PA

1 Comparing the Roles of Business and Government

Chapter Contents

Case Scenario: Zoey Considers Her Options

Defining Government-Business Relations

Why Government at All?

The Debate about the Role and Size of Government

From Debate to Analysis: Judging Government’s Performance on its Purpose and Merits

Reform of the Private and Public Sectors

American Government Institutions

Analytical Case: The Changing Face of Higher Education with For-Profit Education

Practical Skill: Researching Government Jobs

Summary and Conclusion

Case 1 Scenario: Zoey Considers Her Options Zoey is at the student union, enjoying a soda in between classes at college. She is about to get her degree in business administration at a regional state university. She has majored in accounting and will graduate with a high GPA. However, in trying to maintain good grades and work part time at the university, Zoey has not really focused on what she would do after graduation until now. The reality is beginning to sink in—she will soon be out of school! She picks up her soda can, takes a sip, and begins to really consider her options. Although she is good with numbers, it is not her passion. She has come to realize that she is happy to have it as a powerful tool, but making a lot of money is not her first priority at this point in her life. More important to her is an interesting job that will provide her with experience and an opportunity to use her analytic skills to develop her other interests into a true career. Zoey has a horse named Happy, now 22 years old but still rideable. It is her most deeply loved possession. As she ponders what she could do with her life, she realizes that working with animals is not a passing fancy. However, that is not the skillset she has developed, so it is not likely that she can pursue that directly, at least for the time being. Zoey also considers the political science classes she has taken during her undergraduate career. She found them fascinating and would have majored in it except that practically, she knew job opportunities would be highly limited with a general liberal arts degree. Now she wonders if she might work for a government. She might consider working for her local city,

county or state, or even the federal government. She understands that many government jobs pay well, and the training that they provide is generally excellent. Indeed, maybe she could get a job that involved both animals and the government! To explore a few of these options, Zoey takes her laptop out of her backpack and begins googling various sites. She starts by searching for government jobs in her state. One of the top listings is USAJOBS, which turns out to be the electronic federal job center. Her state has two job locations, one for private sector employment (called the state job bank) and one for jobs in state government. There is also a cityjobinfo site with a .gov suffix. While there are third-party sites for government jobs, Zoey does not think it wise to use them until she has exhausted the direct search prospects first. She doesn’t see county jobs high in the google listing, so she types that in and goes directly to the available jobs in the counties close to her. She is amazed at the number of prospects. She sees opportunities to use her accounting skills, which she may rely on for her first job or two. One of her professors told her that having worked in both a government and private sector job provides great experience and makes you much more marketable in both sectors. In this area, Zoey sees far more opportunities than she expected. However, she did not find any jobs with her specific interest in working with animals. A little saddened, Zoey wonders if her boyfriend Zach has any ideas that could help. A little frustrated as well, Zoey grabs a few dollars and heads to the snack bar to buy some chocolate chip cookies. When she googles government jobs with animals, Zoey finds few options. There is a government veterinarian position at the federal level in her area and one working for animal control at the county level. She is not qualified for one and not interested in the other. Zoey would like to continue her job search, but it is time to go to one of her last classes. Well, in just a half hour she learned a lot. She resolves to return to her research about opportunities working with government soon.

Defining Business-Government Relations in the United States

Business-government relations are defined by how the public and private sectors interact in their

numerous complementary, cooperative, and conflicting roles. Definitions vary extensively from country

to country because of the type of government, the nature of the business environment, and the types of

mechanisms and strategies used by each sector in various aspects of their relationships. Prominent

features of business-government relations are the following societal choices:

1. The particular mix of strategies used for implementation of public policy: government ownership, partial ownership (government corporations or government-backed corporations), public-private partnerships , contracting out, procurement, tax incentives, and regulation, among others (e.g., the US oil industry is private, while over 80 percent of the oil production and profits around the world is owned by their respective governments1);

2. The monetary policy pursued (e.g., the control over the supply of money and interest rates as is done by the Federal Reserve) which affects the short and long-term business environment;

3. The fiscal policy followed (e.g., the amount of taxes collected and the way they are spent, such as defense versus education, as well as the role and size of debt which is largely controlled by Congress) which affects the short and long-term business environment;

4. The amount of government protection of the society’s most vulnerable (e.g., welfare), of individual rights (e.g., due process rights; transparency) and of social responsibilities such as the environment, product safety, etc. (e.g., the resources provided to the EPA, OSHA, the FDA, etc.) which have direct and indirect effects on the economy and thus business;

5. The amount of promotion of the business sector domestically (e.g., economic development) and internationally (e.g., trade policies and promotion);

6. The amount of prohibition of government competition (e.g., against entering markets, non- compete clauses in laws,2 legal prohibitions against price negotiation3); and

7. The influence of the private sector, especially big business and Wall Street, on government policy making (e.g., through lobbying, campaign contributions, advisory committees, special access,

drafting legislation, fielding political candidates, high-level appointees such as at Treasury Department, and other means) and administrative actions.

