The Role of Government: Spending for the Public Good
Although everybody hates to pay taxed, most of us are willing to admit they're a necessary evil. If the government didn't take your tax money and repair our nation's roads, would you be inclined to fix them yourself? Similarly, it might not be practical to rely on individual demand to provide police and fire protection, or to launch satellites. Instead, the government steps in and supplies such public goods.
In addition, U.S. society recognizes that some individuals aren't capable of supplying enough labor to provide themselves a decent standard of living. Instead of individuals each contributing voluntarily to care for these people, the government collects "contributions" in the form of taxes from those who are capable of supporting themselves and distributes the money to the less self-sufficient in the form of transfer payments such as Social Security, food stamps, welfare, and unemployment compensation. The individuals who receive these allocations are usually not required to provide any goods or services in return.
The United States is currently facing a problem with spending. for many years the annual budget deficit--on the order of several hundred billion dollars. When combined over time, these deficits have swelled the amount owed by the U.S. government (the national debt) to almost $5 trillion. As a result, interest payments alone on this debt cost U.S. taxpayers $250 billion a year--or $8,000 per second. In 1997 Congress approved a plan to pare down future deficits in order to balance the budget by 2002.
However, reductions in government spending can have rippling consequences. For instance, government spending boosts the economy, and it has a multiplier effect as it makes its way through the economy. Here's how it works. If the government decides to fund new highway projects, then thousands of construction people will work on the project and earn wages. If some of these workers decide to spend their extra income to buy new cars, car dealers will have more income. The car dealers, in turn, might spend this income on new clothes, and the sales clerks (who earn commission) might buy compact disks, and so on. This circular flow of money through the economic system shows that all elements of the U.S. economy are linked. Just as the bloodstream carries oxygen to the body's cells and carbon dioxide from those cells back to the lungs, the economy carries goods and services, which are exchanged for money.
Reference
In addition, U.S. society recognizes that some individuals aren't capable of supplying enough labor to provide themselves a decent standard of living. Instead of individuals each contributing voluntarily to care for these people, the government collects "contributions" in the form of taxes from those who are capable of supporting themselves and distributes the money to the less self-sufficient in the form of transfer payments such as Social Security, food stamps, welfare, and unemployment compensation. The individuals who receive these allocations are usually not required to provide any goods or services in return.
The United States is currently facing a problem with spending. for many years the annual budget deficit--on the order of several hundred billion dollars. When combined over time, these deficits have swelled the amount owed by the U.S. government (the national debt) to almost $5 trillion. As a result, interest payments alone on this debt cost U.S. taxpayers $250 billion a year--or $8,000 per second. In 1997 Congress approved a plan to pare down future deficits in order to balance the budget by 2002.
However, reductions in government spending can have rippling consequences. For instance, government spending boosts the economy, and it has a multiplier effect as it makes its way through the economy. Here's how it works. If the government decides to fund new highway projects, then thousands of construction people will work on the project and earn wages. If some of these workers decide to spend their extra income to buy new cars, car dealers will have more income. The car dealers, in turn, might spend this income on new clothes, and the sales clerks (who earn commission) might buy compact disks, and so on. This circular flow of money through the economic system shows that all elements of the U.S. economy are linked. Just as the bloodstream carries oxygen to the body's cells and carbon dioxide from those cells back to the lungs, the economy carries goods and services, which are exchanged for money.
Reference
- Michael H. Mescon, Courtland L. Bovée, John V. Thill, Business Today, 9th edition, Prentice Hall, 1999
