Download Chapter 9 - Mr. Lee GWHS

Chapter 9
Government’s Role in the
Economy
What should the govt. provide?
• What are the characteristics of a free
market?
• How do we decide WHAT to produce in a
free market?
• What are the characteristics of a private
good?
• 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
• Examples?
• Why doesn’t the private sector provide
these 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.
• Examples? Positive
and Negative
Positive Externality
Negative Externality
• Where is the negative
•
externality?
Dead Weight Loss?
Redistribution of Income
• How does govt. redistribute income?
• How much support should be given to the
poor?
Examples of Redistribution
• Transfer Payments: Cash benefits
• Transfer in Kind: (Non-cash)
– Food Stamps
– Medical care
– Low-cost housing
• Payments to Individuals
– What is the most important thing revealed by
chart on pg. 242?
Payments to Individuals
• Largest portion of budget
• How much did it grow between 19601970?
• 1970-1980?
• Should we be worried?
Section B
Taxes and the Economy
• Why are taxes necessary?
• Two basic principles
– Benefits Received
• Those who use it, pay it
• Ex. Gas tax
– Ability-to-Pay
• Richest should pay higher burden
• Progressive tax (Income Tax)
• How much of total taxes do the richest pay?
• Productivity principle
– Tax laws that encourage efficiency and
productivity (corp. tax deductions for equip.)
• Least Likely to Offend Principle
– Who can I tax and not lose votes?
Burden of Taxation
• Progressive
• How much of total taxes do the richest pay?
• Regressive tax
– Poor hit hardest as percent of income
• Sin Taxes
• Proportional Tax
– Flat Tax proposals
– Same percentage across the board.
Federal, State, and Local Taxes
• Federal
– Personal Income 5-36%
– Social Insurance
• Medical, Social Security
– Corporate Income
• Tax on profits
– Others
• Estate, Tariffs
State and Local Revenues
• Sales Tax
• Property Tax
– Usually funds education
• Income Tax
• License Fees
• Intergovernmental Revenue
Section C: Government Spending
• Public Decision Making
– Contradictions
• Good for people vs. Reelection
• Good politically vs. Good economically
– Public also to blame
• “What have you done for me lately”
– Programs Hard to Stop and Fix
• Inefficiencies can go on and on.
Writing the Budget
• President drafts spending bill
• Congress passes bill
– Compromise usually needed between
conservatives and liberals
• Pork Barrel Legislation
– Spending used to gain votes in your district
Section D:
The Problem of the National Debt
• Good or Bad?
• Bad: Used only for consumption
– Trade off:
• Future consumption vs. present consumption
• Hurts future economic growth
• causes high taxation.
• Good: Used for future growth
– Present expenditure/borrowing can increase
future GDP/tax revenue
• GDP matters
– How much is debt vs. income?
• 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.
• Foreign Debt: Paid to foreign countries
– May affect interest rates
• If foreign countries charge high interest
– Consumes more of the budget
How big is our true debt?
• Present debt : $15 Trillion
• + future obligations/entitlements:
– $75 Trillion
• Is this sustainable?
Social Security and Medicare
• 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.”