The US model, for example, has shown some of the least government intervention in private production

of goods and services, the least management of industry strategies, and a more regulatory approach to

social and individual responsibilities. Asian countries such as Japan, China, and South Korea have shown

a much more corporatist approach, with government steering industry strategies and choosing areas of

the economy to emphasize. The European approach has historically been more of a limited socialism

model since World War II, ensuring broader inclusiveness of the population and less economic disparity.

The European model has been shifting toward the US model for some time, however, even as the US has

taken small steps toward the European model, such as with prescription drug expansion for Medicare in

2003 and the comprehensive health reform (the Patient Protection and Affordable Care Act, or

Obamacare) enacted in 2013. On the other hand, the US government has been robust in its role in

monetary and fiscal policy in order to keep the economy balanced and a preferred “safe harbor” for

world capital.

Harvard business scholar Roger Porter has summarized the context of business-government relations in

the US over time with this useful list of factors:

 A pattern of private ownership of capital with little public enterprise [state ownership of industries];

 A tendency to achieve public purposes through regulation rather than governmental ownership;

 A preference for markets and resistance to central planning (i.e., planning by the national government);

 Relatively aggressive antitrust policies4 that have limited business concentrations;

 An attachment to openness and due process and a tendency to resolve many issues through judicial means;

 Widely distributed power between levels of government and within each level of government;

 A stable two-party system in which power is genuinely shared;

 A highly differentiated business community that includes a relatively large number of umbrella business organizations, a host of national associations and trade organizations, and much representation by corporations individually and collectively in the process of shaping public policies; and nonetheless

 Remarkable stability with respect to the economic, legal, and institutional framework (Porter 2002).

Why Government at All?

The philosopher Thomas Hobbes pointed out that government is more than a fact of life; it is a

necessity. As the foundation of modern social contract theory from which business contract theory

flows, he asserted that without it, there would be no place for industry, no navigation, no significant

buildings, no heavy instruments for travel or agriculture, no knowledge of the face of the earth, no

account of time, no arts and letters, and indeed, no society beyond small clans; “and which is worst of

all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and

short.” To build a society, he argued, people must not only work together, but there must be a

consistent system of rules to motivate people to want to be productive beyond their daily survival

needs. Indeed, the great things of society are a product of complex coordination. While some utopians

have asserted that life without government is possible, examples beyond small communes exercising

direct democracy or very sparsely populated societies are largely absent.

Exhibit 1.1. The Frontispiece of the Book Leviathan by Thomas Hobbes

(Source: Wikimedia Commons)

So most of us accept that not only is government necessary, but in modern times it ensures that our

nation is secure and we have laws and police for security, that our drinking water is pure and our

airplanes safe, that our money will not lose its value, that our roads, bridges, tunnels, and harbors are

well-maintained, that we are provided basic education, and that we can have a say in our policies

through the political system. It should be apparent that this list can go on and on.

Of course governments, like the people they represent, are imperfect, and can themselves become the

cause of problems and misdeeds. As the great statesman William Burke noted, “Among a people

generally corrupt liberty cannot long exist.” So at their worst, governments can launch wars of

aggression, become captive to small oligopolies, demotivate progress, and interfere in people’s personal

freedoms and impose harsh societal norms. Fortunately, as the founder of Pennsylvania noted, “if men

be good, government cannot be bad,” and Americans have been very fortunate to have a government

with a social conscience that has evolved with society. Examples of that evolution include the

articulation of individual freedoms in the Bill of Rights, the emancipation of slaves, the inclusion of

women in the political system (i.e. giving women the franchise to vote), and the expansion of current-

day civil rights.

Pragmatically, we know that government not only is the place where rules are authoritatively made for

the entire economy, but that government itself directly constitutes about one-third of the economy. So

for business people, understanding government only makes sense. Business people need to know the

rules, such as zoning codes, and frequently want to try to influence the rulemaking process, such as in

zoning variances. Government provides a large market for goods such as office furniture and airplanes,

offers a vast array of services useful to business such as trained workers and employment services, and

manages business investment at the local level by making it more or less strict and expensive to develop

businesses or residential construction. It also manages international trade agreements through

organizations such as the World Trade Organization, and global finance as it flows through the

International Monetary Fund and World Bank.

