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Economics Dr.


Lecture Chapter 4: Government II There are 3 main roles for government: 1. make markets possible 2. deal market failures - externalities - public goods 3. do some wealth redistribution

Keep in mind: There are things the government __________________ to make things better. There are things the government is ________________ under the influence of political incentives and constraints.

I. Government and Efficiency We do need ___________ government. However, more government isnt necessarily _______________. Explain.

Governments are often described as being ________________. They actually operate exactly as wed expect, given their _______________. -Government has a monopoly in many cases. DMV example

Post Office example

Unless the market is _____________, there is not a compelling reason to have the _____________provide the good. providing the good producing the good itself

When the government is controlling the allocation of resources, it is _____________ and ____________ who are making the decision. - political considerations When the market controls the allocation of resources, they go where theyll earn the _______________. - amoral - supply and demand 1

II. Regulations Some government regulations may be beneficial to some parties, but _______regulations come with a ______________. Why did Milton Friedman argue that more lawyers should be allowed into the practice? Why did many existing lawyers disagree?

Why did the workers in Delhi, India protest the regulation that was imposed in order to clean up pollution?

Some regulations are favored by people who have the _________________ of caring. - DDT example

Not all regulations are _______________________. - striped bass example

Often times a _______________________ pushes for government regulations in their industry to ______________________________. - interior design licenses Sometimes the government acts like a _____________ hand and sometimes like a _________________ hand. Explain.

III. Optimal Size of Government Economics can point out the _______________________, but youll have your own opinion. Framework for thinking about the role of the government in the economy: 1. Government has the potential to enhance the ________________________ of the economy and make us better off as a result. - legal framework - public goods - externalities 2. Some government activity shrinks the size of the pie, but still may be _____________________. - technically inefficient to transfer wealth - many people want some sort of social safety net 3. Some government involvement in the economy is purely ______________________. - good intentions arent enough - some regulations have costs that outweigh the benefits

IV. Taxes Even when the government is engaging in good activities, it must __________________ its spending through taxes. All taxes exert a ___________ on the economy.

The costs of taxes: - fiscal drag - deadweight loss - discourage investment To ___________________ the costs of taxes, economists favor taxes that are: broad simple fair

V. US Government Spending, Deficit, and Debt Bureau of Economic Analysis

In 2010, the governments in the US took in $____________trillion. In 2010, households paid $___________ trillion in taxes. producers and importers paid $ __________ trillion in taxes. corporations paid $ ___________ billion in taxes.

In 2010, people and firms paid in $___________billion for social insurance programs.

In 2010, the governments spent $___________trillion on things like national defense, parks, education, and government employees salaries. $___________trillion on things transfer programs like social security. $___________billion on interest on debt. $__________billion on subsidies.

To find out where your income taxes are going: Federal: Colorado:

To find the amount of the yearly deficit, take total receipts minus total expenditures.

When the US government spends more than it collects in taxes, it ________________ to make up the difference. A bond is like an IOU. - People who buy bonds are lending the government money now. -The government promises to pay them back later.

U.S. debt is now equal to economy By Richard Wolf USA Today 1/8/2012 WASHINGTON The soaring national debt has reached a symbolic tipping point: It's now as big as the entire U.S. economy. The amount of money the federal government owes to its creditors, combined with IOUs to government retirement and other programs, now tops $15.23 trillion. That's roughly equal to the value of all goods and services the U.S. economy produces in one year: $15.17 trillion as of September, the latest estimate. Private projections show the economy likely grew to about $15.3 trillion by December a level the debt is likely to surpass this month. "The 100% mark means that your entire debt is as big as everything you're producing in your country," says Steve Bell of the Bipartisan Policy Center, which has proposed cutting nearly $6 trillion in red ink over 10 years. "Clearly, that can't continue." Long-term projections suggest the debt will continue to grow faster than the economy, which would have to expand by at least 6% a year to keep pace. President Obama's 2012 budget shows the debt soaring past $26 trillion a decade from now. Last summer's deficit reduction deal could reduce that to $24 trillion. Many economists, such as the Brookings Institution's William Gale, say a better measure of the nation's debt is how much the government owes creditors, not counting $4.7 trillion owed to future Social Security recipients and other government beneficiaries. By that measure, the debt is roughly a third less: $10.5 trillion, or nearly 70% the size of the economy. That is still high by historic standards. The total national debt topped the size of the economy for three years during and after World War II. It dropped to 32.5% of the economy by 1981, then began a steady climb under President Reagan, doubling over the next 12 years. The combination of recession and stimulus spending caused it to soar again under Obama. Among advanced economies, only Greece, Iceland, Ireland, Italy, Japan and Portugal have debts larger than their economies. Greece, Ireland, Portugal and Italy are at the root of the European debt crisis. The first three needed bailouts from European central banks; Italy's books are monitored by the International Monetary Fund. The White House and Congress agreed in August to cut about $1 trillion from federal agencies over 10 years. An additional $1.2 trillion in automatic spending cuts looms beginning next year if lawmakers can't agree on a better way to do it. Economist Mark Zandi of Moody's Analytics says reaching the 100% mark shows "the grave need to address our long-term fiscal problems."

From the CBO: Projected Outlays and Revenues as % of GDP


__________________________________________________________________________________ Summary Governments are often inefficient, due to incentives. Regulations can be helpful or harmful, they all come with costs, and good intentions are not enough. Economics gives a framework for considering the optimal size of government. Taxes are necessary but also impose costs. The government spends more than it collects.