Lesson Nine: Actions of Government

 

Actions of Government

Key Terms:

• Incentives
• Public choice theory
• Rational ignorance
• National Debt
• Taxes
• Government spending
• Budget deficit
• Gross Domestic Product (GDP)

National Content Standards Addressed:

Standard 16 - There is an economic role for government in a market economy whenever the benefits of a government policy outweigh its costs. Governments often provide for national defense, address environmental concerns, define and protect property rights, and attempt to make markets more competitive. Most government policies also redistribute income.

Standard 17 - Costs of government policies sometimes exceed benefits. This may occur because of incentives facing voters, government officials, and government employees, because of actions by special interest groups that can impose costs on the general public, or because social goals other than economic efficiency are being pursued.

Standard 18 - A nation's overall levels of income, employment, and prices are determined by the interaction of spending and production decisions made by all households, firms, government agencies, and others in the economy.

Standard 20 - Federal government budgetary policy and the Federal Reserve System's monetary policy influence the overall levels of employment, output, and prices.

Lesson Objectives (6)

1. Economic reasoning helps us to answer the question of what things we should want and expect government to do: Government should do those things which it can do better than people can do without government.

2. One criterion for determining what government should do is to consider whether the situation involves the free rider temptation. - The free-rider problem refers to situations in which non-payers cannot be excluded from benefits. Examples include national defense, street paving, fire protection, etc. - Coercion (by government) can overcome the problem by ensuring that all beneficiaries bear part of the cost.

3. Like decision-makers in the market, public servants respond to incentives.
   • Incentives in the political process may be different than those of the market.
   • Elected public officials face different incentives than career government employees.

4. The distribution of costs and benefits within our system of government helps to explain both the phenomenon of "rational ignorance" among citizens and the disproportionate influence of special interest groups in the political process.
   • For special interest groups, the benefits of political action are concentrated and the costs are diffuse.
   • For citizens/consumers/voters, the costs of political action are concentrated and the benefits are diffuse.

5. The history of the federal budget deficit is a striking example of the disproportionate influence of special interest groups, who typically want increases in spending and/or reductions in taxes.
   • Historically, balanced budgets were characteristic of American government until the Great Depression. In the years following the Depression, deficit spending has been the more common practice.
   • Until the 1970s, debt grew less rapidly than nominal GDP; during the 1970s, they grew at the same rate. During the 1980s, debt began to rise more rapidly than the nominal GDP. Currently, the debt is over 70% of GDP.
   • The cost of deficits includes the opportunity cost of using government revenues to pay interest, as well as the opportunity cost of government spending in general - the private spending that must be foregone.

6. The design of representative government is often flawed in that, even if most legislators wanted to balance the budget, individual legislators desiring re-election cannot risk voting for specific expenditure cuts and/or tax increases.
   • The key insight of 'public choice theory' is the recognition that elected officials define their best interests in terms of reelection, making them susceptible to pressure from groups most able to influence election outcomes.
   • Proposals to solve the "deficit problem" include term limitations and a balanced budget amendment.

Teaching and Discussion Ideas:

Sample Interactive Discussion Problems:

1. Farmers make up only 3% of the American population. Use public choice theory to explain why Congress consistently votes to continue farm price supports and subsidy programs that provide benefits to relatively few Americans and impose costs on many.
   • Are members of the House of Representatives or the Senate especially susceptible to pressure from agricultural lobby groups? Why?
   • Why might a legislator support aid to agriculture even if there are no farmers among his/her constituents?

Sample Small Group Discussion Problems:

2. Present students with the findings of the special Boskin commission charged with examining measures of inflation:
   • the CPI is overstated by about 1.1%;
   • and revision in the method of measuring the CPI could save the government billions of dollars in social security payments
   • Lead a discussion or debate on revising the CPI measuring process.
   • Ask students to role-play members of various interests groups that might be affected by a revision of the process.
   • Does public choice theory provide any insight into the debate or the positions of the various stakeholders?

Definitions

Budget deficit - The condition that exists when, in any given year, the federal government's expenditures exceed the total of taxes, fees, gifts and other payments. The deficit is bond-financed and adds to the national debt.

Gross Domestic Product (GDP) - The final value of all goods and services produced within the domestic boundaries of the United States in a year.

Incentives - Rewards or punishments for behavior.

National debt - The cumulative total of past deficits and surpluses, financed by the issuance of interest-bearing securities. the debt is owed to the holders of such government securities.

Public choice theory - The application of economic analysis to the political arena made possible by the realization that elected officials, like private citizens, are motivated by self-interest. Officials whose self-interest lies in re-election are especially sensitive to the desire of special interest groups because of their ability to influence election outcomes through financial contributions and voter participation.

Taxes - Compulsory payments by individuals and businesses to government.

 

Copyright © 1999 Foundation for Teaching Economics
Permission granted to copy for classroom use.