Public Finance

Public Finance Harvey Rosen Chapter One: Introduction 1. This book is about the taxing and spending activity of government, a subject usually called public finance. This term is something of a misnomer, because the fundamental issues are not financial (that is, relating to money). Rather, the key problems relate to the use real resources. P4 2. Our focus is on the microeconomic functions of government; the way government affects the allocation of resources and the distribution of income. P4 3. Views of how government should function in the economic sphere are influenced by ideological views concerning the relationship between the individual and the state: a. Organic view of government: Society is conceived of as a natural organism. Each individual is a part of this organism, and the government can be thought of as its heart. The individual has significance only as part of the community, and the good of the individual is defined with respect to the good of the whole. Thus the community is stressed above the individual. The goals of the society are set by the state, which leads society toward their realization. The choice of goals differs considerably. (Plato’s, Hitler’s and Lenin’s) P4-5 b. Mechanistic view: government is not an organic part society. Rather, it is a contrivance created by individuals to better achieve their individual goals. The individual rather than the group is at center stage. I. Libertarians, who believe in a very limited government, argue against any further economic role for the government. In Smith’s words, “Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way”. Libertarians are extremely skeptical about the ability of governments to improve social welfare. P6 II. Social democrats: believe that substantial government intervention is required for the good of individuals. P6 4. Individuals and their wants are the main focus in mainstream economics, a view reflected in this text. 5. Federal Government: Article 1, Section 8, of the Constitution empowers Congress “to pay the Debts and provide for the common Defense and general Welfare of the United States.” The Constitution does not limit the size of federal expenditure, either absolutely or relative to the size of the economy. Bills to appropriate expenditures can originate in either house of Congress. All Bills for raising Revenue shall originate in the House of Representatives. P7-8 6. According to the 10 Amendment, “the powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” Thus, explicit authorization for states to spend