Tightening the Belt: What to Watch for in Local and National Spending

Since the “Great Recession,” many local, state, and national governments have struggled to install a sustainable budget. No matter the level of government, unanticipated costs from increases in predetermined spending remain at the heart of the problem.

Whether it is local governments struggling to pay promised pensions or state governments withdrawing funding to state universities, the idea of what constitutes a public good remains a controversial subject. Luckily, the U.S. economy is, though sluggishly, recovering. But this means that today is pivotal for discontinuing the spending pitfalls that continue to damper economic outlook.

To do this, citizens must grasp the, often sacrificial, economically constructive spending policies. These spending policies provide the most ‘public’ spending allocations both nationally and locally. The following are a few of those spending policies.

The basis of public spending must remain in pure public goods and then cautiously into mixed public goods.

Pure public goods must satisfy the criteria of being non-rival and non-excludable. If someone’s use of a good does not deter another person’s use of that good, then the good is non-rival. When excluding a person’s use of a good is either impossible or extremely costly, the good is non-excludable. Air, defense spending, and lighthouses are all examples of pure public goods.

You cannot prevent people from enjoying their benefits and one person’s use does not affect another’s. But many goods are missing.

Mixed public goods are those that satisfy one criterion but not the other. Interstates, public beaches, and fishing lakes are examples of mixed public goods that are non-excludable but rival. In each of these goods, if they become too “congested” they lose value. These mixed public goods are important in public spending, but should be approached cautiously for they are only valuable to the public if the benefits remain greater than the costs of overuse (often referred as the “Tragedy of the Commons”).

These two criterion of pure public goods, non-excludability and non-rivalry, remain at the core in determining if a project should adopted by the public treasury.

The public should pay for those goods that have more benefits to society than to the individual who purchases them.

These goods, such as vaccinations and education, have positive externalities on society and should be promoted. For example, a child who gets a vaccine enjoys the benefits of sound health, but his or her classmates are also benefiting from less probability to catch a virus.

Because taxes have a redistributive nature, public spending should target inferior goods to those, who cannot afford them. This also means that the public should steer from spending on normal goods.

If when your income goes up you purchase less of a good you previously bought when you had less income, then that good is inferior. The biggest controversy from this is the government’s role in getting middle class households into homes by offering tax deductions for mortgage interest. The 2013 Economic Report of the President states that, “Deductibility of mortgage interest on owner occupied homes was $606 billion.”

The problems facing local, state, and federal budgets have centered on public spending issues, for few politicians want to advocate for tax increases.

But congress has kicked the can down the road long enough, and just as all households must have financial order, so too must all institutions. The risk governments take by consuming now (deficit spending) in hopes of future gains in productivity is risky.

Locally, we must make sure that our leaders follow those principles that promote economically constructive spending in hopes that the example set will trickle back to Washington.

  economy