Government spending Publicly-financed educationTodayGrowth of government spendingExplaining Government GrowthCitizen preferencesSlide 6Marxist viewGovernment shocksChanges in social attitudesIncome redistributionControlling government growthChange bureaucratic incentivesChange fiscal institutionsInstitute constitutional limitsWhy not to impose constitutional limitsSummary: Growth of gov’t spendingPublicly-provided educationSlide 18Positive externalitiesWhat about higher education?Diminishing marginal returns argumentResearch externalitiesPotential negative consequencesGovernment provision of educationPublic provision of educationReality check on educationQuality of public educationUnionization of teachersParents’ choices of their kids’ curriculumSlide 30Size of schoolSchool-sponsored sports and activitiesTotal spendingClass size and total spendingSlide 35Slide 36Empirical work on educationExample of empirical workCost-benefit analysis of spendingResults from Peltzman (1997)How are schools changing?Charter schoolsSchool vouchersSlide 44Slide 45School accountabilitySlide 47Slide 48Education and employmentSlide 50Slide 51Summary: Publicly-provided educationGovernment spending Publicly-financed educationToday: Why government grew so much in the 20th century; Effects of publicly-financed educationTodayWe finish Chapter 6Examination of the growth of government spending in the 20th centuryWe finish Unit 2 by looking at Chapter 7Topics in educationGrowth of government spendingMany western countries have had significant growth in government spending since 1900How is this growth justified?Many theories examinedNo single theory fully explains the growthCan government growth be controlled?Explaining Government GrowthFive theories of government growthCitizen preferencesMarxist viewChance eventsChanges in social attitudesIncome redistributionCitizen preferencesTake median voter’s preferences of public sector goods and servicesG = f(P, I)G represents the median voter’s demand for public sector goods and servicesP is the relative price of public sector goods and servicesI is incomeCitizen preferencesAssume median voter theorem is trueWhen income increases, if income elasticity of demand is greater than one for the median voter, increased public services would be providedGrowth of the middle class may explain why government spending has grown so muchThis theory predicts that voters get what they wantMarxist viewA Marxist model would argue that the private sector overproducesGovernment must expand expenditures to correct thisWorker discontent is curbed by social service spendingSome argue that this is not sustainable, since expenditures will eventually outpace tax revenue capacitySee Figure 18.6, p. 423, for more on tax revenue capacityGovernment shocksChance events lead to shocks on the governmentThese shocks require the government to increase spending substantiallyExamples: The Great Depression and the world warsInertia  increased spending sticksChanges in social attitudesAre people making bigger demands on government?MaybeSimilar idea to median voter theoremCosts and benefits may also be incorrectly perceived by the publicIncome redistributionTwo viewsGovernment grows to help low-income votersSome politicians can promise redistribution to median income and belowIncomes above the median get taxed to pay for income redistributionGovernment grows to help the middle classAppeals to voters near median incomeWith this view, the upper- and lower-income classes pay for the benefit of the middle classControlling government growthSome people believe that government is not too bigOthers disagreeIf the government is too big, how can we make it smaller?Change bureaucratic incentivesChange fiscal institutionsInstitute constitutional limitationsChange bureaucratic incentivesRecall Niskanen’s model of bureaucracyBureaucrat often worries about size of department, not what is efficientFinancial incentives for cost-cutting could backfire, howeverQ could be below Q*Private provision may be more efficientSee Figure 6.4, p. 120Change fiscal institutionsIs the budget-making process undisciplined?Many people believe soCongress-imposed solution: Budget Enforcement Act (BEA) of 1990Spending and revenue targets are setThe cap can be exceeded when an elaborate set of parliamentary rules are followedProblems with BEASome “emergency” spending is known in advance2000 censusInstitute constitutional limitsIf Congress cannot regulate its own spending, should there be a constitutional amendment that does limit spending?Most economists believe “no”Why not to impose constitutional limitsRevenue and spending is usually uncertain until it happensIf tax revenue was overestimated, severe spending cuts would have to occur mid-yearSpending could be forced on states insteadStates could be mandated to provide part of Social SecurityWhat would the consequences be if Congress circumvents the law?Judicially-imposed budget?Will Congress members be punished?Summary: Growth of gov’t spendingAlthough political models have appeal on government spending, they do not fully explain how governments behaveMany people believe that government spending needs more controlBEA and current incentive structure ineffectiveNo constitutional amendment for balanced budgetProbably goes too farPublicly-provided educationReal annual spending per pupil on elementary and secondary schooling has increased by 68% from 1980 to 2004Why is this so?Citizen preferences?Positive externalities of education?Generates more taxes as adultsSocialization reasonsSchool Year Real expenditure per pupil (2004 dollars)1980 $4,9171985 $5,6871990 $6,7461995 $6,8492000 $7,5742003 $8,2422004 $8,248Source: Computed from US Census Bureau, Statistical Abstract of the United States 2006. Washington, DC 2006, p. 155Citizen preferencesSome people believe that each person has a right to a minimum level of educationRecall social utility functionAt low levels of education, social welfare could be min{educi}Basic education needed to be functional in societyEquitability issuesPrevention of de facto caste system if only the rich can afford educationPositive externalitiesAn economist would go further,