There are two fundamental assumptions that underlie this book. The first is that business-government

relations constitutes a necessary skill set for modern business people because government in modern

society is large and thoroughly integrated into our lives. Understanding how governments operate and

the democratic processes that they must follow, what services they offer, and how to work well with

government officials and personnel has become as vital a function as accounting, finance, marketing,

human resource management, or management of information systems.

The second assumption is that we have a duly established, contract-based government that contributes

enormously to the highest quality of life that the world has ever experienced. Nonetheless, all

governments, including governments in the United States, function better or worse depending on a

variety of circumstances related to the quality of policy making, decision making, leadership, and

implementation. Reasonable people can disagree on the areas that government should emphasize or

avoid, or on the overall size of government, and it is not the purpose of this book to assert, for example,

that more or less government is good or bad. However, it is the purpose of this book to describe what

government actually does, to report on its record even when it has not been successful, and, most

importantly, to provide analytic tools to understand where government is more or less likely to be

successful and to fairly evaluate and criticize its performance. That is, we want a better understanding

of, and better tools for, the appreciation and critique of government in its overall functioning, especially

as it deals with business. Also, to the degree that we implicitly evaluate the record, strengths, and

weaknesses of business, we will strive to offer the same fair-handed, but candid, treatment.

In this chapter, we next move to the debate about the roles of government, tackle a critical analysis of

government functions, review private and public sector reform, and then end with a rapid recap of

government structure. These topics are further expanded upon in the following chapters of Part I. Part

II focuses on business-government relations in the sociopolitical arena related to interest group politics

and ethics, Part III covers the policy areas of social regulation and economic policy, Part IV covers

economic development, and Part V covers business-government relations in the global context.

The Debate about the Role and Size of Government

Since the nation’s founding, it has been debated how much of a role the government should play in

business affairs. To this day, the design of the nation’s political and economic institutions reflects a

clash, yet also a creative blending, of two distinct theoretical ideas: a free market philosophy and an

active government doctrine (Lehne 2006). In this section, we will first look at the history of the debate,

and then we will look at some contemporary statistics that discuss the size of government in three

different important dimensions in absolute and proportional terms. We will also look at the

explanations for the size of government. We also introduce the roles of government in this section.

Historical Debate: Laissez-Faire versus Activist Government Approaches

A free market economy (also known as market economy, or Laissez-faire approach, a French term that

means “leave it alone”) refers to an economic system in which decisions regarding investment,

production, and distribution are based on supply and demand. The prices of goods and services are

determined in a free price system. The idea was preached by Adam Smith (1723-1790), a Scottish social

philosopher and a pioneer of political economy. In the same year that the Continental Congress declared

independence, Adam Smith published his classic work: An Inquiry into the Nature and Cause of the

Wealth of Nations (1776), also known as The Wealth of Nations, which laid the foundation of modern

economics. Smith praised the advantages of freely operating markets, in which “an invisible hand” could

help to promote not only the individual interest, but also the public interest. Smith believed the less

government intervention in economic matters, the better, as government could neither have

appropriate knowledge nor be impartial to manage a nation’s economy effectively.

Exhibit 1.2. Adam Smith (1723-1790)

(Source: Wikimedia Commons)

Smith’s Wealth of Nations was a critique of the economic theory, mercantilism, which was a prevailing

thought that dominated public policy making in colonial times. Mercantilism had encouraged European

expansion and guided British policy toward its colonies since the 16th century. According to

mercantilism, national wealth could be gathered or even plundered from neighbors or colonies. To

ensure the prosperity and military security of the state, government should manage substantial aspects

of economic activity, especially foreign trade and tariff protection for domestic industries. Mercantilists’

ideas were embraced by Alexander Hamilton (1755-1804). In his Report on the Encouragement and

Protection of Manufacturers (1791), Hamilton advocated an active role of government in economic

affairs, especially in protecting domestic industries through federally-funded assistance and tariffs.

Newer versions of this activist government philosophy are popular today in continental Europe (Georges

1996; Siaroff 1999) and east Asia (Hau and Hasmuth 2013).

Exhibit 1.3. Alexander Hamilton (1755-1804)

(Source: Wikimedia Commons)

When the founding fathers debated the design of governmental institutions for the new nation, they

drew insights from both intellectual ideas: free market theory and the active government doctrine

associated with mercantilism. On one hand, they wanted to limit the role of government, worrying that

a government actively involved in the details of the economy might overshadow liberty and lead to

economic tyranny; yet on the other hand, they saw the necessity of retaining government power in

certain economic and trade policies to protect their fledging industries. Throughout the history of the

United States, these two intellectual ideas, although framed using various terms, have constantly been

adjusting the institutional design of government and shaping public policies of the day.

