PAD 6060 lecture five

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University of North Florida

Master of Public Administration program

PAD 6060 Public administration in modern society

Fall 2017

Managing money

Public Administrator of the Week

Photo credit

John Maynard Keynes

Intellectual loadstone of ReaganBushObamaTrumponomics

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Lecture goals: Provide an overview of public budgeting and finance.

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Some basic introductory points:

1. The Constitution -- gives the responsibility for a budget to Congress (Article I, Section 7):

“All bills for raising Revenue shall originate in the House of Representatives; but the Senate

may propose or concur with Amendments as on other Bills. Every Bill which shall have

passed the House of Representatives and the Senate, shall, before it become a Law, be

presented to the President of the United States; If he approve he shall sign it, but if not he

shall return it, with his Objections to that House in which it shall have originated, who shall

enter the Objections at large on their Journal, and proceed to reconsider it. If after such

Reconsideration two thirds of that House shall agree to pass the Bill, it shall be sent, together

with the Objections, to the other House, by which it shall likewise be reconsidered, and if

approved by two thirds of that House, it shall become a Law. But in all such Cases the Votes

of both Houses shall be determined by Yeas and Nays, and the Names of the Persons voting

for and against the Bill shall be entered on the Journal of each House respectively. If any Bill

shall not be returned by the President within ten Days (Sundays excepted) after it shall have

been presented to him, the Same shall be a Law, in like Manner as if he had signed it, unless

the Congress by their Adjournment prevent its Return, in which Case it shall not be a Law.”

2. The practice – Despite the Constitution, America has evolved a practice whereby the

executive (i.e, President, Governor, Mayor) indicates to the legislature what resources are needed

to execute public policy. Hence ‘the President’s Budget’, such as the Trump administration’s FY

2018 budget, as well as online copies of past budgets from as far back as 1996. The same occurs

at the state and local levels, with the executive proposing budgets for the legislatures/councils to

consider.

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3. US public expenditure low – Among rich countries, the US ranks relatively low in terms of

total government expenditure (click here). As indicated in Table 1, lecture 1, the US is

comparatively lightly governed. Table 2, lecture 2, indicates that federal expenditure grew from

the 1930s through the 1980s (peaking at 23.5% of GDP in 1983 – see link), before dropping back

below 20% of GDP. Federal spending ballooned to 25% of GDP in 2009, though has dropped

back again below peak Reagan era spending by 2012.

4. US public revenue compared -- among the 15-20 rich nations of the world (Western Europe,

Canada, Japan, Australia, New Zealand, etc.), the US ranks very low in terms of total tax revenue

(click here). As indicated in Table 2, lecture 2, federal revenue has especially collapsed, to barely

15% of GDP in 2009 through 2012. The Reagan years saw a bottom of 17.3% of GDP, while

federal revenues haven’t been this low since 1950.

5. How we got here? Newly elected President George W. Bush declared in his 27 February 2001

State of the Union address

“Many of you have talked about the need to pay down our national debt. I listened, and I

agree. We owe it to our children and grandchildren to act now, and I hope you will join

me to pay down $2 trillion in debt during the next 10 years.”

President Bush's then budget director, a Hoosier named Mitch Daniels, echoed this sanguine

view of the prospects for the federal budget:

"The report we've issued this morning confirms that the nation has entered an era of solid

surpluses. Surpluses on the order of $160 billion, despite an economy that has been weak

now for over a year and in decline for that time. This is the second largest surplus in

American history, in the face of that weak economy, a phenomenon that should strike all

Americans as very positive" (Daniels 2001).

It didn’t work out quite as expected. In February 2001 we had a humongous budget surplus, and

of course we had an equally humongous tax cut (i.e. revenue decrease), to give the money back

to those who earned it (like Paris Hilton). Well, in large part as a result of (for a source):

those humongous revenue cuts,

the recession of 2001 (which started prior to 11 Sep 2001), which both depresses revenue

(less income = less tax revenue) and increases expenditure (more unemployment benefits),

but which ended by 2002,

the cost of the logically necessary war against those in Afghanistan who were behind the

mass murders of 11 Sep 2001, and

the cost of the second, now pretty clearly not necessary war (at least according to The

National Commission on Terrorist Attacks Upon the United States: the 9-11 Commission),

…we now have been running a series of humongous deficits. No fundamental long term changes

have been made to this 2000’s budgetary formula (i.e. neither large tax increases nor spending

increases). The ‘Great Recession’ of 2007-? exacerbated this trend, with record post-war deficits

(though these have returned to the post-Bush-tax-cut trend).

For some perspectives on this:

"Fiscal fantasyland," (2005). The Economist, 9 April, p. 12-13.

