INTRODUCTION TO PUBLIC FINANCE
BY S. J. GABRIEL

The government does not hold a monopoly on political power, such power is exercised in a wide range of institutions within society, including corporations and families.  However, government stands at the top of the hierarchy of power within society.  Government ultimately holds the coercive power to force other institutions to do its bidding.  Government can take away our liberty, seize our property, or determine who is right or wrong in civil disputes.  This unusual power to make the final decision about the conditions of life is the reason the study of government power is critical to anyone who seeks to understand the dynamics of change in both the past and the future.
 
 

Public finance is not the sexiest subject in either undergraduate or graduate programs in economics.  It is not nearly as popular as economic development or macroeconomics, for instance.  Perhaps this is, at least in part, a result of the prevailing attitude towards government in the United States.  Government is often seen as the boogeyman in American political and cultural life.  As indicated in the bold-faced paragraph above, there is ample reason for looking upon government with some suspicion.  Afterall, it does have unparalleled power over social life.  However, such a perception of government must be tempered by the realization that, in a democracy, government is supposed to be the primary representative institution of the collective will of the people.  Thus, government power is, or should be, popular power.  If it isn't, then democracy is malfunctioning.  Government is failing to act as the instrument of the collective desires of the citizenry.  In the United States, we often see this failure embodied in economic policies that lack consensus (or perhaps even majority) support, particularly tax policies.  Politicians, particularly those opposing incumbents, often rail against the influence of "special interests" in the determination of taxing and spending policies.  Indeed, success at getting elected to political office in the United States is inordinately determined by the ability to raise funds from corporations, unions, and wealthy individuals whose support is rarely motivated by civic spirit, rather than narrow self-interest.  Large numbers of individuals are effectively disinfranchised by this kind of political process.  Thus, even in a country where the vote has been extended to most adult citizens, genuine democratic determination of government seems elusive.  This feeds the prevailing cynicism with government policy.  This does not, however, point to something inherently flawed about government policy-making.  Instead, it indicates the difficulties in creating genuinely democratic governance.  Ultimately, in order for government to be the instrument of collective wants and needs there must be popular control over government.  Corporations, unions, and other narrow interest groups must not weild so much power over the selection of the people who shape government policy as to circumvent this popular will because it is only when the government represents the people that public finance can become an unambiguous instrument for achieving popular goals and objectives.

We must also not forget that corporations, in particular, wield a great deal of power in society and this power is growing.  Corporations constitute sub-governments, in so far as the corporate boards of directors and management shape, within the constraints of the primary government's laws, the rules of social life within their confines.  Given that most people spend the best years of their lives, the best days of their lives, and the best hours of their days within these corporate structures, then the way corporations function (primarily undemocratically) probably has more to do with the way they experience life than the actions of the much maligned government.  If these corporations also influence the policies of the government, then this makes it all the more likely that public policy would strengthen the authority and reach of corporations.  The extreme version of such policies is often called, laissez faire. 

This gives us a sense of the struggle over government policy and the relationship of such policies to democracy.  What are the responsibilities of government?  In a sense, there are none.  Governments, like all institutions, exist in an environment wherein precedence is often far more relevant than some version of moral principle (which is, presumably, what we are referring to by the term responsibility).  Some governments are constituted by individuals who seem to have no other objective than to satisfy their own (and, usually, their family's) self interest.  Military dictators and civilian autocrats often use their control over the levers of governmental power to steal from their people, transferring unfathomable amounts of wealth into Swiss bank accounts or so-called off-shore accounts.  They coerce bribes from individuals, corporations, churches, and other non-governmental institutions in exchange for privileged treatment or the removal of the threat of harsh treatment.  Such behavior is not unheard of in societies normally labeled as democratic, including the United States. 

What exactly is it that government's normally do, then?  This is, perhaps, a better way to begin than the false notion of government responsibilities.  As indicated above, governments determine the rules of the economic and social game:  the political framework of rules and modes of enforcement of rules, including contract law.  Mainstream economics, in particular, has become a discourse of contracts:  every transaction is, in essence, the effect of an explicit or implicit contract.  The market economy is shaped by these rules of the game.  The government determines, in the legal sense, if a transaction is or is not fair.  Indeed, it is only the government that has the power embodied by Leon Walras' famed auctioneer, although there is no government in history, nor is there likely ever to be such a government, that can do what the auctioneer was asked to do in Walras' general equilibrium system.  In addition to determining the rules by which all economic agents must conform in order to be acting legally, the government is itself an economic agent.  The government produces goods and services, charges its citizenry and other institutions functioning within its boundaries for its services, and can force the redistribution of resources from one economic agent to another.

Every action of the government influences the behavior of other economic agents.  Government is a critical determinant of the relative health of the economy.  In an economic downturn, a recession or depression, the government is the only institution likely to have the ability to act in a countervailing manner to reduce the severity of the downturn or even generate a reversal of trend.  The effectiveness of such government action is a question of the proper mix of public policy, often in the form of changes in spending, taxing, and regulation.  Public finance has produced lively debates over the relative effectiveness of different types of such policies, and these are issues we shall discuss in detail this semester. 

In progress.