The Public Sector: Services Provided

Government at the federal, state and local levels provides many services ranging from national defense to education and local park maintenance. To finance these services, the government levies taxes. The government budget shows expenditures — or outlays — on one side, and tax revenue on the other. In most years, the federal budget is in deficit and the deficit is financed by borrowing (floating government bonds). This is how the national debt accumulates. It is now about 90-100 percent of GDP, not as high as say, Japan or Belgium, is denominated strictly in U.S. currency. For these reasons, the U.S. government bonds are still considered a safe investment. This column is concerned about the expenditures side, while the next column will discuss the tax side.

What kinds of goods and services are provided by the government? For the most part, these are public goods, or goods that are enjoyed collectively, as distinguished from private goods that are consumed privately. Public goods are indivisible and are consumed by all citizens regardless of whether each paid toward it. Consequently, no one person would be willing to finance public parks or police protection. If left to the private sector, such activities would be underfinanced or not financed at all. Yet, they are essential for a stable environment conducive to the conduct of private business.

In other less extreme cases, the provision of public services is justified by externalities.

Consider, for example, higher education. It benefits individual students directly, by enhancing their future income. And to that extent, they should pay for their own education. But, there are gains to society at large. These include, an educated citizenry, better-informed voters and an improved labor force. Such benefits are “external” to the individual, but “internal” to the society of which he or she is a part. It is the same as the case with vaccination against infectious disease: When a person in vaccinated, everyone benefits, since the risk of contracting the disease from that person is reduced. To the extent that such externalities exist, a government subsidy of that activity is justified.

Although the lines of demarcation between private and public goods are sometimes blurred and often controversial, the paragraphs above offer general guidelines for the type of services usually offered by the public sector. Political “liberals” define public goods as broadly as possible while political “conservatives” define them narrowly.

Finally, it should be noted that the public sector mainly finances these services, it does not produce them, the goods and services it needs are purchased from the private sector.

Growth in public spending has accelerated in the past forty years, and it now claims one fifth of the national output.

The reasons for that growth are many and varied. They include a rise in national security expenditures because of wars and international tensions; the provision of more public services, owing to population growth and the increased urbanization of society, and the assumption of greater governmental responsibilities for the poor and less fortunate members of society.

Which level of government provides what services? National defense looms large in federal government expenditures. A variety of services in the areas of education, health, energy, the environment, technology, commerce and agriculture are also provided. And finally, a very sizable item is transfers in various forms. These are income-maintenance programs that assist the aged, the disabled, the poor and the unemployed.

Finally, payroll taxes, levied on both employees and employers, are channeled the Social Security Fund. Retired people draw social security payments out of this fund. State-government expenditures are concentrated in the areas of higher education, highway construction and maintenance, heath and hospital services and public welfare. Much the greatest share of local government expenditures is absorbed in K-12 education. Other areas of local responsibility include police and fire protection, health and welfare, and highway maintenance. This information is summarized in the following table.

Next month’s column will concentrate on the tax side of the public sector.

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Mordechai E. Kreinin

Mordechai E. Kreinin

Mordechai Kreinin is a University Distinguished Professor of Economics, emeritus at Michigan State University and past President of the International Trade and Finance Association. He is the author of about 200 articles and books about economics, including the widely used text, International Economics. He can be reached at kreinin@msu.edu or by cell phone at (517) 488-4837

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