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"Penny wise, pound foolish," (2006). The Economist, 11 Feb, p. 32.

“A slight reprieve?” (2010). The Economist, 2 Sep.

“Why No One is Celebrating The Much-Lower Deficit,” (2014). Forbes, 15 April.

“CBO: Trump’s budget doesn’t balance federal ledger,” (2017). Fox News, 17 July.

6. Budgets = values. More broadly on budgets, this is from a former governor of Vermont:

“After a month, I learned to read budget numbers like words and find meaning between the

lines. I compared the budget book to abstract art: the longer you looked at it, the more you

could see... It was a highly subjective document, hammered together by hundreds of hands,

both public and private, each with an imprint of personal preference and public obligation.

There was a truth hidden here, but rather than being sharp, it was dull. If read correctly, this

gray columned document revealed an infinitesimal detail the cumulative values of its many

authors, as well as the labyrinthe structure of state government itself.” (Kunin 1994)

Her point: you'd think something like budgeting, which is so amenable to quantification, would

be fairly clear. Not so! Indeed, budgets are about more than money:

“Budgets are beyond dollars. They are choices, policies, and philosophies, and the ways in

which budgets are made reflect the choices, policies, and philosophies of governments.”

(Henry 2004, p. 214)

7. Budgets are dynamic!

A dollar in tax is a dollar not spent in personal consumption or private investment.

A dollar not spent on public education will reduce productivity in the long run.

A dollar ‘saved’ in fire and safety and public health and mowing median strips may result

in less revenue (people and firms leave or do not come) or higher costs elsewhere

(insurance costs, etc.).

A dollar spent on a road will save costs on vehicle wear and tear, and travel times.

Etc.

Anyhow: this is provided as an introduction to macro-level budgeting and finance. Budgeting is

where the policy rubber meets the road. Rhetoric is fine, but if it isn't backed with resources,

nothing will happen. As for taxes, Schiavo-Campo and McFerson put it well:

“In recent years, the case for cutting taxes in the United States has rested on the statement

that the tax revenue is 'the people's money, and the people should decide how to spend

it.' This proposition is true, appealing, and meaningless. Whether for national security,

social protection, law and order, and so on, government services do not materialize out of

thin air as the result of political decrees, strong willpower, or fervent wishes... In the words

of Justice Oliver Wendell Holmes, inscribed on the front of the Internal Revenue Service

headquarters in Washington, taxes are the price we pay for a civilized society.” (p. 128)

The public budget, and some public management economics

1. Cyclical versus structural economics. A common mistake, and arguably the most important

single point of this lecture, being made in today’s public policy concerns a failure to distinguish

between structural and cyclical economic problems. Structural problems concern long term

problems of declining competitiveness (education, infrastructure, research & development,

environment, health, quality of life, etc.), while cyclical issues concern deviation around that

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long term rate of growth. Much of what follows will be on cyclical issues, and how short-term

variations in public policy can help smooth out these cycles. But as a general rule: if you’ve been

borrowing, spending, and cutting interest rates for a number of years – in other words, if these

cures for cyclical problems are not working – then the problem is structural.

2. Budgets and fiscal policy. As implied in the previous paragraph: the budget is also used as an

instrument of fiscal policy: government intervention in the economy. This, historically, was a

‘socialist’ (big guv'mint) concept popularized by British economist John Maynard Keynes, hence

references to government meddling in the economy as 'Keynesianism'. Keynes' (1936) classic

statement justifying government economic intervention was as follows:

“The outstanding faults of the economic society in which we live are its failure to provide for

full employment and its arbitrary and inequitable distribution of wealth and incomes. The

State will have to exercise a guiding influence on the propensity to consume. Furthermore I

conceive that a somewhat comprehensive socialisation of investment will prove the only

means of securing an approximation to full employment.” (p. 378)

3. Keynesian fiscal policy. If I remember my economic history, Keynes demonstrated this

through the concept of the national income equation:

Y = C + I + G + X - M

In English, it translates to:

National income (Y) = Consumption + Investment + Government + eXports -iMports

To give you some sense of

the magnitudes of these

elements of national income,

Table 1 breaks these down as

of the second quarter of 2017.

This was Keynes way of

showing what contributed to

national income. If income

(economic growth) was

lagging, you should increase

demand: personal

consumption, investment,

government spending,

increase exports, or decrease

imports. Keynes assessed the

efficacy of these options as follows:

Consumption: unemployed people, who lack income, cannot spend it. Also: paradox of thrift.

