slides capitulo 1 gruber upc.ppt

8/11/2019 SLIDES CAPITULO 1 GRUBER UPC.ppt

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Chapter 1

Why Study Public Finance?

Public Economy

UPC University


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IntroductionContrasting views of government

The role of government is to create an

environment in which the entrepreneur is willing totake risk and be able to get a return on the risk

taken. George W. Bush

the right public policies can foster an

environment that makes strong growth and jobcreation easier.

From Kerry and Edwards Our Plan For America


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IntroductionWhat is the proper role of government?

These are the issues addressed inpublic finance.

What is the proper role of the government in theeconomy?

Expenditure side: What services should thegovernment provide?

Taxation side: How should the government raise itsmoney?


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THE FOUR QUESTIONSOF PUBLIC FINANCE

Whenshould the government intervene in theeconomy?

Howmight the government intervene?

Whatis the effect of those interventions oneconomic outcomes?

Whydo governments choose to intervene in the

way that they do?


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When Should the Government Intervene

in the Economy?

Normally, competitive private markets provideefficient outcomes for the economy.

Generally hard to justify government intervention in

markets. But two main justifications are: Market failures

Redistribution


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When Should the Government Intervene?

Market failures

In a typical market, the efficient outcome is wherethe supply and demand curves intersect. In thecontext of health insurance, some people are

uninsured.


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When Should the GovernmentIntervene? Market failures

In 2003, there were 45 millionpeople withouthealth insurance in the United States, or 15.6% ofthe population.

Lack of insurance could cause negative

externalitiesfrom contagious diseasetheuninsured may not take account of their impact onothers.

Measles epidemic from 1989-1991, caused by low

immunization rates for disadvantaged youth, was theproblem. Government subsidized vaccines for low-income

families as a result.


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Redistribution

Government may care about both the size of theeconomic pie as well as the size of each persons

slice of that pie.

For example, society may value an additional $1 ofconsumption by a poor person more highly than $1of consumption by a rich person.

Redistributionis the shifting of resources fromsome groups in society to others.


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Redistribution

Of the uninsured, for example, roughly three-quarters are in families with incomes below themedian income level in the United States.

Society may feel that it is appropriate to redistributefrom those with insurance (who tend to have higherincomes) to those without insurance (who tend tohave lower incomes).

Redistribution often involves efficiencylosses.

The act of redistribution can change a personsbehavior. Taxing the rich to distribute money to thepoor could cause bothgroups to work less hard.


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How Might the Government Intervene?

If the government wants to intervene in a market, there are anumber of options:

Using theprice mechanismwith taxes or subsidies.

Tax credits that lower the effective price of health

insurance. Mandatethat either individuals or firms provide the good.

Pay-or-play mandates that require employers to providehealth insurance, such as Californias Health Insurance Act.

Public Provision

The Medicare program for U.S. senior citizens. Public Financing of Private Provision

Medicare prescription drug cards, where private companiesadminister the drug insurance.


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What Are the Effectsof Alternative Interventions?

Much of the focus of empirical public financeisassessing the direct and indirect effects ofgovernment actions.

Direct effectsof government actions assume nobehavioral responses and examine the intendedconsequences of those actions.

Indirect effectsarise because some people change

their behavior in response to an intervention. Thisis sometimes called the law of unintendedconsequences.


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What Are the Effects of Alternative Interventions?Expanding health insurance

Direct effectof government provision of health insurance for theuninsured: Roughly 44 million Americans could be covered at costof $88 billion. This would be the intentof the law.

Indirect effectof such a policy: Some crowd-out of othersources of health insurance for the free government healthinsurance.

Potentially large, because nearly 200 million Americans hadprivate insurance in 2003.

If 90 million people dropped private insurance, this would

triple the cost to $268 billion. If only 10% of people (20 million) dropped insurance, the

costs would rise to only $124 billion.

Key question:How many of these people would respond? Thetheory does not provide guidance on magnitudes.


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The Congressional Budget Office

Congressional Budget Office (CBO) providesnonpartisan analyses needed for economic decisionsof the government.

Plays role as scorekeeper by estimating costs. Played a role in the defeat of the Clinton 1994

health care plan because of its estimate of the cost.


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Why Do Governments Do What TheyDo?

Governments do not simply behave as benignactors who intervene only because of market failureand redistribution.

Tools ofpolitical economyhelps us understandhow governments make public policy decisions.

Just as market failures can lead to marketinefficiency, there are a host ofgovernment failuresthat

lead to inappropriate government intervention.


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Why Do Governments Do What TheyDo?

For example, substantial variation across developedcountries in health care delivery suggests efficiencyand redistribution are not the only considerations.

U.S.: Private health insurance Canada: National public health insurance

Germany: Mandates private health coverage

U.K.: Free national health care


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FACTS ON GOVERNMENTThe size and growth of government

The size of the government is often measured

relative to some benchmark, the most common onebeing GDP. It adjusts the size of government for

inflation and population growth. 1930s: U.S. government spending 5% of GDP.

1970s onward: About 20% of GDP (Figure 1).

Trend is similar in other countries until 1960s; U.S.government grew more slowly thereafter (Figure 2).


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Figure 1

Source: OMB Historical Tables: Budget of the United States Government, Fiscal Year 2004


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Figure 2

Source: OECD Historical Statistics


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FACTS ON GOVERNMENTDecentralization and budgeting

Other features

Decentralization: In the United States., local, stateand federal governments all spend substantial

amounts of money (Figure 3). Spending, taxes, deficits, and debts: Federal

government was close to a balanced budget until themid-1970s (Figure 4).


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Figure 3



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Figure 4



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FACTS ON GOVERNMENTDistribution of spending

Other features

Distribution of spending (Figure 7).

In 1960: over half of federal government spending on

defense (a classic public good). In 2001: Less than 20% of budget for defense, much

more devoted to social insurance programs.

Distribution in state and local spending has not changed

as dramatically; education makes up the single largestcomponent of spending.


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FACTS ON GOVERNMENTDistribution of revenue sources

Other features

Distribution of revenue different at state/local level.

Sales taxes

Grants-in-aid (from federal government) Income taxes

Property taxes

Roughly equal in importance.


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Figure 8a


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Figure 8b


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FACTS ON GOVERNMENTRegulatory role of the government

Other features

Regulatory roledoes not usually show up as agovernment cost but does increase the reach of

government. FDA regulates nearly 25% of consumer

expenditures.

OSHA regulates workplace safety at 7 million job

sites. FCC, EPA.


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Timeliness of This Course

Public finance topics are almost always at theforefront of public policy debates. Liberal andconservative viewpoints differ. Examples include:

Social Security: Privatize or raise payroll taxes? Health care: Socialized medicine or tax subsidies?

Education: Higher teacher pay or vouchers?


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Recap of Introduction

Four key questions in public finance

How should the government intervene?

Size of government

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