money and most families have to live within some sort of budget, either a structured and planned budget, or an unstructured one where you basically spend until you run out of money and then wait for the next paycheck.
Democracies face many of these same problems. This is particularly true of the modern welfare state that seeks to better the lives of its citizens through a whole range of government programs. Not only are there the traditional functions of government such as the military and the courts, it is now pretty much taken for granted by many that government should be involved in a whole range of other activities such as building roads, education, health care, the arts, broadcasting, and scientific research, to name just a few. Like the family budget there never seems to be enough money to do everything that people, or at least their politicians, want.
When a family faces a money crunch, the options for additional money are limited: families can either borrow, or they can change their employment situation by either getting a raise, a better paying job, or getting additional jobs. Some families try to get around the shortage of money by borrowing the extra money they need. If the borrowing is for a major purchase that they will be using for a long period of time, such as a house or a car, this can make sense. But if they are using credit cards simply to add to their monthly income, while it will work in the short term, it will only be a temporary fix. Credit cards are not a good option in the long term.
For a short period of time, one can artificially increase their disposable income by using credit cards. Need an extra $200 per month to make ends meet? Transfer $200 per month of spending onto credit cards and the problem is solved; but only temporarily. As credit cards are used, their balances go up. And as balances go up so do minimum payments. Before long that extra $200 per month is consumed by $200 in monthly payments to credit card companies that now must be made. In short, using credit cards creates new bills that must be paid and in the long term this only adds additional burdens to the monthly budget. Thus for individuals, the only real long-term solution to additional money is either a raise, a better paying job, or an additional job.
Governments can also borrow money, but this has a similar effect as with individuals. Again for major long-term projects this can make sense. It can also make sense when dealing with short-term problems with long term implications such as wars or recessions. Government also has the additional rationale that when the Government borrows money for long term projects such as a road, the money will be paid back by those using the road over its lifetime, at least theoretically.
An option that governments have, which families don’t, at least not legally, is to simply print the money they need. However, this is not a very good option, as simply increasing the number of dollars only makes each dollar worth less. In short you have inflation, and while you have more money, everything now costs more.
One other option governments have is to raise taxes. This is somewhat like an individual asking for a raise. However whereas an employee can ask, governments demand under penalty of law. Therein is the danger, for taxes act as a burden on the economy. If this is already clear to you, you can skip the next section and go directly to Taxes in Action. However if it is not clear, or if you question this, then continue reading.
Foundations
The foundation of our entire economic system is providing goods and/or services for a fee. Businesses either succeed or fail, based on whether they are providing goods or services that people want, at a price that they are willing to pay.e The businesses that do this well tend to make a lot of money, the ones that don’t, do not stay in business very long.
When someone gets a job, they are to some extent a business providing a service.f Their ‘customer’ is their employer. If they can provide a service that an employer is willing to pay for, then they get a job. Now just as some businesses are able to charge more for their goods and services, likewise some jobs pay more.
Discussion of the specific price difference involves going into the theory of supply and demand and is beyond the scope of the discussion here, but in short to get a better paying job, or to have a successful business, a person must find a need that is not being met, or not being met well, and then address that need in a way that is better than the competition. We will look more in depth at competition in the next chapter. But this boils down to a question of simple value. If a business can deliver more value per dollar they will get more business. If not, people will go elsewhere.
An employee’s service is of value to the employer because it helps the business to meets the needs of its customers more effectively. In addition, as the employee has more disposable income, they are then able to purchase more goods and services. The businesses that people purchase from are able to generate more revenue, and thus are able to purchase more goods and services, hire additional employees, or distribute the additional funds to their owner who can now purchase more goods and services. In short, it is a classic win-win situation where everyone does better. The economy grows.
The problem for government is that it does not provide goods and services in this fashion. Many people can think of stores they like to shop in, or businesses they like to deal with. But who likes to deal with the government? When was the last time you heard somebody say they wanted to go to the DMV or to the IRS when they were not being forced to go by government itself? While government does provide goods and services they do not compete in the marketplace for business, but rather, often require people to be their “customers.”
A business charges for its services based on people’s willingness to pay. This is how a business gets its money. From these monies the business must pay for its costs such as raw material, labor, taxes, etc. What is left over, if anything, is profit for the owner(s).15 Again if there is a lot of profit, the owner(s) will probably want to invest back into the business, so that it grows even larger. If there is not enough profit, the business fails. As a result there is a strong incentive for businesses to provide services that people want, and at a price they are willing to pay. Even when they are doing so successfully, they must be on guard for others who may come along and do it better.
No such incentive exists for government. Most people deal with the government only when they have to, and avoid it as much as possible. When people do deal with government, the service is generally not good.g This is not because the people who work for government are not as smart or as talented, but because they operate in a different system with different incentives and objectives.
If government revenues were based on a willingness to pay, government would cease to function very quickly. In a few areas, such as the National Parks, people probably would still go because they wanted to, but the vast majority would ‘go out of business’ very quickly. After all, how many people would want to go to the DMV and pay to have their car registered because they liked the services they provide and the way they provided them? As such, government services must be mandated and paid for in the form of taxes or required fees.
A classic example of how this leads to different approaches can be seen in the area of transportation in which there are both government and private choices. When privately run modes of transportation, such as the airlines, don’t have enough money, their approach is to try to attract more customers by providing better service, or by cutting fares. Lower fares mean more riders, more riders means increased revenues.h
When government run means of transportation such as local bus systems or subways have similar problems, their normal response is to raise rates. The reason for this difference is that they have different incentives, and therefore they have different responses.
Be it a private business, or a government office, both are focused on satisfying those who provide the money to pay the bills. In a private business, that is the customer. If the customer is not happy, they will take their business, and their money, elsewhere. But for a government office while the person coming into the office could be deemed the customer they are not the one who provides the
