The federal government is now running budget deficits. North Carolina’s elected leaders are expected to face a shortfall in the General Fund for the upcoming fiscal year. In the upcoming months, there will be many proposals and counterproposals about what to do with these fiscal situations.
People who say government needs to do all it is now doing, and maybe more, will push for tax increases to close the budget gaps. Conversely, those who think government is now doing too much will argue for spending cuts to eliminate the budget deficits.
So when it’s all boiled down, the debate about budget shortfalls and taxes is really a debate about the role of government. What functions should government have in our economy? Once this question is answered, conclusions about taxes and spending can come much easier.
Here I outline four potential roles for government. I show the logic of each role but also expose pitfalls, issues, and questions. It’s easy to see why people disagree.
Providing Safety and Security: Probably the primary function of government is to provide safety and security for residences. National defense, courts, police, and the prison system are ways government at all levels gives this protection. The logic of this function is straightforward. For people and businesses to invest, risk their resources, and expend time and money maintaining property, they must feel secure, safe, and protected. Also, for business contracts to be entered into, parties must believe the contracts can be legally enforced.
Few people disagree with this function of government. However, there is disagreement about scope and strategy. There are arguments about the extent to which our national defense extends to the rest of the world. Domestically, there are arguments about the best strategy for containing crime. Can crime be better reduced through enforcement and punishment or by social programs focused on prevention?
Providing Public Goods: In our market-based economy, products and services are provided only if people are willing to pay for them. But if this means some products and services aren’t provided at levels deemed adequate for a properly functioning economy, then there may be a rolefor government intervention.
Education and roads are two good examples. If left to their own decisions, some people wouldn’t obtain an education. Although such individuals may eventually suffer from their lack of training, society could also suffer because educated workers are generally more productive, and greater labor productivity results in lower costs and prices for all. Thus, to encourage education, in most countries the government pays for some or all of education to certain levels.
For roads, it has been technically infeasible for private companies to build roads and then limit use to drivers who pay for the highways. Hence, for most of history, government builds and maintains roads using gasoline taxes, which do bear some relationship to road use.
So education and roads are considered “public goods.” But there are issues. Although government can finance these products and services, it’s possible for either the government or private companies to actually provide the goods. This is the debate about publicly financed and run schools versus private schools funded with public vouchers. Also with respect to education, to what level (high school, college) should government fund it, and what should be the funding split between the government and the student?
Promote Competition: For more than a century, it has been the policy of the federal government to promote competition in markets and discourage market domination by one or a few firms. This is done under the theory that competitive markets result in lower prices and better service for consumers.
The government pursues this function by outlawing price fixing and other collusive practices and prohibiting mergers it determines will result in significantly less competition.
Although laudatory, this role does raise several questions. Is “big” necessarily “bad” in business? Larger companies can often take advantage of “economies of scale” and have lower costs and lower prices for consumers.
Income Assistance: This is, by far, the most controversial of the potential functions of government. Income assistance (some call it “income redistribution”) involves taxing income from some households and providing it, either directly or indirectly, to other households.
Supporters say this function is a necessary form of compassion to provide a required minimal standard of living to citizens. Opponents say income assistance is outside the proper scope of government and can create problems that upset the proper functioning of the economy.
There are a whole series of questions and issues about income assistance. What is an adequate standard of living to guarantee? Should support be given through cash or be tied to necessities such as food, medical care, and housing? Should support be limited in time?
The debates about the proper roles of government will likely last forever. But understanding the components of the debate may, at least, make the discussions more productive.