Investment: in a recession there is typically unused plant (factories, equipment, etc.), so firms

are reluctant to invest in more if they are not fully using existing plant.

eXports: You can't force people in other countries to buy your stuff.

iMports: You can force your citizens to buy domestic goods by prohibiting imports, but you

are likely to see an offsetting reduction in exports, as other countries retaliate in kind (they

will force their citizens to buy their stuff). Again: no solution to recession here.

Table 1

Components of US economy, 2016 Q2

Component $b C -- private consumption 13,308.6

Goods 4252.4

Services 9056.2

I -- investment (plant, equipment, buildings, etc.)

Nonresidential

Residential

3174.1

2210.4

739.1

G -- government 3330.9

Federal defense 741.3

Federal non-defense 514.5

State and local 2075.1

X -- exports 2,316.4

I -- imports -2,883.3

Y -- gross domestic product, or national income 19,246.7 Source: Bureau of Economic Analysis

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Government: The imperfect nature of the alternatives above was why Keynes advocated

government spending. This could come in a number of forms:

Tax cuts: put money in the pockets of people, and they might spend it. This increases

business revenues (they sell more stuff!), encouraging firms to hire people and invest.

o Yet if taxes are cut to stimulate consumer demand, people might save instead, or pay

down debt, hold cash, invest overseas, buy cheap junk from China. Who knows!?!?!?

o And so tax cuts for the poor are preferred to tax cuts for the rich, as the poor are more

likely both to spend the money, and to spend the money locally: food, housing, etc.

Government spending: As a result of these limitations of tax cuts, Keynes argued that

direct government spending was the best option. Government should borrow during

slowdowns (or better, spend saved surpluses) and spend to stimulate demand.

Equally important, government could spend this money on useful things: investments in

roads, dams, research, education, etc. As a result, employers would hire workers to make

the stuff government buys, putting money in peoples' pockets, encouraging firms to

invest, and so lifting the economy out of recession, while also improving the rate of long

run growth (and so making it easier to pay back the money loaned! – see also R & V-G’s

discussion of Greek finance, p. 283-7). An example!

Once the economy picked up again, government would run a surplus to pay off the debts

piled up during the recession. So the idea behind Keynesian economics was not to run up

debts. It advocated balanced budgets over the business cycle.1

Think of Keynesianism as the judicious use of budgetary steroids (or a huge can of Red Bull

budgetary kickass!): when the economy is flagging a bit, you give it a boost (or ‘wings’).

4. Reaganomics. In modern times the alternative logic of Supply-Side economics is more that too

much government (and so high taxes) is an economic drag. By cutting taxes (government

revenue), we will improve the economy and, paradoxically, end up with more tax revenue. The

Reagan administration practiced another derivation, by borrowing money to cut taxes in the short

term, in the belief that these lower taxes would pay for themselves through higher economic

activity. This did not result, and deficits grew (as we saw in Table 2, lecture 2). The economy

improved marginally (3.6% annual growth, compared to 3.0% for the previous six years), but

much of this was artificial, ‘Keynesian’ demand, through the borrowing that funded the tax cuts.

5. Bushonomics. Keynesianism is also what the GW Bush administration ostensibly tried to do

with its tax cuts: government micro-management of the economy by providing 'stimulus' through

borrowing money to put it in peoples' pockets. 'Ostensibly' because candidate Bush wanted to

1 I’ll also add defense spending as an alternative for stimulating the economy. Like consumer spending, to the extent

that the products are built in the US, it will create jobs in the short term. However even Adam Smith recognized,

way back in 1776, that defense spending will not improve the economy. As Smith put it:

“The labour of some of the most respectable orders in the society is, like that of menial servants, unproductive

of any value, and does not fix or realize itself in any permanent subject; or vendible commodity, which endures

after that labour is past, and for which an equal quantity of labour could afterwards be procured. The sovereign,

for example, with all the officers both of justice and war who serve under him, the whole army and navy, are

unproductive labourers. They are the servants of the public, and are maintained by a part of the annual produce

of the industry of other people. Their service, how honourable, how useful, or how necessary soever, produces

nothing for which an equal quantity of service can afterwards be procured. The protection, security, and defence

of the commonwealth, the effect of their labour this year will not purchase its protection, security, and defence

for the year to come” (p. 352).

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cut taxes back in 2000 when the economy was growing strongly (4.1%), and still wanted to keep

the tax cuts after the mild recession of 2001, even when the economy was growing strongly

again, and we had both a large deficit, and a growing national debt. Even Keynes argued that

government should practice deficit spending during recessions to stimulate the economy, but pay

back that borrowed money (through generating surpluses, not deficits) during good times. In

short: there is no recognized school of economic thought that argues for borrowing money to

fund tax cuts when the economy is growing.

