[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

Chapter 17
THE PUBLIC SECTOR
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Throughout American history, the issue of the role of government in the economy
has been at the center of political discussions. Today’s debates focus
on the sizable imbalance between the federal government’s spending and
its tax revenues and on the future financial health of government programs that
provide retirement income (Social Security) and health insurance (Medicare) to
the elderly.
The impact of the government on the economy is huge, much larger than raw
statistics on the size of the government might suggest (e.g., federal tax receipts and
expenditures have averaged around 20 percent of GDP over the past fifty years,
while state and local government taxes and expenditures now total around 14 percent
of GDP). The government influences the economy not only through taxes and
expenditures but also through myriad regulations that affect every aspect of economic
life. This chapter describes what the government does, why it does what it
does, the trade-offs it faces in choosing what to do, and how those choices are made.
The United States has a federal structure in which responsibilities are divided
between the federal government and state and local governments. Federal expenditures
represent about two-thirds of total government spending. State and local governments
are responsible for education (their single largest category of expenditures),
local roads, law enforcement, and fire protection.
One way of understanding what the federal government does is to look at what
it spends its money on. Figure 17.1 shows how its spending has changed over the
past half century. In the 1950s, defense expenditures represented more than half of
all expenditures; by 2000 defense had fallen to just 16 percent of the total. Though
this figure has risen to close to 20 percent as a result of the wars in Afghanistan and
Iraq, it is still a significantly smaller share of government expenditures than in earlier
years. A half century ago, Social Security and welfare expenditures were about
an eighth of the total; today they are three-eights. In recent years the federal
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