Author: Larry Littlefield

In the discussion of public expenditures, it was shown that the unit of government that directly provides a public service or benefit isn’t necessarily the unit of government that pays for it. In this section, the overall structure of funding of government revenues will be discussed in detail. One finds nationally that local governments, which are responsible for a very large share of the direct provision of public services, pay for relatively little of this in local taxes. Fees for services, fines for misbehavior, and aid from higher levels of governments account for the majority. And many local government services are not only funded by state governments, or federal aid passing through state governments, but are provided under rules set by state governments. Under our federal system, the federal government collects most of the money, and local governments do most of the work, but it is the state governments that actually make most of the decisions on the margin. Here in New York City, there is an important difference. Local taxes pay for 60 percent of the city’s spending, even though that spending includes services and benefits, particularly public assistance and a Medicaid, that are state functions just about everywhere else. Still, the rest of the state in many ways controls the city’s budget.

As the discussion of inducements and requirements shows, not all government-directed activities are, in fact, undertaken by the federal, state, and local governments themselves. Of the $2,819 billion directly spent by all three levels of government in 1995, only $593 billion was spent on public employee wages and salaries, about 21 percent of the total. Another $40 billion was spent on public pension contributions for these employees, perhaps a similar amount was spent on other employee benefits such as health insurance, and more was spent on the buildings these employees occupied and the supplies they used at work. Even so, it is apparent that work done by public employees is just part of the range of government-directed activities. In fact, while total direct government spending equaled $2.8 trillion, more than one-third of the 1995 total GDP of $7.4 trillion, the work actually done by governments accounted for just under $1.0 trillion in the national income accounts, or about 13.3 percent of total GDP. Similarly, public employees accounted for just 21.6 million of the 149 million jobs in the U.S. that year, or about 14.5 percent.

Government expenditures, the subject of my prior posts, are not the extent of government activity. Instead of doing something itself, the government often uses inducements, restrictions and controls to influence – or force – private organizations or individuals to do it, or not do it, instead. Such inducements and requirements impose costs, but do not require the collection of taxes (except for enforcement), so they are in that sense “off the books.” That doesn’t mean, however, that the costs aren’t real. The possibility of using inducements and controls as a substitute for public revenues and expenditures is central to the developing health care debate. Rather than having the government collect taxes and fund health care for working age adults, Massachusetts has decided to try to force individuals and businesses to spend more of their own money on health care, a policy that from a budget perspective is “free.”

While my prior post organized public expenditures by category of public service, there is another way to look at it – by basis of eligibility. As the data in the prior post showed, only about 20% of public spending went for general services for everyone, with most of the rest either payments for the past (interest, pensions) or services and benefits with eligibility limitations. The most common limitations are based, at least in theory if not always in practice, on age, means (the amount of money one has or earns), needs (disability), or some combination of these. Spending by basis of eligibility is analyzed, using a variety of data from the 2001 Statistical Abstract, in the attached spreadsheet. Unlike the 1995 data previously prevented, this table is a hodgepodge and must therefore be thought of as a rough estimate. The tabulation finds that programs with eligibility limited by age, means and need accounted for about half of all government expenditures in 1998, with age-restricted benefits accounting for the vast majority.

My overview of government activities begins with an overview of public spending, by category, at the federal, state and local level, with data in the attached spreadsheet. The key point here is that much of what the government spends money on most working taxpayers never see. National defense. Interest and pensions. Income and health care for senior citizens. Education for children. And, to a lesser extent, income and health care for the poor, disabled and unemployed. Most of the remaining services that working age adults do see, protection services like police and fire departments, infrastructure and amenities such as roads, transit systems, parks and libraries, water and sewer systems and local trash collection – are provided by local governments. The only federal organization that regularly provides services direct to all of the American people is the Post Office.