6. Obamanomics. President Obama’s economics wa a more traditional form of Keynesianism.

While both Presidents Reagan and Bush borrowed to fund personal tax cuts that were meant to

stimulate the economy, President Obama’s ‘stimulus’ did feature some infrastructure and

education spending. By most accounts, it was about 1/3rd

tax cuts (to get Republicans on board),

1/3rd

infrastructure and stuff like that, and 1/3rd

aid to state and local governments, both to

maintain services, and to maintain demand. For many of the reasons cited above, though, early

(2011) results of the Obama stimulus impact were likely mixed. For a later analysis, click.

7. ‘Supply-side’ economic policy. The logic of supply-side economics has its origins in ‘Say’s

Law’, from the early 19th

century French economist Jean-Baptiste Say. Put simply, Say’s Law

has it that supply creates its own demand, so unemployment is impossible, because the act of

production creates the consumer demand for the product: those who get paid to make the stuff,

buy stuff themselves. Note from the discussion of Keynesianism, above, that supply may not

create its own demand: people might save instead, or pay down debt, hold cash, invest overseas,

buy cheap junk from China. This is one dimension of contemporary Supply-Side economics

(click for an explanation of Supply-Side economics from a Supply-Sider), which I’ve also seen

applied as a criticism of Keynesianism: Keynes was wrong (we’ll discuss this later), and so

instead focus on improving ‘supply’ in the economy, or the production of goods and services.

8. What of the ‘Supply-Side’ historical record? First, former President George H.W. Bush called

Supply-Side economics voodoo economics. Second, if supply-side effects work, economists

argue that they kick in only at marginal tax rates of 70%+. We got a macro-economic overview

of the record in Table 1, in week two (to save paper, I won’t copy and paste it in here).

9. Big government = rich country. To

repeat some week two stuff that is

relevant here, too: beyond the US time

series data presented in Table 1, lecture 2

(as America grew richer, its government

grew, too), this trend is also evident in

cross-national analysis in Figure 2, at

right. The figure uses public consumption

(purchases by government agencies) as an

indicator of the size of government and, as

can be seen, as countries become richer,

government grows. (The data,

incidentally, comes from an SPSS dataset

available here). This is not to argue that

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more government = a richer society. Instead an effective, honest, ‘right-sized’ government is

required. As the ultra-conservative World Bank put it in opening their 1997 World Development

Report:

“An effective state is vital for the provision of the goods and services -- and the rules and

institutions -- that allow markets to flourish and people to lead healthier, happier

lives. Without it, sustainable development, both economic and social, is impossible.” (p. 1)

‘Right-sized’ means doing what government needs to do, avoiding what government isn’t good

at; though as the equally successful US (smaller government) and Sweden (larger government)

illustrate, there is a fair degree of choice within this band of ‘right-sized’ governments.

On causes of this

growth, Table 3

looks at some

large components

of US federal

spending over

time. On this

data, all net

federal spending

growth since the

1970s has been in

Social Security

and especially health care.

10. To update Say’s Law, supply-side economics is:

First a repudiation of Keynesian demand management.

Emphasizes instead tax cuts to the wealthy, who will invest and so ‘create jobs’.

Another dimension is that government should just butt out of short term meddling, and

instead focus (if it does anything) on long term productivity improvements (education,

infrastructure, research & development, environment, health, quality of life, etc.), or the

‘supply’ side of the economic equation.

Problems:

It didn’t work:

in the 1930s (here the evidence was reversed: large tax increases did not result in

economic calamity);

in the Reagan era, with massive cuts in the highest marginal tax rate, from 70% to

28%;

2 Sources: Historical budget data from OMB, including

Table 8.4—Outlays by Budget Enforcement Act Category as Percentages of GDP: 1962–2016 ; Table 15.5—Total

Government Expenditures by Major Category of Expenditure as Percentages of GDP: 1948–2010 ;

http://www.cbo.gov/budget/data/historical.pdf

Notes: a – The actual figure was about 1% higher than this, as during the Bush administration much of the funding for the

military deployments in Afghanistan and Iraq was not included in normal DoD appropriations. b

– 2000-2007.

Table 32

Social services (income security) as percent of GDP

Defense Net

interest

Social

security

Medicare Income

security

Medicaid

1950-9 ~9.4 1.4 1.1 --- ---

1960-9 9.4 1.5 2.7 --- ---

1970-9 5.8 1.6 3.8 0.9 1.4 0.4

1980-9 5.8 2.6 4.5 1.6 1.4 0.6

1990-9 4.0 3.0 4.5 2.2 1.6 1.1

2000-9 4.1a

1.7 4.2b

2.6b

1.6b

1.4b

2010 4.7 1.4 4.8 3.1 n/a 1.9

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or in the GW Bush Presidency, with more piffling cuts in the highest marginal tax

rate from 39.5% to 35%.

