1、Introduction to Public Budgeting and Finance,Administrative Stuff,Use of WebCT Any problems so far? Organization of course Each session = 4 weeks, with corresponding number of readings Syllabus is rough guide only Not all reading materials will be covered in lecture, but all should be read carefully
2、 Group projects Homework assignments due by following session Take home final due week after course,Objectives of the course,Survey the dominant theories in budgeting and finance, compare practice and trends Learn how to strategically plan a budget, how to manage ongoing activities, and how to contr
3、ol spending; Understand the role of public organizations in a market economy Understand social security, public health and other major categories of public expenditure Understand the theory and practice of the redistribution of wealth and resources Understand the impact of taxes on social welfare. L
4、earn from practitioners in the field.,What is Public Budgeting?,How governments strategically plan a budget Manage ongoing activities Control spending,What is Public Finance?,The study of how governments collect and spend money and real resources How do governments collect/spend money? Positive anal
5、ysis How should governments collect/spend money? Normative analysis We are studying public finance in a market economy,What is the Role of Government?,To maintain and improve the welfare of the people To protect the people from harm To provide the institutions that allow market to function (e.g. pro
6、tection of property rights) To provide the essential goods and services that markets fail to adequately provide,The Role of Government: Ideology,Current Trends,Reagan tax cuts Shrink government “down to the size where we can drown it in a bathtub” Grover Norquist “The era of big government is over”
7、Bill Clinton Bush tax cuts Free market ideology,Organic view of government,Society is a natural organism Goals of society set by state Actions of individual are judged by the contribution they make to the state “Ask not what your country can do for you; ask what you can do for your country.”,Mechani
8、stic view of government,Individuals are paramount, government created to meet the needs of individuals Big debate over importance of individual freedom Two types of freedom: Freedom to do as you like Freedom not to suffer from activities of others As society grows more crowded, second type of freedo
9、m becomes more important,The Role of Government: Objective Analysis,Complexity theory and systems thinking Government in a market economy,Complexity theory and Systems thinking,Bringing together many, many simple components leads to emergence of spontaneous order, complex system: 2 H and 1 0 atoms f
10、orm water molecule, molecules form cell, cells form organs, organs make up humans, humans make up society Complex systems greater than the sum of their parts Characterized by non-linearities, feedback loops, emergent properties, unpredictable surprises, etc. Government is a complex system,Government
11、 in a market economy,Economics is the allocation of scarce resources among alternative desirable ends What are the desirable ends? To maintain and improve the welfare of the people Government and economics have the same desirable ends What are the scarce resources? What are the characteristics of th
12、e scarce resources? Whether resources should be allocated by government or the market depends on the physical nature of the scarce resources Once we agree on the desirable ends, deciding on the role of government moves towards objective science and away from ideology.,Legal Framework,Federal Governm
13、ent: Expenditure,Constitution empowers government to “pay the debts and provide for the common defense and general welfare of the United States.” Bills to appropriate expenditures can be initiated in either house, must be approved by both houses and President,Federal Government: Revenue,Duties, impo
14、sts and excises must be uniform throughout US Constitutional amendment (16th) required for federal income tax 5th amendment cant take away property without due process of law, compensation required Cant tax articles exported from states Empowered to borrow money,State and local governments,States ha
15、ve power not explicitly relegated to federal government Cant impose duties on imports or exports Power of local governments granted by states,The Size of Government,Historical context,What was the highest marginal tax rate Under Eisenhower?,Under Kennedy? Today?,Highest tax bracket currently applies
16、 to single people earning $54,000/yr,What has happened to the deficit?,What has happened to the size of government as a share of GDP?,How does size of US government compare with other countries (2001)?,How does the federal government spend its money?,How do state governments spend money?,Miscellaneo
17、us (43%, +) Education (35%, -) Public welfare (17%, +) Highways (5%, -),Where does the government get its money?,Federal Individual income tax (+) Social insurance (+) Corporate tax (-) Other (-),State and local Other (+) Sales tax Grants from federal government (+) Property tax (-) Individual incom
18、e tax (+) Corporation tax,How do we Objectively Measure Government Performance?,Role of Theory,Observe, form hypotheses Test hypotheses through continued observation, measurement and experiments Confirm hypotheses repeatedly and you have theory Reject hypotheses and youre back to the drawing board T
19、heory tells us what questions to test,If we fail to test our theories and their assumptions, or continue to believe them when they fail the tests, they become ideology, not theory,Neoclassical Economic Theory,Assumes humans are rational, self interested utility maximizers Empirical studies reject th
20、is Assumes perfect market competition Empirical studies reject this Assumes in perfect markets invisible hand leads to efficient allocation: greatest good for greatest number Cant be tested in practice, because governments always intervene with perfect functioning of market,Ecological Economic Theor
21、y,Assume economy is subset of ecosystem Ecologically sustainable scale is first priority Socially just distribution 2nd Efficient allocation 3rd,Georgist Economic Theory,Ownership of land leads to poverty Value of land is created by nature and society, not hard work of individual Land tax could fina
22、nce all government expenditure, prevent land speculation and concentration of ownership, end poverty Land tax could be extended to include all value created by nature and society,Empirical methods for Testing theories,Interviews Subjective, hard to interpret Experiments Ethical issues, self selectio
23、n, etc. Sample size Econometrics (statistics) Torture the data and it will confess Theories can be very hard to test,Measurement in a complex system,Very hard to isolate cause and effect E.g. feedback loops Rarely have adequate baseline data Systems evolve over time Values matter,How do we normative
24、ly measure government Performance?,Why do we need normative measures?,We need some way to measure social welfare, and choose between alternative states Economic theory provides some guidelines Theory can be very incomplete Different theories make different ethical assumptions The most commonly taugh
25、t approach is neoclassical welfare economics,Pareto Efficiency,Pareto improvement- Any change in allocation that makes at least one person better off without making anyone worse off Pareto optimum an allocation where no further Pareto improvements are possible We always want to be at a Pareto optimu
26、m,Indifference curves in Edgeworth box,Contract curve,Marginal rate of substitution,If you lose one fig, how many apples would you need to remain just as happy? Determined by slope of indifference curve Pareto optimum occurs when,Production possibilities frontier,Marginal cost,Marginal cost of figs
27、is the number of apples you have to give up to get one more fig,Efficiency demands that,across all goods and all people in the economy,First Fundamental Theorem of Welfare Economics,Assumptions: If all producers receive the same price And there is a perfect market for every commodity And people are
28、perfectly rational, Then, the free market automatically leads to a Pareto Efficient allocation If assumptions hold and all we care about is Pareto efficiency, then government should be minimized But some Pareto optimums may be better for society than others,Second Fundamental Theorem of Welfare Econ
29、omics,We can attain any point on the contract curve by changing initial endowments and letting market take over. So initial distribution matters, big time,Conclusions,If markets functioned according to theory, the major role of government would focus on initial distribution Markets unfortunately do not function according to theory, as well learn in next lecture,
