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    Untitled

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    GOWRISHANKAR S

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    Incidence and profile of the aggregate public sector / income redistributi ada during the Period 19g" lower-income classes occurred in Can- quo in the United States Brae This is similar to the essential status Reynolds and Smolensky,12 © Period 1950-1970, as pointed out by ment of peng: a eeation, Output, and complexity in economic ity erative basis. Thus, while the resources allan b ¢ is, efforts to find a predictabl long-run, functional relationship between certain causal variables and relative public sector growth. Even though they are classified as positive theories, several of the important studies were not intended as such by their authors. * Age Wagner hypothesis of increasing governmental activity ‘ Statement of the hypothesis. Adolph Wagner, a famous German political economist (1835-1917), argued that a functional, cause-and- effect relationship exists between the’ growth of an industrializing econ ind the relative growth of its public secto . According to Wagner ielative growth of the povermmerracebeioey inherent char- acteristic OF industrializing economies. He referred not only to Britain, Which essentially had completed ‘its industrial revolution before ‘agner’s time, but to nations such as the United States, Frayce, and many (in the West) and Japan (in the East), whose industrial Tevolutions wi ik ‘ere contemporary to Wagner's life. Hence, the Wagner iMthesis of inereasing governmental activity holds that as per capita seagee22d_output in id output increase_in “industrializing nations, the public ss of these nations necessarily grow a8 a proportion of total nomic activity 14 B Reynol ids and s, “ mn wv anal Wagner Analysis o ‘Spending in ‘olensky, Public Sector Expenditures. 890). For a comprehen- Wa inanzwissenschaft, 3d ed. (Leipzi ch ‘agner hypothesis, see Richard M. Bird, The Growth of Govern- (Toronto: Canadian Tax Foundation, 1970), chap. 4. t Cragrer 16 as the basic Cause wi fy, § al prose? Trializing Cvonomia. thy | Wagmet nee that oa ra indy Wa ner are th les, me relative grow govert eset ped at go Ne ‘ she 80K, nt functions which al chain-reaction clrounstunces e ‘ny » in ve! f governmental ¢,. owth in BOVE th ol tal eg, tm, progress ens ¥ me d relative erelat (long-term) in nate leads to the io hail is cleat! Y pypothes!s, Wagner distin, Aa ivity. i e sti ~Buigh 4 “eae oy tenon el ti arke certain types of foe nd order esr participation in th? Pera Seeond Wagner dese ing the provision of ce teria) ction of ee oh ee communications, education, and i si blic-type, 8 ; On, ia Peanling arrangements, first type of public sector actiy; ed that need for a th Activity It is argue ‘along with economic grow and increas? 0 and order, inca the inevitable accompanying gro 8 be, e ; ele wth int capita output, a results in an impersonalization ang aut in tralized administratio ic institutions. Economic OMatign | of many social and economic ns . Stowth a n inistration thus increase labor spegia}:. 4 cen, ae a a iies and interdependencies im eatin sail if. Efficient performance ofthe economy, given ar OMe ag oft these interdependencies and the desirability of Maintai, ing gus tative governmental services, suggests the need for additional a sector economic influence. le Wagner believed, second, that government co duce certain economic goods requiring large cause private corporations cannot undertake profitable basis. The similarity of this viewpoint to those of g, ith, | Mill, and others is obyious.1® These industries often are characterized 4 by natural monopoly conditions of production, which involve heay j fixed costs, or by joint consumption conditions, or by significant a sumption externalities (not Wagner’s terminology), which give the ' goods an income-elastic demand during the period of industrializa-‘ tion. Such goods take on important characteristics of publicness and 4 thus incur a social. (collective) interest in their u allocation. 4 Graphic presentation of the Wagner hypothesis. The Wager hy- pothesis of increasin, '§ governmental activity is demonstygted in Fig- ure 16-2. In this graph, the real!