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Government and Spending

In: Business and Management

Submitted By cybermystg
Words 676
Pages 3
Government activity affects the economy in four ways:
• The government produces goods and services, including roads and national defense. Less than half of federal spending is devoted to the production of goods and services.
• The government transfers income through both the tax system and outlays. Popular perception typically focuses on transfers across income classes through the progressive income tax system and means-tested benefits, referred to as vertical redistribution. But vertical redistribution is dwarfed by horizontal redistribution, transfers unrelated to income class. The largest beneficiaries of transfers are the elderly, through programs such as Social Security.
• The government collects taxes, and that alters economic behavior. For instance,taxes on labor change the incentives to work, while taxes on specific goods (e.g., gasoline) change the incentive to consume and produce those goods.
• The government regulates economic activity for a number of reasons, including environmental protection, workplace safety, and consumer protection. The economic impact of regulation is probably the hardest and most contentious to measure of the four types of government economic activity.
In a nutshell, the government’s largest activity has gone from national defense in the 1960s to transfers to the elderly today. Defense spending peaked at 9.5% of GDP in 1968, and then fell to 4.7% of GDP in 1978. It then rose to 6.2% of GDP in 1986, before beginning a sharp decline to 3.0% of GDP in 2001. It began rising again and stood at 4.6% of GDP in 2009. At the same time, mandatory spending (excluding net interest) has risen from 4.9% of GDP in 1962 to 14.7% in 2009. In the long run, much of the growth in mandatory spending has been in programs for which the elderly are major beneficiaries. Non-defense discretionary spending, which includes spending on

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