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5. Binary Intervention: Government Expenditures
WHEN1 WRITERS ON PUBLIC FINANCE and political economy reach the topic of “government expenditures,” they have traditionally abandoned analysis and turned to simple institutional description of various types of governmental expenditure. In discussing taxation, they engage in serious analysis, faulty as some of it may be; but they have devoted little attention to a theoretical treatment of expenditure. Harriss, in fact, goes so far as to say that a theory of government expenditure is impossible or, at least, nonexistent.2
The bulk of discussion of expenditures is devoted to describing their great proliferation, absolute and relative, in the last decades, coupled with the assumption (implicit or explicit) that this growth has been necessary to “cope with the growing complexities of the economy.” This slogan or similar ones have gained almost universal acceptance but have never been rationally supported. On its face, the statement is unproved and will remain so until proved.
Broadly, we may consider two categories of government expenditures: transfer and resource-using. Resource-using activities employ nonspecific resources that could have been used for other production; they withdraw factors of production from private uses to State-designated uses. Transfer activities may be defined as those which use no resources, i.e., which transfer money directly from Peter to Paul. These are the pure subsidy-granting activities.
Now, of course, there is considerable similarity between the two branches of government action. Both are transfer activities insofar as they pay the salaries of the bureaucracy engaged in these operations. Both even involve shifts of resources, since transfer activities shift nonspecific factors from free-market, voluntary activity to demands stemming from State-privileged groups. Both subsidize: the supply of governmental services, as well as the purchase of material by government enterprises, constitutes a subsidy. But the difference is important enough to preserve. For in one case, goods are used for and resources are devoted to State purposes as the State wills; in the other, the State subsidizes private individuals, who employ resources as they think best. Transfer payments are pure subsidies without prior diversion of resources.
We shall first analyze transfer payments as pure subsidies and then see how the analysis applies to the subsidizing aspects of resource-using activities.