Chapter 6 Government's Economic Functions

I. Provide a proper legal atmosphere rules for participants
II. Insure competition
involves evolving antitrust laws
III. Provide equitable income distribution
involve citizen A helping citizen B through taxes

IV. Adjust for market failures  as the profit motive may ignore some costs and benefits 1 video
V. Affecting total economic activity
involves economic growth, help for participants, managing the future 4 videos  
VI. 2016 State Government Fiscal Policy Report Card Required to balance their budgets, states acquire unfunded future liabilities.
VI. Criticism Modern Capitalism
have evolved but they began with the began when George Washington signed the Jay Treaty

   I. Provide a proper legal atmosphere
       A. rules for participants of capitalism
       B. Our Democratic, Capitalist Republic has evolved see  Roots of capitalism
       C. The battle began in 1735 with the
Zenger Trial over freedom of the press.
. How it evolves is about Election Issues2016
  II. Insure competition 
      A. Antitrust laws protect against abuse of monopoly power.
      B. Justice Marshals Took Charge in 1803

      C. Natural (justifiable) monopolies such as AT&T were allowed
          1. duplicating high-cost fixed investments is illogical
           2. Teddy Roosevelt continued the battle against monopoly power of trusts
      D. The emphasis on free markets discussed in chapter 3 has resulted
           in some natural monopolies being broken into smaller companies
           which had to compete against new companies touting new technologies.
III. Provide equitable income distribution 
     A.   1930's_Government_Safety_Net_Deficits
began the process
B. Transfer payments where a government moves general revenue to a
          specific group, i.e., Aid to Families with Dependent Children and college
          students are examples.
     C. Market Intervention (affecting supply and demand)
          1. Minimum wage decreases supply raising price and lowering quantity.
          2. Excise taxes on alcohol, cigarettes, jewelry, etc., deceases supply.
          3. Farm price supports, aid to small business and education increases supply.
     D. France redistributes income more than most with higher taxes for most.
     E. Does the Economics of the Trans-Pacific Partnership create  conflict between
         functions 3 and 4?







Middle-class tax entitlements, called Tax Expenditures, (benefits) redistribute income to many middle class members

1. Mortgage interest

6. Employer-paid unemployment insurance
2. Home equity loan interest 7. Employer portion of social security
3. Property taxes 8. Employer-paid workman's compensation insurance
4. Employer-paid health insurance 9. Employer paid retirement plans
5. Employer-paid dental insurance See Presidential Issue Entitlements


Wealthy benefit most from tax subsidies: study  Reuters 9/22/10

IV. Adjust for market failures
      A. Adjust for spillovers (externalities)
1. Effects of a market system often spillover onto non-participants
                 who are external to the market transaction. 
            2. Both costs and benefits result.
                a. Pollution hurts (costs) society so government tries to affect the 
                    supply of, and demand for, pollution causing products such as
                    automobiles. For automobiles, they lower supply by requiring 
                    catalytic converters and lower demand with high excise taxes. 
                b. An educated workforce benefits society so government
                    increases demand (aid to students) and supply (aid to colleges).


                 c. Our addiction to oil has and global warming
               has government's attention, but little action

        3. How big should our government be video 1:13

 B. Discretionary Spending Down 50 to 33%


    B. Government does more in some countries than others.

Editors Note: Cost Data, taken from The Big Picture Blog, of  October 18, 200,7 some governments bare the cost of health insurance which increases these percentages. 6/22/13 p55

Local Government Employs Most, then State, Federal Government Flat

Image result for number of federal government employees graph


Spending has an Effect

V. Affecting total economic activity
     A. This includes a multitude of diverse topics. 
          1. Trying to limit the effects of business cycles by lowering
               unemployment and inflation 
          2. Assisting companies trying to compete in the new global
              economy. Example: Decades of government sponsored
              research creating franking which could
              result in U.S. energy independence. 
          3. Using foreign aid to make sure we have stable oil prices  
              a. Israel-United States military relations
              b. US and Foreign Aid Assistance from
          4. The Bailouts of 2007 results are in. 

 B. Opinions differ substantially as to the responsibilities or lack of
          responsibilities government has in these areas.

Modern Money & Public Purpose 1 hour plus
   1, The Historical Evolution of Money and Debt
           2. Governments Are Not Households

              3: The Eurozone
              4: Real vs. Nominal Economy

  VI. Macroeconomic goals of government 7.20

  VII. For more information visit
A. Democratic Capitalism vs. Capitalistic Democracy 
        B. The Size and Functions of Government

And Economic Growth from the Joint Economic 
Committee of the United States Senate and
        C. The 2006 Transparency International Corruption

Perceptions Index from Info please and
Political Corruption from the University of Exeter 
        D. Solyndra Failure explores governments attempt to 

           foster green technology.
        E. Book review Why Government Fail So  Often 4/9/14  




Reading of Interest

Q: Charles Seville, Fitch Ratings to L. Summers

I just wanted to take us back to the U.S. Larry, you alluded at the beginning to slightly sub-optimal, sub-par growth and economic outcomes, and that’s partly why people are supporting the presidential candidates they are. I wondered, do you see any good ideas out there for solving some of those problems, and the chances that they will be adopted?

