percent of GDP.