® per capita output of public goods (PG) is measured on the vertical axis, and real? per capita income (!) « measured on the horizontal axis. Time is an important third nl sion implicit in the graph, because the growth in the real per ‘ol ly Output of public goods and in real per capita income is realist” | rporations Must fixed investment de. such investment on a *§ See Chapter 2, "Adjusted for price-level changes, Fiscal incidence and profile of the aggregate public sector | 328 eee RE 16-2 Wagner hypothesis: The relative expansion of ibile sector economic rou activity over time a ; CO ee 1s 3 9 Pot Se zs a 6 | ro g y i 3 a o 3 6 9 2. IS Real per capita income ($000) m assumed to take place on a historical basis over an extended period of time. In the equations following, which correspond to various aspects of the graphical analysis, the subscript a refers to a “later” and the ; subscript o to an “earlier” point of time. Line PG! in Figure 16-2 represents a circumstance in which the \ public sector maintains a constant proportion of the total economit f production of the society over time. In other words, as real per capita income increases, due to economic development of the society, the real per capita output of public goods remains at the same proportion of total economic activity. Thus, PG, _ PG, Ye The constant-proportions line, PG!, can be used as a retevence point for the presentation of the Wagner hypothesis in Figure 16-2. Thus, along line PG?, the proportion of resources devoted to the output of public goods is expanding over time. That is, PG, . PGy Y > 'Y." In other words, the income elasticity of expenditure for public goods (,) is elastic. \ eG) PG? Real per capita output of public goods ($000) 10,500 0 3) 6 9 12 15 Real per capita income ($000) m” Preindustrial and postindustrial maturity stages of a society’s eco- nomic development. Since the Wagner analysis was directed toward industrializing nations, a dis. ‘cussion of the hypothesis should delimit the industrialization era in a nation’s history from a possible earlier preindustrial stage, and also ftom a possible later Period of postin- dubia asia ee "ving standards are affluent not only on an erage basis, but on a dist j 7 whichis baa at ore ‘stributional basis as well.37 Figure 16-3, rminology of Fi 16-2, ides, in line PG?, an example of of Figure , provides, public goods tora) ene rion ofthe real per capita output of wncome may change, depending on the ment in a nation’s ec er t on and pore” PGIY will tend f Conjectured that Preindustrializat ‘ to decline in the e\ i ti iali. i : nomic evolution. Thus,» "4ustrialization iiages of x society 07 PG He - PG ys ; "For a discussion of HOVE economic develo Pend idge University pt 8€¢ 8nd posing” f fe Unive easy a Witenes maturity cage | - Crowtl “al —_ ¢ Id “Pete . would represent }, "aggregate public sector 827 are described beloy,' f these stage, rm a. 8, ae Subsistenc, The Teasons why this may occur provided by the private’ 8s ang since food, clothing ang “ctor 80ods h, ; , th ‘ave traditionally been exclusion principle cay Shelter MOURA mark _ ‘arket-type arrangements, nomic expansion of a Preing Plied, ‘Convitible B00ds to which the capita output of private lustri Sequently, the gradual eco- Soci per capita income, which 4 to becgnY Well may cause the real per ic good bela 4, Seater proportion of real a Pa oes vaiea ‘come aa that the real er capita output capil . ining proporti, ‘As real per capita ine Portion of real per ome cont; tive allocative importance of tines to i increase, however, the rela- For example, investment in socia} eatot may be expected to change. tions, transportation, and education tat ae such as communica- economic development process, Sines Hie take place as part of the fixed costs of production and igi © 800ds tend to have heavy i Joint consumption or externality charac- teristies, they are often provided by the government sector of th cosnomy rather than by the racket, Thus, let ws gay thereon capita income rises above $3,000 in Figure 16-3, the economy enters an industrialization stage and the real per capita output of public goods now becomes a greater Proportion 2 of real per capita income over an extended period of time. This stage, which represents the; Wagner hypothesis, is largely explained by the fact that important social capital items provided by the public sector have now become part of aggregate demand. Ultimately, these social overhead items will be provided in sufficient quantities, and the society will attain Postindustrial maturity at a real per capita income level of (say) $10,500. : ; All spending units are now assumed to Possess an aie ae d of living in the postindustrial society."* It seems pI eae a Suggest that, at this stage of economic development, ene goods ig’, be providing adequate quantities of those econome Bort with decreasing production cost and joint consumption to additional D acteristics, and so society will increasingly fim ating a “too Private sector output.!