SUMMERS: Look, there are hard questions and there are relatively easy questions. If you have a country that can borrow money for 30 years at below 3 percent in a currency it prints itself, with epically construction unemployment and record low materials costs, it is an astonishingly bad idea to have the lowest level of net infrastructure investment in 60 years relative to income.

Look at the cost of borrowing, and look at LaGuardia Airport. (Laughter.) Look at the cost of borrowing, and look at an air traffic control system where oak tag bulletin boards and yellow stickier play a crucial role in guiding your flight to landing. So the first and most obvious thing to say is that there has been no better time to stimulate demand in the short run, supply in the long run, and to remove burdens from our children in the form of deferred maintenance through a major program of renewing the country’s infrastructure.

That’s not just a public sector concern. That’s a private sector concern as well, which goes to—you know, I make fun of the airports and all of that, but the truth is that a phone call is more likely to be dropped driving from LaGuardia into New York City than it is driving from the Alma-Ata Airport into downtown Kazakhstan. (Laughter.) And that’s about private structure—private sector infrastructure investment, which goes to a whole set of things in the regulatory environment, in the incentives that are provided to corporations.

Another example in the private sector is, has there ever been a moment to put coal in our past—a better moment to do that than now? That creates demand in the short run, environmental improvement in the medium run, and capital costs will never be lower. So that’s one crucial part of, it seems to me, getting things going.

I think a recognition by the financial authorities that if—that the problems used to be over-lending and over-heating, but today’s problems are low-inflation and lack of availability of credit for many in small- and medium-sized business. And an orientation of financial policy to that would move things—would surely move things forward. There were lots of people who got loans to buy houses in 2005 who should not have gotten loans to buy houses in 2005. There are plenty of people today who should be enabled to purchase a home, who have good but not great credit, and who are not able to get access to that capital. So I think the priorities have to attach to stimulating public investment, stimulating private investment.

And I would say on final—one final thing, and I think this can be overdone, but I’ve come to think there’s substantial truth in it. When I was a student, we—an economics graduate student, 40 years ago—we were taught about a fundamental tradeoff between equity and efficiency, that you could make the economy more equitable but in order to do that you’d have to have more redistribution of various kinds and that would mean higher taxes, it would mean that as people got benefits you took more away when they got richer, and all that created disincentives, and so you had to choose a good place in the tradeoff between equity and efficiency. And there’s still substantial truth in that idea with respect to some policies.

But at a time when the economy is short on demand, the consistent trend towards income moving away from the middle class is leading to more of it going to people who don’t spend it, don’t inject it back into the economy, don’t create demand, and that is contributing to the sluggishness that is part of our problem. And so appropriately progressive taxation, a minimum wage that was higher than the minimum wage when Ronald Reagan was president—because we have made some economic progress since then—and such measures would, I think, also contribute to accelerating the growth rate of the economy over the next decade.

Glennon. In “National Security and Double Government,” he argues that while congressional and White House control waxes and wanes, America’s national-security apparatus is essentially set in stone—a shadowy “second government” made up of mostly nameless, faceless individuals who determine and administer our policies.

traditional representative government (the people we vote for who are perceived to wield power) and nonrepresentative government (the people who actually move all the key levers).

He labels the first group “Madisonians” after James Madison, who firmly believed that the checks and balances of our republic rest ultimately on “civic virtue—an informed and engaged electorate,” without which ”the governmental equilibrium of power would face collapse.”

“Trumanites,” in homage to the president who signed the 1947 National Security Act, thus creating the security state as we know it today, including the Central Intelligence Agency, the National Security Agency and the Joint Chiefs of Staff. To run these complex organizations, the Madisonians need experts, and the Trumanites are nothing if not experts.


The second  group Trumanites determine and implement the options put before the president. They write and implement the bills that Congress signs and they provide the classified justifications for the secret and invasive policies that the courts defer to and uphold. Intelligence Committee majority report on CIA interrogation provides a rare and deeply troubling window into the “second government” depicted in Mr. Glennon’s book

. According to the report, the Justice Department’s Office of Legal Counsel defended the legality of the torture program based largely on inaccurate information provided by analysts at the CIA. Contractors hired to conduct the interrogations were not given adequate background checks, despite claims to that effect by the senior leadership. The two psychologists hired by the CIA to “develop, operate and assess” the program had no training in counterterrorism, no specialized knowledge of al Qaeda or other terrorist organizations, and no on-the-ground experience as interrogators—shortfalls that did not prevent the agency from paying them a collective $81 million between 2005-09.



VI. State Government Fiscal Policy






                Source  State Government Report Cart from CATO





Last Chapter 

Next Chapter 

Our Free Internet Libraries
improve grades and careers.

3 Free Business Book Summaries
Including New York Times Bestsellers
Please support this site by shopping at and for students.

Chapter 6 Class Discussion Questions

Table of Contents

Chapter 6 Homework Questions

Economics Internet Library