The logic of Keynesianism (investors will not invest, if investors have excess capacity) is

logically sound. Note below, the $2t in cash that US corporations are sitting on.

Finally, Adam Smith’s The Wealth of Nations, argued the following:

“It is the maxim of every prudent master of a family never to attempt to make at

home what it will cost him more to make than to buy. The taylor does not attempt to

make his own shoes, but buys them of the shoemaker. The shoemaker does not

attempt to make his own clothes, but employs a taylor. The farmer attempts to make

neither the one nor the other, but employs those different artificers. All of them find it

for their interest to employ their whole industry in a way in which they have some

advantage over their neighbours, and to purchase with a part of its produce, or what is

the same thing, with the price of a part of it, whatever else they have occasion for.

“What is prudence in the conduct of every private family can scarce be folly in that of

a great kingdom. If a foreign country can supply us with a commodity cheaper than

we ourselves can make it, better buy it of them with some part of the produce of our

own industry employed in a way in which we have some advantage.” (p. 478-9, see

also, and go to IV.2.12)

The quote refers to foreign trade, but despite Schiavo-Campo and McFerson arguing that

“this assertion is wrong and embodies what logicians call the ‘fallacy of composition’”

(p. 127), it is still relevant when applied to supply-side economics: a family facing a

revenue shortfall will not cut its revenues. Even worse would be borrowing to sustain

current, non-productive consumer spending.

Conservatives on fiscal policy

History has not been kind to ‘Supply-Side’ economics, but there have been a number of much

stronger conservative critiques of Keynesianism. Ironically both the Reagan/Bush, and Obama

administrations practiced classic Keynesianism: with a slow economy, government should

borrow and spend to artificially pump in demand. The Obama approach has focused more on

direct government spending (helping local governments keep teachers, firefighters and police

officers employed; direct infrastructure and development spending; extending unemployment

benefits; and tax cuts); the Reagan and Bush approach more on tax cuts. The logic (spend when

the economy slows) is sound, but problems have been identified.

1. Problems with Keynesian practice. More broadly, Keynesian economic micro-management

as practiced3 was long ago challenged by many economists, and certainly by conservatives,

who noted at least the following problems:

Politics. Politics often dictates interventions, so the economy could be stimulated prior to an

election, rather than when the economy was slowing (click for example, and for a good

summary).

Uncertainty. It is often hard to know just exactly where the economy is in the business cycle,

and so stimulus might be applied at the wrong time.

3 I add this proviso as Keynesianism argued for balanced budgets over the business cycle: borrow to fund deficits in

downturns, but then run surpluses to pay off those debts when the economy recovers. We voters like governments

that do the borrowing, but have not supported governments that try to do the latter.

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Lags. There are lags between applying the stimulus and achieving results (during which

time things might have changed).

o Displacement. Government fiscal policy might just shift money out of private hands and into

public hands. Government, after all, has to borrow money to give it to us as tax cuts. If we

(or someone in the US) loans the money to the feds, they won't then spend it, or loan it to

someone seeking to start a new business. This has been less a problem recently:

o First, US corporations have been widely reported as holding over $2t in cash, which they

refuse to invest (click here). Taxing this money and putting it back into the economy

would have the needed stimulatory effect.

o Second, about 2/3 of the recent deficit has been funded by overseas interests, in part

because we haven’t been saving enough in the Social Security Trust Fund to borrow to

fund our tax cuts.

o What goes ‘round… The biggest problem here is long term: just as borrowing from China

will stimulate the US economy now; it will slow the US economy in 20-30 years, when we

have to pay off the loans.

2. Starve the beast? This raises the obvious question: Reagan’s tax cuts left us yawning deficits

and massive debt, and Bush’s tax cuts did the same. So what is going on here? It is likely that

while most supporters of the economics of current tax cut policies are just narrow ideologues

who don't know better; those who know better, know that the tax cuts won't achieve their stated

aims of stimulating the economy and reducing the deficit through growth. Instead, the purpose is

just to 'starve the beast' that is government (See Bloomberg, Forbes, and the Cato Institute).

3. It’s our fault. Of course, another explanation is that these borrow-and-tax-cutters are just

populists who will say what the people want to get elected. As Henry (2007) indicates:

70% of Americans are worried about the size of the deficit and the accumulated debt.

o Remember: 'deficit' means we are spending more than we are taxing.

Only 35% were willing to cut government spending to fix the deficit.

Only 18% were willing to raise taxes to fix the deficit.

About 1% were willing to cut spending and raise taxes.

