The Federal Spending
Introduction
Federal spending includes the expenditures by the federal government and their obligation in various categories which include grants, salaries and wages, procurement contracts, payments made directly to individuals and other direct payments and coverage commitments in the form of direct loans, loans which are guaranteed or insured and on insurance.
Increase in the federal growth has either a positive or negative effect to the public. It is notable that the increase in the federal spending on infrastructure, education and training. Research and development can cause increase in the growth of the economy significantly. Clearly the peculiarity between the consumption and investment is apparent: consumptions leads to immediate payoffs while investment leads to benefits over a long period of time. Most expenditure in practice provide a combination of present and future benefits: for instance schooling may have an experience that is enjoyable which in real sense builds skills that the future employer will value.
The main drive for long term development is growth in the productivity of labor; this implies the output that is produced per an hour of working. The productivity of any individual depends on the skills they have and the materials and equipment that are available for them to use. It also depends on factors like the prevailing technology, talent of the entrepreneur as well as the legal and social environment in which individuals operate at.
All the government levels can play a tremendous role in promoting growth through spending directly on certain categories of expenditure which can be classified as investment. Federal expenditure on public infrastructure, education and training and in research and development in modern science and technology could be a big booster to development in the public domain.
Economics of Government Spending Theory
The theory of economics does not come into conclusions about the effects of government outlays on the performance of the economy automatically. In fact almost all the economists would concur to the fact that there are situations in which lower levels of spending in the government would lead to the enhancement of the growth of the economy while in others higher levels of spending in the government will be encouraged.
If the there is zero spending in the government, obviously the growth in the economy will be very little. This is because enforcement of contracts, protection of property and infrastructural development will be very hard. This means that some spending in the government is essential for the rule of law to operate successfully. The activity of the economy is very low or inexistence in the absence of government spending and it is high if the core functions of the government are financed. This doesn’t imply that the government cost nothing but the benefits therein are larger than the costs incurred in the spending.
The benefits of the economic growth have direct effect to the public. This is because it the public who benefit from the economic growth or economic stagnation or even failure.
Cost vs. Benefit
Economists will generally agree that government spending can become a burden at some point. This can be either because the government becomes too huge or because the outlays are not well allocated. In such cases the cost of the government becomes larger than the benefits therein.
Downward sloping of a graph for economic growth against the government spending can be explained by various reasons which include the following:
Cost extraction: Government spending requires costly choices in financing. The federal government can’t spend money without having to take money from someone. All the options for financing of the spending in government have adverse repercussions. For example taxes will discourage productive behavior particularly in the current tax system in the United States which has been imposing high rates of tax on work done, saving, investment and the productive behavior forms. Borrowing also lead to consumption of capital that would have been available for investment in the private sector and may also lead to higher interest rates in the extreme case. Inflation also causes the currency of a country to lose focus and hence causing widespread distortion in the country’s economy.
The displacement cost: Spending in the government causes displacement in the activity of the private sector. In real sense every dollar spent by the government means one less dollar in the productive private sector of the economy. This slows down growth since the economic forces guides private sector’s resource allocation whereas the forces in the politics have dominance when the politicians and the bureaucratic group decide on how to spent money. Some spending by the government such as the maintenance of a well functional legal system can have a high return rate. But generally governments don’t use the resources in an efficient manner hence resulting in less output in economic.
The negative multiplier cost: This happens when the spending in the government finances harmful interventions. The portions of the federal are used in financing of activities that have negatives effects on the activity of the economy. For example a variety of regulatory agencies have small budgets but they impose large costs on the productive sector economy. The outlays for the international corporations such as the IMF and Organizations for Economic Co-operation and Development (OECD) is frequently insignificant as compared to the damage in the economy which result from the anti-growth policies which are advocated by these multinational bureaucracies.
The behavior subsidy cost: The spending in the government encourages destructive choices. Many programs of the government subsidize to decisions that are not undesirable in the economic world. The welfare programs have encouraged people in choosing of leisure at the expense of work. For instance employment insurance programs have been providing an incentive to remain unemployed. There are flood insurance programs which encourage construction in flood plains. These are some of the examples of government projects that lead to reduction of growth in the economy and diminishing of the national output because of promotion of misallocation or underutilizing of resources.
The behavioral penalty cost: In this case the spending in the government discourages the productive choices. The programs of the government often discourage the decisions that are economically desirable. Saving is essential in helping to provide capital for new investment, yet the incentive to save has been undermined by the programs of the government that subsidize retirement, housing and education. Some other Medicaid programs in the government spending are good examples for they generate economic effect due to the eligibility rules that encourage individuals to depress their incomes in an artificial manner and misallocate their wealth.
The market distortion cost: Spending in government leads to distortion of the allocation of resources. The buyers and sellers in markets that are competitive determine the prices in a process that ensures that the allocation of resources that is most efficient, but some of the programs of the government interferes markets that are competitive. In both education and healthcare the subsidies of the government to reduce the expenses that are out of pocket creating problem third-party buyer. When individuals use the money of other people they become less concerned about price. This undermines the critical role of competitive markets hence the cause of significant inefficiency in sectors like education and health care. Government programs also lead to resource misallocation because individuals, organizations and companies spend time money and energy in obtaining special favors of government or in minimization of their share of the government cost.
The inefficiency cost: In this case the spending in the government is a less effective way in delivering of services. The government provides many services directly and activities such as education, airports and postal operations. The private sector could do better in provision of these same services and even at lower costs. If privatization could have taken place in cases like the airport and the postal services there would be evidently improved services. In cases like that of education benefits can only be realized by making sure that the models used are based on competition and choice.
The stagnation cost: Innovation is inhibited by the mode of government spending employed. Due to the competition and the will to increment of income and amassing of wealth, individuals in the private sector constantly look for news ways and opportunities. Economic growth is greatly enhanced by this discovery process of destruction that is creative. The programs of the government however are inherently inflexible due to the centralization and bureaucracy. Reduction of the federal programs to the state and local levels can do away with or alleviate this effect.
Federal Investments in Human Capital
The growth in the economy depends partly on the skills that people bring to the work they do. Federal programs may contribute to the human capital through programs offering education, job training and acquisition of skills informally through the experience of work. The outlines of human capital are found in the portion of the budget that covers outlays for education training, social services and employment.
Research and DevelopmentSspending by the Federal
Research and development creates a resource of knowledge that can be used over time for production of new products and the process of the production itself. If research is done well it is easy to know which production processes are most viable and hence one can avoid the ones that are wasteful. When new technology is to be introduced in the market it is advisable that one gets many to know whether it will survive in the prevailing conditions and this can only be arrived at by doing adequate research.
Federal Investment in Physical Infrastructure
The production and distribution of economic output in the private sector depends largely on the public transportation and the environmental facilities which include, highways, mass transit, airports, railways, water resources and supply of water and treatment plants for the waste water. These public facilities form a significant fraction total stock of the economy. If the federal spending put it into consideration and give it the necessary funding the public will benefit from it tremendously.
Conclusion
Federal spending has a lot influence in the public and its activities. When the funding of some major projects by the federal government fail then the public will suffer because it will not be able to undertake its duties well due to lack of the basics. Proper funding of programs beneficial to the public for it aids it to realize major steps in the development.
Reference
Congress Budget Office (2008) How federal spending for infrastructure and other public investments affect the economy, USA: Government press
Mitchell, D. (2005) The impact of government spending on economic growth: USA: Heritage foundations
Lowry, C.R. (2005). The effects of public welfare spending and federal welfare reform on private social services employment in American States: USA: Iowa State University
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