Chapter 9 Government’s Role in the Economy

What should the govt. provide? What are the characteristics of a free market? What are the characteristics of a free market? How do we decide WHAT to produce in a free market? How do we decide WHAT to produce in a free market? What are the characteristics of a private good? What are the characteristics of a private good? Principle of Exclusion Principle of Exclusion –Not available to everybody –“Pay to play”

Section A Public Goods and Services

Public Goods Provided by govt. on an equal basis Provided by govt. on an equal basis Examples? Examples? Why doesn’t the private sector provide these goods? Why doesn’t the private sector provide these goods? What are the reasons for public goods? What are the reasons for public goods? –Externalities –Wealth Redistribution –Not profitable but valuable to society

Externalities Effects (both good and bad) for resources being allocated incorrectly. “External” costs (unseen) to society. Effects (both good and bad) for resources being allocated incorrectly. “External” costs (unseen) to society. Examples? Positive and Negative Examples? Positive and Negative

Positive Externality

Negative Externality Where is the negative externality? Where is the negative externality? Dead Weight Loss? Dead Weight Loss?

Redistribution of Income How does govt. redistribute income? How does govt. redistribute income? How much support should be given to the poor? How much support should be given to the poor?

Examples of Redistribution Transfer Payments: Cash benefits Transfer Payments: Cash benefits Transfer in Kind: (Non-cash) Transfer in Kind: (Non-cash) –Food Stamps –Medical care –Low-cost housing Payments to Individuals Payments to Individuals –What is the most important thing revealed by chart on pg. 242?

Payments to Individuals Largest portion of budget Largest portion of budget How much did it grow between ? How much did it grow between ? ? ? Should we be worried? Should we be worried?

Section B Taxes and the Economy

Why are taxes necessary? Why are taxes necessary? Two basic principles Two basic principles –Benefits Received Those who use it, pay it Those who use it, pay it Ex. Gas tax Ex. Gas tax –Ability-to-Pay Richest should pay higher burden Richest 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 principle Productivity principle –Tax laws that encourage efficiency and productivity (corp. tax deductions for equip.) Least Likely to Offend Principle Least Likely to Offend Principle –Who can I tax and not lose votes?

Burden of Taxation Progressive Progressive How much of total taxes do the richest pay? How much of total taxes do the richest pay?

Regressive tax Regressive tax –Poor hit hardest as percent of income Sin Taxes Sin Taxes Proportional Tax Proportional Tax –Flat Tax proposals –Same percentage across the board.

Federal, State, and Local Taxes Federal Federal –Personal Income 5-36% –Social Insurance Medical, Social Security Medical, Social Security –Corporate Income Tax on profits Tax on profits –Others Estate, Tariffs Estate, Tariffs

State and Local Revenues Sales Tax Sales Tax Property Tax Property Tax –Usually funds education Income Tax Income Tax License Fees License Fees Intergovernmental Revenue Intergovernmental Revenue

Section C: Government Spending Public Decision Making Public Decision Making –Contradictions Good for people vs. Reelection Good for people vs. Reelection Good politically vs. Good economically Good politically vs. Good economically –Public also to blame “What have you done for me lately” “What have you done for me lately” –Programs Hard to Stop and Fix Inefficiencies can go on and on. Inefficiencies can go on and on.

Writing the Budget President drafts spending bill President drafts spending bill Congress passes bill Congress passes bill –Compromise usually needed between conservatives and liberals Pork Barrel Legislation Pork Barrel Legislation –Spending used to gain votes in your district

Section D: The Problem of the National Debt Good or Bad? Good or Bad? Bad: Used only for consumption Bad: Used only for consumption –Trade off: Future consumption vs. present consumption Future consumption vs. present consumption Hurts future economic growth Hurts future economic growth causes high taxation. causes high taxation. Good: Used for future growth Good: Used for future growth –Present expenditure/borrowing can increase future GDP/tax revenue

GDP matters GDP matters –How much is debt vs. income? Payment of debt as a percentage of Budget Payment of debt as a percentage of Budget

National Debt

How does this graph change the debt picture?

Foreign vs. Domestic Debt Domestic Debt: Paid back to American citizens. Domestic Debt: Paid back to American citizens. Foreign Debt: Paid to foreign countries Foreign Debt: Paid to foreign countries –May affect interest rates If foreign countries charge high interest If foreign countries charge high interest –Consumes more of the budget

How big is our true debt? Present debt : $15 Trillion Present debt : $15 Trillion + future obligations/entitlements: + future obligations/entitlements: –$75 Trillion Is this sustainable? Is this sustainable?

Social Security and Medicare A SUMMARY OF THE 2008 ANNUAL REPORTS Social Security and Medicare Boards of Trustees A SUMMARY OF THE 2008 ANNUAL REPORTS Social Security and Medicare Boards of Trustees “The financial condition of the Social Security and Medicare programs remains problematic. Projected long run program costs are not sustainable under current financing arrangements. Social Security's current annual surpluses of tax income over expenditures will begin to decline in 2011 and then turn into rapidly growing deficits as the baby boom generation retires. Medicare's financial status is even worse.” “The financial condition of the Social Security and Medicare programs remains problematic. Projected long run program costs are not sustainable under current financing arrangements. Social Security's current annual surpluses of tax income over expenditures will begin to decline in 2011 and then turn into rapidly growing deficits as the baby boom generation retires. Medicare's financial status is even worse.”