So at least 16% of Americans (70 - (35 + 18 + 1)) are worried about the fact that we spend

more than we tax, but are unwilling either to spend less, tax more, or both. So we have the

deficits and debt that we deserve.

4. Automatic stabilizers. An important factor of the past decades has been automatic

stabilizers. This takes the guesswork out of Keynesian economic fine tuning and has an anti-

recessionary stimulus kick in automatically: unemployment benefits.

5. The local context. Finally, if this sort of Keynesian, ‘socialist’ government meddling in the

economy works, it only does so at the broad (national) level, not at the local level. Even at the

national level, American tax rebates that are spent in China will stimulate the Chinese, not

American economy. This 'leakage' problem becomes more acute at the local level. Then

Republican Presidential candidate Rudy Giuliani claimed that he cut taxes in New York,

stimulating an economic recovery (see link, as an example). This is unlikely, as it is too easy for

New Yorkers receiving those cuts to spend elsewhere: New Jersey, Connecticut, online, etc.

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6. Monetary policy. As a result of these criticisms, many conservatives advocate monetary

policy, rather than fiscal (government spending) policy. This is where the Federal Reserve

comes in. Through influencing the supply and price of money (interest rates), the same results

obtained by Keynesian fiscal policy are sought. Click for an explanation for why the Federal

Reserve has been set up to be independent of political manipulation.

7. Low, stable inflation. A twist in monetary policy, though, is that the primary goal is often low

inflation, rather than economic growth (and so more jobs) directly. The logic is that if one seeks

to obtain higher growth and more jobs through policies that lead to inflation, this inflation will

ultimately undermine the pro-growth policies. So one can best seek growth not through seeking

growth, but through maintaining a lid on inflation.

8. But not no inflation. A final twist on inflation-targeting is that the target is not no inflation, but

rather low inflation. Low inflation is especially good as a way to reduce wage growth. Fail to

give someone a pay rise (in a period of no inflation), and they will be angry. But give them a 1%

pay rise in a period of 2% inflation, and they will happily make plans to spend that extra money!

More budgetary context -- federal

Where the money comes from (Table 4):

Income tax -- 'progressive' (marginal

rates from 10-35% of one's federal

taxable income).

Corporate tax -- hard to wield in a

global economy. Firms can shift operations to low tax venues, or shift their 'revenues'. This is

largely why corporate income taxes are relatively low (R & V-G, p. 307-8).

The US has a confusing corporate tax reality, with a higher top rate than many rich

countries, but one of the lowest overall rates of corporate taxation, once deductions are

applied and loopholes hopped through (source).

Worse, the deductions and loopholes are not uniformly applied, hurting some industries

and helping others (source).

Payroll taxes (social security, retirement) -- regressive, generally targeted (to social security,

unemployment insurance, etc.), but money is fungible!

Sales and excise tax -- regressive, applied

in myriad ways, typically by state/local

government (20% of state/local revenues).

Where the money goes: See Table 5, at right.

'Entitlements' or Mandatory (~60%):

Mis-named, as no one is ‘entitled’ to

these. Instead, they are determined by

eligibility, and the annual bill not

directly determined by Congress, but

4 Given how much these items are raised so much in internet memes, it is worth noting that the budget for the

Department of Education was $687.3b, Energy was $27.2b, and ‘State and other International Programs was $42.9b

Table 4

US federal receipts, 2016

Source ($3268b) $b Percent

Individual income taxes 1546 47.3

Corporate income taxes 300 9.2

Social insurance and retirement 1115 34.2

Excise, estate and gift taxes 116 3.5 Source: Summary Tables (Budget 2018)

Table 5

US federal expenditures4, 2016

Expenditure ($3853b) $b Percent National defense 585 15.2

Medicare 588 15.3

Medicaid 368 9.6

Social security 910 23.6

Other ‘mandatory’ 560 14.5

Other ‘discretionary’ 600 15.6

Net interest 240 6.2 Source: Summary Tables (Budget 2016)

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instead the result of however much it costs to serve those eligible.

Social security (20.1%)

Medicare (13.3%)

Medicaid (7.6%)

Interest (6.4%).

'Discretionary'

Defense/security (~20%)

The state and local level

Some context on state and local

budgets. First revenues, presented in

Table 6.

State:

Federal transfers account for

1/3 of state revenues.

Other major sources: sales and

income tax, and fee-for-service (higher ed).

Local:

Again, intergovernmental transfers (from state and feds) dominate.

After this: property tax, utility/hospital fees, sales tax.

Next, where state and local money

goes: Table 7.

Florida low tax. State taxes in

Florida are low, on a per person

basis (31th

lowest in the country).

