Government Very basic considerations 1 Here What does

Government Very basic considerations 1

• Here: – What does Government do? – The size of Government. 2

• What makes government different from firms? – Not profit maximization - could have other goals. – Has coercive power; membership is not voluntary (except, eg, choice of citizenship, location. . . ) • What makes Government useful? – Sometimes the markets cannot cope; they produce bad results; or at least we think they do. – Sometimes we want not what markets provide (freedom, wealth, efficiency) but other things (equity, ticket to a good afterlife, safety, stability), so coercive power may have good results. • What makes Government not that good? – Profit maximization may be really great. – Sometimes coercive power is misused. 3

• How Big is the Government? – How would you even measure? – Production? – Financing? – Regulation? 4

• Financing – Federal government gets money from people. • many taxes • other revenue includes crown corporations and government investments – Federal government distributes. • They do a lot of 'transfers to persons' • and 'transfers to other levels of governments' – provincial government does a lot of direct production: • education • health care – provinces also transfer money to people and governments – BC puts about 2/3 of its expenditure into health, advanced education and K-12. • BC gets about 1/6 of its revenue from Federal transfers. • It is customary to express these numbers – as a proportion of the whole economy – in per-person terms. – express line-items as proportions of the total. 5

• The size of government has changed over time. – Security/police/protection/military financed by the population is an old idea. – Welfare is also a surprisingly old idea – but not as old as police/defence. – The Great Depression was a big shock. It was a decade-long economic downturn. Unemployment rates were 20 to 40 percent around the developed world. 40% for several years in Germany, 30% for several years in the USA, much longer depression in Canada, but somewhat shallower, with unemployment around 20 -30%. • The unemployment rate now is 7. 3%, and likely counts more people as unemployed than would have been counted at the Depression time. – Governments got way bigger. Continuing the picture from 1960, we see that the modal size government social spending started about 5 or 10 percent of GDP in 1960, and ended up at 10 to 30 percent of GDP by the mid 1990 s. – There is also plenty of variation across countries: • We think of the USA as a 'little-spender' (because it is), but even there, spending more than doubled as a share of the economy, from 5 to 14 percent of GDP. • In Canada, it grew from 7 to 18 percent. 6

• Big social transfers are neither the road to poverty nor the road to wealth. • Why did government grow so much in rich countries over the last half-century? • Many theories: – Government is a luxury. – Government is theft from the rich by the poor. – Government has momentum. – Demography: Government spends on old and young people. – Calamities create government. 7

• Government as a producer is different. – Social expenditures include lots of transfers to people. – Government production is stuff like defence, health care, old age pensions. • Equity and Efficiency – You can do a lot of analysis by structuring your thinking so that you consider the equity and efficiency consequences of government action separately. • The Equalisation program is essentially aimed at equity: the idea is to give all Canadian residents access to a 'decent amount' of public services no matter where they live. § Economic systems § § § Traditional economies Command economies Market economies Mixed economies Why mixed? 8