Question

Answer the following questions about government and deficit.

a. Explain the three distinctive features of government activities according to Heilbroner and Thurow (CP-3)?

b. Why is government’s budget (and debt) different than household budget (and debt) according to Heilbroner and Thurow (CP-3)?

Answer 1

(A)

1. the role of government in the economic process as a buyer of output from its roie as a spender of money. The difference, we may remember, lies in those portant expenditures called transfer payments, such as Social Security. Many of the disputes about how big govenment is or how fast it is growin inge on whether the arguer is talking about government as a buyer or as a spender. In 1996, for example, government (local, state nd federal) bought about 22 percent of GDP But the amount that gow ernment spent was over 40 percent larger, or about transfers accounting for the difference 33 percent of G DF imy Which measure "counts" Essentially, the answer depends on what we want to know. Govenment as a buyer of GDP -a purchaser of de fense, education. transportation, and the rest-gives us some idea of the importance of public output as a component of GDP Transfer pay- ments tll us something quite diflerent However manybilos they may involve, transfer payments do not add a penny to GDP. Transfers are an indication of the extent of the government's role as an agency for the redistribution of income, rather than fo the production of outpu Obviously. it makes sense to keep tnck of these twa forms of govern mcnt spending separately The second distinction is one we have been at pains to emphasize all along-that between federal versus state or local gvernment. More GDP is bough al the state and local level ian at ihe federa level. Most of the transfer payments emanate frem the federal govenment not the states and localities. The box of figures on page 103 shows this clearly. One of the reasons we should beer this division in mind is that the federal government gives a good deal of money to state and local governments. These grants-in-aid are, of course, transfer payments One result is that states and localitics can carry out various programs in education, the environment, even in road building they could net other wise alford.

2.A second result is that the federal governmen urs a deficit partly because it supports state and local activity. Erase the transfer from the federal government to cities and states and yo wil lessen the federal deficit by tha amount. Alas, you would simultaneously put the states and localities in a terrific bind. More on that later, too.

3.Third, we cannot consider government without keeping somewhere in our minds the division between welfare and warfare. Here the purchases-versus-transfers distinction again helps sort out things. Most of federal purchasing of GDP has to do with warfaren 1996, for ex ample, almost two thirds of the federal contribution to GDP was for as Texas expenditure and regulations

(B)

So it makes a difference when we see the government's activities as those of a responsible sector, not as those of a houschold or firm mak ing decisions without regard as to their aygreyate effecis on the level uf eccnomic activity. The difference becomes sharpest when we examine that most misunderstood of all the government's activitiesdelicit spending. Defiit spending means hat lhe goement spends more than it takes in through tExes, borrowing the rest. The borrowed sums become part of the government debt, and we frequently hear admoni tins aboul this debt that stem fro the endecy to viewi as if it were the debt of a single family or enterprise. The government we are told, cannot borrow indefinitely, any more than a family or a firm A goverment tha incurs a desicit is siply living beyond its means." nny Is it true? It sounds true. And yet even economists who oppose deficit spending strongly for other rcasons would admit that the argu ments that equate government with single families or tirms are not tre. Let us take the maer of he delicil. Cau e goveel safely inur a defici that is. borrow as well as tax? In Chapter Five, when we first noted how the different quencs hought GDP, wc saw that the husiness sector as a whole regularly spent more than its receipts from sales. The difference. we recal, lay in the savings of the household sector that business borrowed to financc its capital outlays Now that kind of "excess" spending is cetainly not called a deticit by any business firm. When the American Telephone and Telegraph Company or the Exxon Corporation uscs the savings of the public to build a new plant and new equipment, it does not show a loss on its an nual statement to stockholders, even though its total expenditures on current costs plus those on capital cquipment may have been greater tlian sales. Isa, expenditures are divided intu two kinds: one rela ing current costs to current income, and the other relating expenditures on capital goods to an entirely separate capital account. Instead of call ing the excess of expenditures a deficit, they call it ivestment. The Economics of the Public Secior 107 Can AT&T or Fxxon afford to run "dficit of the latter kind indef initelył The answer is yes. The extra earnings from those new investment.