Florida also has one of the

friendliest business tax climates

(5th

lowest corporate taxes in the

country, and ‘second best state for

business’), and a low combined tax

burden (5th

lowest in the country).

Jacksonville low tax. Jacksonville,

it is generally acknowledged, is a

relatively low tax community

(source),5 when compared to the

other large (in population) Florida

counties.

Investment climate?: On the other hand, Duval County has recently had:

the dubious distinction of being the murder capital of Florida (source),

5 Though consolidation makes difficult to find data on this for Duval County. Hence the 2008 source cited.

Table 6

State and local revenues, 2014

State Local

$b % $b %

Total 2361 1772 Intergovernmental 551 23.4 551 31.9

Taxes 867 36.7 624 35.2

Property 14 0.6 452 25.5

Sales 412 17.5 105 5.9

Individual income 312 13.2 30 1.7

Corporate income 46 1.9 8 0.5

Other revenue

Education 97 4.1 23 1.3

Hospitals 56 2.4 77 4.3

Utility 14 0.6 146 8.2 Source: 2014 Census Bureau

Table 7

State and local expenditures, 2014

State Local

$b % $b %

Total 2048 1722 Intergovernmental 497 24.3 16 0.9

Education 284 13.9 621 36.0

Higher education 228 11.1 41 2.4

K-12 education 7 0.3 579 33.6

Public welfare 490 23.9 53 3.1

Hospitals/health 114 5.6 138 8.0

Highways 96 4.7 66 3.8

Police/fire 14 0.7 132 7.7

Corrections 48 2.3 27 1.6

Government admin. 56 2.7 74 4.3

Parks and recreation 5 0.2 33 1.9

Housing and devt. 9 0.4 41 2.4

Sewerage/ solid waste 2 0.1 73 4.2 Source: 2014 Census Bureau

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worries about its infrastructure stock (source and source) not to mention the need for massive

public investment in its port (source);

the only West Nile virus cases in northeast Florida (source);

the country’s worst tuberculosis outbreak in 20 years (source);

a river that turns green from algae blooms every summer (source); and

mediocre schools (source), yet has made public education cuts (source); etc.

Some nuts and bolts of managing the money

The budget as managerial tool. The budget has become a key managerial tool, both in terms of

directing and monitoring policy. By directing I refer to the allocation of resources influencing

what takes place. By monitoring I mean that budgeting increasingly means not only the

accounting of resources coming in and going out of a cash box, but of monitoring the results of

the funded activity.

Why taxes? Duh. As well, see Article I, Section 8 of the Constitution, and Lipsky, pages 44-8.

Principles of taxation. Again, Adam Smith (click link, and V.2.25-29) got the ball rolling on

this, identifying four key principles:

1. Equality. “The subjects of every state ought to contribute towards the support of the

government, as nearly as possible, in proportion to their respective abilities.”

2. Consistency. “The tax which each individual is bound to pay ought to be certain, and not

arbitrary.”

3. Convenience. “Every tax ought to be levied at the time, or in the manner, in which it is

most likely to be convenient for the contributor to pay it.”

4. Efficiency. “Every tax ought to be so contrived as both to take out and to keep out of the

pockets of the people as little as possible over and above what it brings into the public

treasury of the state” (how the US compares).

Related to this, too, is that if taxation discourages bad behavior, and encourages good behavior:

all the better. Hence ‘sin taxes’, and deductions for myriad things ostensibly good for society.

This is what Raadschelders and Vigoda-Gadot discuss in Denmark (p. 292-5).

‘Annuality’ of the budget. Meaning: we have one every year because, you know, the cycle of the

seasons absolutely govern modern life. Realistically, we should probably budget for 5-10 year

cycles, and do this to some extent through capital budgets. And so, Schiavo-Campo and

McFerson open their discussion of budget preparation with ‘three prerequisites’:

1. The need for a middle term fiscal perspective.

2. The need for early decisions. The sooner problems are addressed, the better (except…).

3. The need for a hard constraint on expenditure. This is focused at the ministry

(departmental) level, rather than whole federal government. Again, Schiavo-Campo and

McFerson are taking a global perspective, not parochial American one, and these

problems are greater elsewhere.

Stages. Top-down (Schiavo-Campo and McFerson, p. 143-4):

How much money: preparation of the medium-term fiscal framework.

Central government communication of expenditure ceilings to agencies.

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Preparation of agency budget proposals based on these guidelines.

Let’s talk: negotiation between central government and agencies. Nick Henry identifies

‘opportunistic tactics’ that agencies use to combat central government strength (p. 244-5):

Politics rules. 'Success' is measured by bringing more resources into your department. Is this

consistent with good government ethics? Who, after all, does the manager serve: her

department, or the citizens? Strategies and tactics:

Find, serve and use a clientele for the services you perform, and mobilize these

stakeholders in the event of cuts. Example.