® Moveover, society a te | preference for large” Public sector, in relative terms, due toa cu nd the absence of tket activity, with its greater individual freedom al utput of private Pulsory taxation. Hence, the real per capita 0 3 even though its roves possible, of course, tor a nation to choose to enter stage snr isp, distribution) problem has not been solved- owth in Wester industrial Gnomes ence of a slowdown in relative public sector grr Some Contrary Evi dence Quy see Moris Beck, “The Expanding Public $e30r toyard A Theat Orn Nétional Tax Journal, March 1976, pp, 15-21 ar gga), pp. 1-15. Meanwhile Mop hie Sector Growth,” Public Finance, Vol. 37, No- 2.(Uoather such constai United Staal Conservatism in the early 1980's sugges SB} Chapter 16 goods may well become, once again, @ larger proportion of real Dey capita income during the postindustrial maturity stage Opposite, the relative importance of the public sector may be expected to de cline. Critique of tne Wagner hypothesis. Although the Wagner hypo, esis has many attributes, it also has several dete. Primarily, hypothesis deals with interdiscip! inary pheno » even thou; not sufficiently interdisciplinary in its analytical framework, a ty science, economics, and sociology are among the several discip); ‘which rust be involved in any theory of public sector expendity®! Such theories must consider the cultural characteristics of a soci te, thus seems unlikely that the causal conditions described by w, YI which are primarily of an economic nature, constitute all of the et, mary determinants of a relatively expanding public sector d industrialization and economic growth. Although the Wagner h; 7 esis does accumulate and partially explain important historical lack of a comprehensive analytical framework causes it to fal] shor: these explanations. Yet, it does provide a convenient framew, ort in discussion and for further research. ork ‘Alan Peacock and Jack Wiseman have observed that the w, argument contains, three important defects: (1) it is based agner organic self-determining theory of the state, which is not the} ea = ing theory in most Western nations; (2) it omits the influence oe governmental spending; and (3) it stresses a long-term trend of publ omic activity which tends to overlook the significant ti jn of public expenditure growth.” time pattem The displacement, inspection, and concentration effects ———— ——— Peacock and Wiseman, in their early 1960s work, emphasize the time pattern of public spending trends rather than striving fora gem ine positive theory of public sector growth.2! Their general approach includes three separate, though related, concepts. These are the dis. placement (threshold), inspection, and concentration (scale) effects. Using empirical data for the British economy after 1890, they ob- serve that the relative growth of the British public sector has occured on a steplike rather than a continuous-growth basis. Government fiscal activities, in other words, have risen step by step to successive new plateaus during the period studied. Moreover, the absolute - relative increases (steps upward) in taxing and spending by the Brits government have generally taken place during periods of majors Public Expenitar is 1961), Pm: ing for ~W Alan T. Peacock and Jack Wiseman, The Growth of United Kingdom (Princeton, N.J.: Princeton University Press, Ibid. : / ta “rene Pee any disturbance or cri,,, ProNe othe aggregate pub secey | 380 the previous lower tay 08 wa, ; an higher, pudgetary leven’ xpendit {ePression. These crises cause levels 0 tolerance wh After the wt levels to be replaced by new, to support a higher level ae have a crisis has ended, the new carty 4 heavier tax burden Public ¢, ate take the society willing other words, the tax thre than it Drevin ature, since it realizes it can ivation t Shold hag ov tUsly had th ible. I motivation he return to the I ca increased, Thee aan possi le in overnmental revenues are uy, er Tecrisis level ere is no strong «cher level of publi sed, instead of taxation. Greater highe! isplaceme i sector ivi ad, to support a permanently sector disp hich in takes place Of a pene @ Permanent public resources which had been allocated Po of society's economic sector. Over the secular periog 1899 neeusly through the private occurred several times in Creat Beet displacement pro- ing tax threshold behavior. Time (; ; Porizontal axis, while public sector, rid ae expenditures as a percentage of gross national product (GNP)® are oprured along the vertical axis. The equation GIGNP will be used to symbolize the relative importance of the British public sector to the gate economy at different points of time. It is suggested that as * social crises cause a relative expansion of the public sector, the dis- sock effect which occurs