To fully understand public policy, one must first understand what the three levels of government – federal, state and local – actually do, the relative magnitude of spending on different government functions and services, and how these are paid for. No one can figure this out just by reading the newspaper or watching the television news. The media discusses each issue, and each public expenditure category, one at a time, generally without reference to the totality of government activity. With the 2008 elections around the corner, I have elected to provide a comprehensive overview of what the government does, who does it, and who pays for it, what is relatively more or less important, and what is a federal, a state or a local responsibility. I will follow with a further discussion of equity and eligibility, since (as you will see) a large share of government expenditures are only available to those who meet eligibility requirements.

As Errol Louis wrote over the weekend, the New York City Housing Authority is facing a financial disaster similar to that faced by the New York City Transit Authority in the 1970s, and perhaps again soon. The causes are similar. “Solutions” that provided benefits to many politically important groups in the short run have proven to be a disaster in a future no one cared about. The NYC housing projects are, by (I believe early 1980s) federal law, the place of refuge for the worst off, most troubled and most vulnerable not just of NYC, but from anywhere. And, these people are only required to pay 30 percent of their income in rent, no matter how low that income is. At first, this federal burden was coupled with federal money that covered the net cost of the projects, the difference between what it cost to operate them and the paltry rent received. But more recently the federal government, because public housing is concentrated in NYC and has little support elsewhere, has cut funding for it. The projects have also been a politically convenient place for New York City to put those who for whatever reason become homeless. In fiscally difficult times, however, both the state and the city have cut their support, relying on the agency to shift burdens to the future. Moreover, the unlimited health care and the 2000 pension enhancement that are a boon to current and former NYCHA staff has sucked money away from services and maintenance in the projects. There is one key difference between the NYCHA and the MTA however. For public housing, the future is now.

If Sheldon Silver is right and Eliot Spitzer has learned his lesson, then he has learned the wrong lesson, and the rest of us need to be worried. Silver's lesson probably is:

a) Don't contest elections, even against the other political party, and upset the deal.

b) Don't challenge existing fiscal priorities.

c) Don't concern yourself with fairness for the victims of those priorities.

Mayoral control of the New York City public schools doesn’t expire until June 2009, but with the state legislature seemingly in the mood to oppose anything Mayor Bloomberg is in favor of, the Mayor has already started a public relations push. I happened to be at home one day last week and saw a commercial on the subject, albeit obliquely on the subject, on daytime television. And in late June Crain’s NY Business reported that in a breakfast for business leaders the Mayor “vowed to fight for renewal of mayoral control of the school system when the law authorizing it expires.” “It's hard for the Legislature not to reauthorize something where parents say, ‘My kids for the first time in memory are getting the kind of education they need to compete in the world,’” the Mayor is quoted as saying. Another publication quoted the Mayor as not wanting to go backward on education. Well, it isn’t hard for the New York State legislature to do anything, regardless of how good or bad it is for the city’s children. They don’t care. They don’t have to. But even if they did, it isn’t clear Mayoral control should simply be extended as it.

Just because someone cames up with a really bad solution doesn’t mean he didn’t identify a legitimate problem. At the core of Marx’s economic thought is the identification of a “contradiction” in capitalism: each individual business can maximize its own profits by cutting its workers’ pay, but business in general has to turn around and sell products and services to those same workers in order to make money. The result, Marx asserted, there would be a series of increasingly dire crises and depressions, a theory that looked pretty good in 1932. But capitalism is an adaptable economic system. For the past decade or more, businesses have been able to make rising profits, and top executives have been able to capture a rising share of national income, by selling more and more to those who have less and less. This has been possible for three reasons. First, thus far health insurance and pensions, which affect well being in the future when one is sick or retired, have been cut more than cash, which is spent today. Second, Americans have gone deeper and deeper into debt, increasing spending today but cutting it tomorrow. And third, people in the rest of the world have been willing to lend Americans the money they need to spend more than they earn. But the wheels may be about to come off this system, and New York City and State had better be ready for the fiscal consequences.