Knowledge rules: convince legislators that you know better than them, they need to trust

you. Henry offers the National Science Foundation as exemplar, think, also, about

NASA in this role.

Capitalize on the fragmented nature of the process: make down-payments that then have

to be honoured. Example.

Various other 'contingent' shell games. Example? Or this?

Finalization of a draft budget.

Approval of draft budget by top levels of the executive, and

Submission to the legislature for approval

Approaches to budgeting. Henry includes a long discussion of historical phases in budgetary

theory.

Line item -- "simply the allocation of resources according to the cost of each object of

expenditure" (Henry, p. 204-7). Line item budgeting is what you do if you keep a personal

budget: count money coming in, county money going out

Performance budgeting -- "attuned to identifying broader programs and government

performance as well as objects of expenditure" (p. 207-9).

Planning-programming-budgeting -- "a system … designed to improve government

efficiency and effectiveness by establishing long-range planning goals, analyzing the costs

and benefits of alternative programs that would meet these goals, and articulating programs

as budgetary and legislative proposals and long-term projections" (p. 209-11).

Management by objectives -- quoting Jun "'a process whereby organizational goals and

objectives are set through the participation of organizational members in terms of results

expected,' and resources are allocated according to the degree to which organizational goals

and objectives are met" (p. 211-2).

Zero-base budgeting -- "the allocation of resources to agencies on the basis of those agencies

periodically reevaluating the need for all of the programs for which the agency is responsible,

and justifying the continuance of termination of each program in the agency budget proposal"

(p. 212-3). In other words, this is a sort of 'anti-incremental' budget, where one doesn't start

assessing one's budget for t2 by starting from the budget in t1.

Target-based budgeting -- "a method of allocating resources to agencies in which agency

spending limits (and often agency goals, too), or targets, are set by the [CEO of the

government; agency heads are permitted to attain their goals in the manner that they deem to

be most effective within these centrally set spending limits, and are expected to demonstrate

progress in the achievement of agency goals in next year's budget request" (p. 213-5).

Budgeting for results -- "a system of resource allocation that links the disbursement of funds

to performance measures. Results budgeting is, most definitely, a return to the traditions of

Program/Performance Budgeting of the 1950s" (p. 217-8).

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Public finance. Nicholas Henry doesn't spend much time on public finance, so I'll add a few

comments from Denhardt and Grubbs, which I've used in the past. Public finance includes

"the long-term financing of buildings, roads and highways, and equipment;

they must carefully plan and manage borrowing;

they must ensure against future losses; and,

in all cases, they must try to get the most for the money they spend" (p. 185).

Capital budgeting -- Capital expenditures are often treated separately, in a capital budget which

often is financed by a large share of debt. Given that "the benefits of these items are spread over

future generations... it is therefore not unreasonable to share the burden of repaying the money

borrowed" (Denhardt & Grubbs, p. 186). If one applies this logic to the current policies of

cutting taxes in times of deficit spending, the logic would be that the benefits of Paris Hilton's

tax-cut driven spending are spread over future generations, so it is reasonable to share the burden

of repaying the money borrowed to fund her tax cuts. Hey: don't blame public administration,

this is a political problem.

Risk Management -- legal liability: if you provide coffee at a public function, be careful! The

first step (reassuringly) in risk management is to identify potential risks, and reduce them (p.

189). Insurance is a solution for local governments that don't decide to insure themselves

(through paying these costs through operating expenditures).

Capital stocks. Capital budgeting (if not deficit spending) looks long term. It is also worth

thinking in terms of capital stocks. The community that saves money from its current budget by

cutting back on maintaining its infrastructure, may in reality be losing money. Though the

current budget remains in balance, the stock of useful infrastructure in the community has

depreciated, much like the loss in value of a house. For an excellent, very recent (short

newspaper) article on this, see:

Gruen, Nicholas (2012). “GDP’s blind spots ignore full impact of education spending.”

Sydney Morning Herald, 11 September. Available online.

So there you have it: budgeting and financial management in public and nonprofit

organizations. Individuals who handle these functions are a vital part of organizations.

* Summary: Budgeting: it's not all about the money!

*

References Denhardt, Robert and Joseph Grubbs (2003). Public Administration: An Action Orientation.

Belmont, CA: Wadsworth/Thompson.

Henry, Nicholas (2013). Public Administration and Public Affairs. Pearson.

Keynes, John Maynard (1936). The General Theory of Employment, Interest and

Money. Cambridge: Cambridge University Press.

Kunin, Madeleine (1994). Living a Political Life. New York: Vintage.