helps to explain the time pattern by Seer be povetomnetal growth took place. This displacement effect w @ Or the European equivalent of GNP known as gross domestic product (GDP). Public sector Tevenues and expenditures as percentage of GNP 7 nditu of expe Te Conti, cut tat nw de a Se ture ed © &8, suc} the ame ‘of the ine ie results of aes » benefits and frequently nvolve the disturbance, other expenditure itermeconomic activity. Some ont into new rid oa formerly by the private yay ve been PIV’ echnological advancement y,4., revious allocational hist ich while others may be the voli have no P! allows new goods weer i disturbances frequently force 5." Moreover, war or othe! Jutions to importantt problems yj and their governments t0 5" whi k sol her gover _— ‘This is referred to as an ingveen previously been ion effect. isplacement and inspection effects, Pea oe ieee concentration Kosala) effe ct. This ort ‘a refers to the apparent tendency for cen (natio mal) gove economic activity to become an increasing proportion of to sector economic activity when a society is experiencing ie mt phenomena. This means, of course, that subnation al goveramers 7 essarily will decline in relative importance within the public tes Empirical data for the British economy consistent with this ° pothesis during the 20th century. is by. TMment tal public The doubtful existence of a positive theory of public expenditure ‘A comprehensive review and analysis of the public expendi literatures including an examination of the positive theon neat been provided recently by Ved P. Gandhi. In this study, Gandhi concludes that the existence of a general positive theory of public expenditure cannot be established. The inability to establish a posi- tive theory, of course, could result merely from measurement prob- lems (which are well documented by Gandhi). Or, it could reflect the intrinsic absence of pervasive independent variables to explain public expenditure behavior over a heterogeneous range of nations. Gandhi a to support the latter reason, and such a conclusion seems tens le. Indeed, it is difficult to expect that complex public expenioe behavior can be reduced to a single primary explanatory vari set of primary explanatory variables, capable of accurately Pr chs trends in public sector size and output composition in societies d , A Revie ® Ved P, Gandhi, “Trends in Public Consumption and Investor. peck Issues and Evidence,” in Secular Trends of the Public Sector wald (Paris: Editions Cujas, 1978), pp. 85-110. —— a oth rized by , i, conomic diffe ?®'ay “tone ow aggregate pe #0! ies despite thei," ex," op, 7 Ee ren On {nd noneconomic differences: jal nature may he ore ofgate of megeratic, mixed, political cau £Ven 1 t0cig), Mttket orientation. Furthermore, ange over time, 1" decir iter i ltural, institutional, and histor: dency in much of yom iq" Making cance: In addition, the pa tehthodological super’ "cent of ne, teix may be subject to nal analytical techn TY to Riblic egg factor that explains the (On an a priori basis ues, Me series ture literature to assign ested to explain the = ot bog opposed to cross-sec- py the Wagner hypothesis, nan Posing relevant variables can be ublic goods (PG) will grow moc that n®e"Y Which i represented during the period of industria aly th Teal per capita output of independent variables woulg inch ttn an real per capita income e; : Sampling of such “likely” 1, The process of industrializatio, «, . 9, An oe tolerance level of elf Wagnen, national economic crisis ‘ation follow; 5 pnt oats ger {Ped inay lowing periods of private sector (Baumol).25 #¢ sector behind that of the 4, The monopolization of factor public sector. 7 The bureaucratic entrenchment of i 5 ments, and personnel, and political Vote Programs, depart- government officials. mizing by elected 6, Sufficiently strong preferences by society for public.and ouast public goods to cause an income-elastic demand for these sede 7. An increasing demand by society for improved quality ie tee ently supplied governmental output. 8 Distributional policies of either a tax-transfer or merit-goods variety. 9, Macroeconomic stabilization and economic growth policies, 10. The process of urbanization and, relatedly, of suburbanization. ll. Environmental and other resource-related policies of govern- ment. 12. A changing age distribution of the population. 18. Diminishing opposition to taxation as society becomes more affluent. See the discussion in Bernard P, Herber, “Positive Theories of Public Expos se er presented at the 1977 annual meeting of the Westem Economie Asso abe a California, June 20-23, 1977. seot aeus risa

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