Speaking Notes
PADM 5301 Public Budgeting
Spring, 2010
Dr. Neubauer
Question about how big the government should be and supply side economics (as in the Reagan Administration).
With some exceptions, government does not really PRODUCE goods and services.
Government is not the ESSENTIAL ENGINE of a nation's economy. The ENGINE is the private sector -- businesses and corporations. The private sector produces the good and services that governments tax in order to have money to do the things that governments must do.
If the private sector is doing good, then government revenues are relatively high.
But by taxing the private sector, the private sector ("engine") becomes less productive. The less productive it becomes the less revenue taxes produce for the government.
Much or what government does is the result of problems such as unemployment, which is the product of a sluggish private sector.
SO WERE IS THE TIPPING POINT beyond which higher taxes interfere with the "health" of the private sector (the engine) more than what government can do with the revenue it derives from the taxes.
COMMON SENSE -- if tax rates increase government revenues will increase.
BUT as taxes rise the "engine" cools down and the problems that government tries to address increase.
THE PROBLEM -- when tax rates increase the result is that there is LESS PRODUCTIVITY TO TAX and government receipts may actually FALL as a result of higher taxes.
SUPPLY SIDE ECONOMICS (Reagan era) -- CUT TAX RATES, productivity will increase, and there will be more productivity to tax, and GOVERNMENT REVENUES MAY ACTUALLY INCREASE.
IN OTHER WORDS, a smaller percent of a larger number is more than a larger percent of a small number.
THE PROBLEM IS that because "rich" people pay more taxes than poor people tax cuts are likely to be "unfair" to the poor (regressive in nature).
"SUPPLY SIDE" says, "Poor people benefit indirectly from tax cuts on the rich and tax cuts on businesses and corporations." Tax cuts improve the economy, leading to the creation of jobs. It is better to let the private sector prosper (and create jobs) than for the government to get the money to try to help unemployed people. This is sometimes called "TRICKLE DOWN ECONOMICS." The benefits of the tax cuts "trickle down" to the poor.
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It is important to realize that AGENCIES receive budgets and that most agencies implement MULTIPLE PROGRAMS.
The usual way that budgets are structured is in CATEGORIES OF EXPENDITURES. This is the way it is usually done. It is relatively easy to do it this way. In other words, decisions revolve around each of the categories. YOU USUALL ASSUME THE BASE and argue with others about the marginal INCREASE or DECREASE from last year. The reasoning may be PRETTY SHALLOW, but this approach is not too cognitively demanding. We do this because we can do this. It is a CONTROL mentality.
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ONE STEP UP is to think not so much in terms of categories as in terms of PROGRAMS. Now the focus is on the PROGRAM (something the agency is trying to do) rather than so much upon the categories of expenditures across all programs within the agency. Now THE PARTICIPANTS CAN HAVE A MORE INTELLIGENT CONVERSATION. But the information/data needed is more sophisticated. Now employees in the agency begin to have to fill out many FORMS about various programs. This is TIME CONSUMING AND CAN BE COSTLY. Because the same forms are probably used for all programs in all agencies the required information MAY NOT MAKE SENSE. The other people budgetary decision making process are likely to get many notebooks full of information/data and they do not have time to digest it. The notebooks get put on selves and usually we then fall back on categories of expenditures.
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ONE MORE STEP UP is to try to use PERFORMANCE DATA to inform decisions in budgetary processes. In other words, it is not just, "do we need another garbage truck?" It is, "if we had another garbage truck how would having it affect our average cost per ton of collected garbage?" AGAIN, all agencies within a government are likely to be asked to fill out the same forms about their inputs, outcomes, and rates of efficiency. AGAIN, these calculations are costly to produce and are likely to wind up in notebooks put on shelves. The notebooks get put on selves and usually we then fall back on categories of expenditures.
THREE MAJOR REASONS WHY WE TEND TO FALL BACK ON THE SIMPLE APPROACH.
1) The decision makers lack the cognitive abilities to digest the vast amounts of information/data that the sophisticated methods produce.
2) The existing way it is done serves the needs of all the major actors (kinds of participants) even though it probably produces suboptimal budgets.
3) We tend to take a "one size fits all" approach to how budgets "should" be created in all kinds of agencies. What works for one agency may make no sense at all for another agency.
TECHNOLOGY CAN HELP MAKE BUDGETARY PROCESSES (AND THE RESULTING BUDGETS) MORE RATIONAL.
The real constraint is the human brain. We can "leverage" it in multiple ways but communities of human brains do not necessarily "scale" well. Just as there are limitations on individual brains/minds, there may be limitations on the ability of people to grasp information collectively.