Professor Jane Leuthold

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Public Sector in a Market Economy

• Professor Jane Leuthold
• Department of Economics
• University of Illinois

Economics 214
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Agenda for today

• To discuss the size and scope of government
• Is the US government too big?
• Is the US budget really in surplus?
• What does it mean to privatize government?
• What is school choice and would it be a good
  option for the American school system?

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Discussion Is government too big?

• How do the Republicans and Democrats divide on
  this issue?
• What are some of the costs of government being
  too big?

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Costs of big government

• Government purchases of goods and services
  utilize resources that could be used to satisfy
  private wants and needs
• Government decisions are not subject to the
  discipline of the competitive market
• Funding government expenditures may create
  undesirable disincentives that waste resources

• Is it possible for government to be too small?

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Benefits of big government

• Government satisfies the legitimate wants and
  needs of its citizens defense, education,
  health care ..
• Private markets dont always work well because of
  noncompetitive markets or failure of private
  firms to take account of their full cost of
  production (pollution).
• Government may be needed to address issues of
  economic opportunity.

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Measuring government size
Twenty-eight cents out of every dollar is spent
by government. In total, the federal government
will spend 1.8 trillion in 2000.
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Government spending as a of GDP 1999
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Decomposing federal government spending

• Purchases of goods and services those that
  require productive resources (land, labor and
  capital) 27
• Consumption expenditures (current spending)
• Gross investment (roads, structures)
• Government transfer payments 45
• Grants to state-local governments 13
• Net interest paid 14

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Purchases of goods and services
Production-possibility curve

• Purchases of goods and services absorb resources
• More government means less private
• The cost of government is the private goods and
  services foregone

B
D
Govt goods and services
C
A
Private goods and services
GDP C I G NX
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Transfer payments

• Redistribute purchasing power among citizens
• Social Security
• Cash payments to low-income families
• Farm aid
• Do not absorb resources beyond those needed for
  administration.

Does this mean they are not important??
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Federal spending
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Federal government growth
13
International spending comparison
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How are government goods and services distributed?

• Nonmarket rationing
• No direct charge (national defense)
• According to eligibility criteria (student loans,
  farm aid)
• Sale (fare for public transportation, tuition)

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Mixed economy
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Mixed economy?
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Federal tax revenue
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Composition of taxes
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Budget surplus (deficit)
Government expenditures - Government
receipts ________________________ Government
surplus (deficit)
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In the news ...
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Past and future budget deficits and surpluses
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On and off budget spending

• Off budget Social Security and Postal Service
• On budget everything else
• Unified budget combines on and off budget items

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Is the federal budget in surplus?
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The latest estimates
1999
Actual 2000 Projection Unified Budget Surplus
124 bil 167 bil Off-budget
124 bil 148 bil
On-budget 1 bil
19 bil
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How should we spend the surplus?
ASK GEORGE W. BUSH
ASK AL GORE
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Ask Gore
I assume a 10-year, on-budget surplus of 3.045
trillion, based on estimates by the Office of
Management and Budget. I support setting aside
2.169 trillion for Social Security from
2001-2010, and spending 64 billion to reduce the
federal deficit. I support using 432 billion
to shore up the Medicare program, including
prescription drug benefit.
BACK
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Ask Bush
I assume a 10-year, on-budget surplus of 4.115
trillion, based on January 2000 estimates by the
Congressional Budget Office. I support setting
aside 2.282 trillion for Social Security from
2001-2010. I support using the projected federal
surplus for a five-year, 460 billion tax cut,
including a simplification of income tax rates
and elimination of the estate tax. I would spend
1.3 trillion on tax cuts over 10 years.
NEXT
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Privatizing government

• Could some government services be dispensed of
  entirely, allowing resources to be used
  elsewhere?
• Should government assets and enterprises (such as
  public schools, jails and detention centers,
  roads and bridges) be sold to private firms to be
  operated for profit?
• Should government goods and services be subjected
  to market competition through the use of vouchers?

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Soap Box topic

• Should taxpayer money be used to provide all
  parents regardless of income with vouchers of
  4,000 per year for each child who attends a
  private school?
• Support your position with an economic argument.
  Submit your argument to the Soap Box before 5 pm
  Friday for full credit.

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Next time ...
Thursday August 31 Efficiency, Equity and the
Role of Government Text, Chapter 2