Text: Neil Bruce, Public Finance and the American Economy
Grading: Grades will be based upon two midterms, a final examination and homework. The weighting is approximately 20%,20%,40%,20%. The examinations will be of the multiple-choice type and the major homework assignments will be the creation of two webpages. Instruction on the creation of webpages will be provided in class.
The first midterm will cover the material in Chapters 1 through 7 in the text plus additional material presented in class. The second midterm will cover material in Chapters 8 through 13 and any additional material presented in class. The final will cover the entire text with special emphasis on the material in Chapters 14 through 19.
Content: Public Finance is concerned with the economics of the public sector; with taxation and expenditures of governments and their effects on the economy. In addition, governments create regulations that significantly affect the economy without involving either taxes or expenditure. The end product of a study of public finance should be the formulation and evaluation of public policy. At one time Public Finance presumed that governments were pure, selfless institutions that would function perfectly to implement socially optimal policies. The newer, more realistic approach treats the government sector of an economy as a special interest group of people operating in their own self-interest which may or may not be in the interest of the general public. This approach is called Public Choice Theory. For example, politicians behavior may be most easily be explained on the basis that they are maximizing the chances of their being re-elected. This accounts for an emphasis on short term projects which will have their impact in time to influence the electorate at the next election. The good things are scheduled before the next election and the bad things, such as balancing the budget, are postponed until after the next election. But governments are made up of career bureaucrats as well as elected politicians and the priorities of the bureaucrats may be different from those of the politicians.
The fact that politicians or bureaucrats are, in their decision making, pursuing their own interest is not necessarily detrimental to the public interest. In the private economy there operates the Invisible Hand Principle that businesses while attempting to maximize their profits will at the same time achieve public good that was no part of their intention. It is the institution of a competitive market that aligns private interest and public good. This alignment is not achieved when the markets are monopolistic. The policy problem is to create institutions so that the private interest of the decision makers is not at variance with the public interest. What we do not want to do is to create arrangements that work only if the people in power are saints. As an introduction to the Public Choice Theory perspective of government I will present some information on famous cases of political bosses and their machines in the U.S. which controlled the politics and economy of cities and states. These are people who definitely were not saints. On the other hand these people did have a remarkable amount of popular support. They well illustrate the point that the ideal form of government is not democracy per se but constitutional democracy.