Session 10
Government
and the
Economy
Readings:
Chapters 19-20
Illustrations © by
Tony Biddle
Please Note
• This curriculum material is
provided to support union,
community, and non-profit
organizations to undertake popular
economics training.
• Non-commercial use and
reproduction, with appropriate
citation, is authorized.
• Commercial or professional use is
prohibited without approval from
the Canadian Centre for Policy
Alternatives, Ottawa, Canada.
www.economicsforeveryone.com
© Canadian Centre for Policy Alternatives, 2009
Key Topics Covered
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The historic role of government in capitalism
The economic functions of government today
Class interests, class conflict, and government
Government’s “toolkit”: policy levers and
instruments
• Types and effects of government spending
• Types and effects of government taxing
• Debts and deficits: myths and reality
Key Terms Introduced
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democracy
public goods
natural monopoly
regulation
redistribution
monetary policy
fiscal policy
social policy
industrial policy
public ownership
program spending
transfer payments
government production
public consumption
public investment
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income tax
sales tax
progressive tax
flat-rate tax
payroll tax
wealth tax
user fees
environmental tax
deficit
surplus
balanced budget
debt
debt burden
public-private partnership
income security
market income
The “Myth” of “Big Government”
• Stereotype: Capitalism was “pure”
– Then government, taxes, unions came
along and “polluted” it
• Reality: Government has played a
central role supporting and stabilizing
capitalism from Day 1
• Without strong government, capitalism
wouldn’t exist
• “It’s not what you have, it’s what you
do with it”
Whose Nanny State?
“The idea that conservatives trust the
market while progressives want the
government is a myth. Conservatives
simply are not honest about the ways
in which they want the government to
intervene to distribute income
upward.”
Dean Baker, The Myth of the Nanny State
In the Beginning…
• Strong central government was a key
factor in explaining the birth of
capitalism
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– Where
– When
Protection for property
Unified market, standards, currency
Colonialism (resources, markets, slaves)
Labor relations
– Create new working class (enclosures)
– Police workers and unions
Open for Business:
10 Ways Government Serves
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Protect private property
Pay for basic infrastructure
Pay for essential training & schooling
Manage & police labour relations
Business-friendly macro environment
Enforce stable rules & standards (weights,
measures, quality, competition)
Support investment with incentives/taxes
Open new markets (privatization, trade)
Tax loopholes/subsidies for high income
Rescue businesses in times of crisis
Mapping Government
• Impacts on income
– Taxes (from individuals, businesses)
– Transfer payments (back to individuals,
businesses)
• Impacts on production
– Direct provision (amounts to 15% of GDP
in Canada, more in Europe)
– Procurement (purchases from private
businesses – not on map)
– Regulation (affects conditions of
production in private sector)
Government
collects taxes
from both
workers & the
capitalist.
Some tax
revenue is paid
back in
transfers,
again to both
workers & the
capitalist.
Site of government
production.
Financed by direct gov’t
consumption spending.
Wages paid
to public
sector
workers.
Understanding
Government on the Map
• What workers get:
– Extra source of consumption
– Extra source of work & income
– Political/democratic potential to use
government for change
• What capitalists get:
– A new source of spending power
– Power to police & regulate the operation of
the whole system
– Backstop when things turn ugly
Taxes: Fair & Otherwise
• Income taxes
– Progressive: rate rises with income
• Sales / Value-added taxes
– Supposedly “encourages saving”
• Corporate taxes
– Income taxes
– Capital taxes
• Payroll taxes
• Wealth taxes
• Environmental taxes
Deficits and Debt:
The Bogeyman of Fiscal Policy
• Deficits caused by insufficient revenue
– Structural: not taxing enough to pay for
services
– Cyclical: automatic impact of recession on
revenues, spending
• Debt is the culmination of consecutive
deficits
• Debt is OK if:
– Debt incurred to pay for public investment
– Debt is stable as share of GDP
– Interest rates are not too high
The Politics of Debt & Taxes
• Phobia about debt aimed at justifying
downsizing
• True constraints on public finance:
– Debt can’t grow forever as a share of GDP
– After-tax profits must be sufficient to
motivate desired business investment
• But that’s a lot of room:
– Moderate annual deficits OK
– Taxes on individuals OK
– Some additional taxes on business OK
Neoliberalism:
Is Government Weak … or Strong?
• Downsizing and refocusing government
has been a key feature of neoliberalism
• Yet government remains strong & central
– Example: monetary policy to regulate the
overall labour market
• The issue is not is government big or
small, or is it strong or weak
• The issue is who does government serve?
Key Features of Neoliberalism
(p.48)
• Key goals:
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Reduce & control inflation; protect financial wealth
Restore discipline & insecurity to labour
Eliminate “entitlements”; law of jungle
Roll back & refocus government; cut taxes
Restore dominance of business
Claw back popular expectations
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Use interest rates to control inflation & labour markets
Privatize and deregulate industries (more “space” for profit)
Cut social security (esp. for working-age adults)
“Deregulate” labour markets (incl. attacks on unions)
FTAs to expand markets and limit government intervention
• Key tools:
Why is it SO Hard
to Win Real Power?
• Slanted playing field of democracy
– Media
̶ Financing
̶ Apathy
• Power imbalance in the economy after
the ballots are counted
– Capitalists control investment, regardless of
who is in power
Session #10, Student Exercise:
YOU Be the Finance Minister!
• Design the main parameters of a government budget for
a country you would like to live in.
• Choose the types of spending programs you prefer, and
the types of taxes to collect. Also choose the size of
government activity relative to the size of the overall
economy.
• Answer several questions about the political nature of
budgetary choices.
• See www.economicsforeveryone.com for copies of the
full exercise set and instructions.
www.economicsforeveryone.com
© Canadian Centre for Policy Alternatives, 2009