Jesse Burkhead

The Balanced Budget

Introduction, 191. — I. Views of the classical economists, 192. — II. Major characteristics of Keynesian thinking about national debt and deficits, 206. — III. Reasons for slight Keynesian impact on prevalent attitude towards government debts and deficits in this country, 210; reasons for widespread acceptance of doctrine of balanced budgets for the federal government, 212.

The Pure Theory of Public Expenditure: General Equilibrium

The preceding chapter has shown how the characteristic features of pure public goods, joint supply and the inability to exclude, can be encompassed by partial equilibrium analysis. An important conclusion of the partial analysis of public goods is that while the properties of a normative, competitive-like equilibrium solution can be known, no reasonable assumptions about motives of, and interactions among, individuals ensures that it will be reached. Nonetheless, the nature of the partial equilibrium analysis and the issues that arise in the determination of a solution are significant because they indicate the fundamental similarities and differences between public and private goods. But, as has been demonstrated in so many other areas of economic analysis, partial equilibrium takes as given many of the factors which are in fact variables in an overall system. A comprehensive pure theory of public finance must, therefore, be cast in general rather than partial equilibrium terms.

Determinants and Consequences of Public Expenditures

The positive theory of the public sector, as with other subdivisions of economics, has as its concern the formulation and testing of behavioral hypotheses. Economists’ interests in the positive aspects of government behavior naturally lie in those hypotheses that concern real or financial resources. The main hypotheses relevant to the positive theory of public economics encompass those that deal with the determination of levels of public expenditures and revenues along with those that explain the consequences of such outlays and revenue collections upon the economic status of society. Because this book is concerned with public expenditures, positive theories of taxation and tax incidence and the empirical studies of these matters are excluded from discussion here, except insofar as revenue considerations are relevant to expenditure determination. Furthermore, as the introductory chapter explains, stabilization aspects of expenditures are not systematically examined in this study, and, therefore, there is no development here of those aspects of positive theory that deal with the effects of budget policy on aggregate demand.

The Politics of Collective Choice

The framework for public expenditure decisions explored in Chapters 2 to 4 is grounded on individualistic assumptions. The satisfaction of social wants, in this approach, must rest on the preferences of sovereign consumers. Optimality for the public sector is conceived of in terms of conformity with individual preferences in a manner strictly analogous to the conformity with preferences that defines Pareto optimality in the private sector.

The Nature of the Public Sector

Perhaps the most general observation that can be made about government activities is that they have grown, both relatively and absolutely, in all countries of the world. This commonplace observation must necessarily serve as the starting point for any systematic treatment of the political economy of public expenditure, for the growth of government lies at the heart of continued controversy over the role of the public sector. This controversy is particularly acute in a mixed economy where the public sector is growing more rapidly than the private and where it often appears that this growth is at the expense of, or contributes to a diminution in, private economic activity. In any economic system, regardless of the relative growth of public and private activities, there will be continuously difficult and controversial choices in selecting the appropriate composition of government expenditure and in choosing among alternative government programs that are intended to accomplish social goals.

Benefit-Cost Analysis

Benefit-cost analysis is a technique for assessing the economic utility of a public investment project. The technique can be used to indicate whether a specific expenditure should be undertaken. It can also be used to determine the appropriate scale of investment and thus the optimum size of a specific investment project, as well as the product-mix, capital intensity, and other aspects of project design. A benefit-cost approach can also be employed as the framework for a general theory of government investment. In this chapter emphasis will be placed on benefit-cost as a decision technique, although some attention is also directed to benefit-cost as investment theory.

Market Failure, Public Policy, and Public Expenditure

Analysis of the pure theory of public expenditures reveals a pathological case of market failure. That is, goods with the “double polar” characteristics of joint supply and the impossibility of exclusion are such that their production will occur only under public organization (collective supply). Yet, in itself, the pure theory of public finance constitutes neither an economic rationale for the state nor an adequate economic theory of government expenditure. An economic theory of the state, consistent with the traditions of individualistic economics, may be developed around the assumption that the state aims to maximize societal economic welfare defined in terms of conformance with individual preferences.1 If market-determined prices are presumed to be the primary way in which preferences are manifest, such a theory requires a thoroughgoing description of all sources of failure of decentralized markets coupled with an analysis of the potentialities of various government policies to deal with these failures. The analogous economic theory of public expenditure must elucidate the specific role of government budgetary outlays as one among various state actions intended to deal with market failure. Further, it must distinguish public expenditures whose purpose is to subsidize households and private market organizations from those government expenditures for goods and services which then are either provided through collective organization and supply or are sold by the state.