The nation started with a very limited government. During the Industrial Revolution (1820-1870),

American government started to pursue a moderate control of certain aspects of the economy. The

Industrial Revolution made the United States a leading global industrial power by the late 19th century.

Despite the gradually expanded government roles in the nation’s economy, America’s commitment to

free market theory was extremely high in the late 19th and early 20th century. The end of slavery, as well

as the surge of immigration, created a large market of inexpensive labor. New technologies in iron and

steel manufacturing, new communication tools such as telegraph and telephone, the emergence of

corporations as the dominant form of business organization, vast infrastructure improvements, and a

readily available supply of natural resources all fueled the engine of capitalism. Powerful industrialists

such as Andrew Carnegie, Jay Gould, and John D. Rockefeller, known as “robber barons” by their

enemies, held great wealth and power. This period of cutthroat competition for massive wealth

accumulation, known as the “Gilded Age,” eventually created the call for reform both in the private

sector and in government (which was thought to have become corrupted by big money interests)

simultaneously, thereby segueing into a new period called the “Progressive Era.” The Progressive Era

(1880 to 1920) saw the reform of the private sector by means of “trust-busting,” or anti-monopoly laws,

and the reform of local government (e.g., making it less partisan in many places) and the Congress, by

means of restructuring the Senate with the Seventeenth Amendment.

The Great Depression, which began in 1930 largely as a result of market excess and the devastating

economic collapse that worsened over four years, introduced an era of active government controls that

are associated with Keynesian economics. John Maynard Keynes (1883-1946) was a British economist,

one of the founders of modern macroeconomics, and considered the most influential economist of the

20th century. In his book The General Theory of Employment, Interest, and Money (1936), Keynes

introduces the idea that some private sector decisions could lead to overall inefficiency, and could

require active government policy responses. Without regulation, for example, thousands of banks could

fail in a single year, wreaking havoc. During 1933 alone, over 4,000 banks did indeed fail, wiping out over

$140 billion dollars in savings. Such losses caused millions of depositors to withdraw their money,

leading to the collapse of the economy for a nearly a decade. Keynesian economics advocates a mixed

economy, in which the private sector is predominant, but in which government also plays a role in order

to prevent depressions and intervene during milder recessions. Keynesian economics served as the

standard economic model in the United States during the latter part of the Great Depression, World War

II, and the post-war economic expansion (1945-1973).

Exhibit 1.4. John Maynard Keynes (1883-1946)

(Source: Wikimedia Commons)

The economy was increasingly expanding and prosperous during this post-war period, until the early

1970s. Under new foreign competition and rising oil prices, the nation experienced a period of

“stagflation” featured by sluggish growth, high inflation, and high unemployment rates. Up to that time,

Keynesian economists ignored the possibility of stagflation because historical experience suggested that

high unemployment was commonly associated with low inflation, and vice versa. However, when

stagflation occurred, it became obvious that the relationship between inflation and employment rate

could shift. Economists became skeptical of Keynesian theories, and Hayek’s defense of classical

liberalism regained popularity.

Exhibit 1.5. Friedrich A. Hayek (1899-1992)

(Source: Wikimedia Commons)

Friedrich A. Hayek (1899-1992), winner of the 1974 Nobel Prize in economics, published his classic work

The Road to Serfdom in 1944, in which he launched a war against central planning. A planned economy

is an economic system in which the government controls and regulates all aspects of economic

activities, including investment, production, distribution, prices, etc. Hayek believed that government

should play a limited role in the areas that most members of a free society would tend to agree should

be under market control. If government’s role reached into those areas where people would probably

not readily or generally agree, it could create a tendency toward dictatorship and totalitarianism (the

“serfdom”). Hayek’s resurgent popularity introduced a world-wide movement dubbed “neoliberalism,”

which espouses free market economics (or economic liberalism) as a means of promoting economic

development and securing political liberty. Famous proponents of the neoliberalism in the US included

another famous Nobel Prize winner, Milton Friedman (1962), and his colleagues at the University of

Chicago. The movement is sometimes described as an effort to reinvigorate the policies of 18th and 19th

century classical economic liberalism preached by Adam Smith.

The emergence of neoliberalism coincided with the rise of conservative governments in Great Britain in

1979 with Prime Minister Margaret Thatcher, and in the United States in the 1980s with Ronald Reagan.

Under Friedman’s influence, President Reagan promised an economic revival through deregulation, tax

cuts, and a reduction in the size and scope of federal programs. Reagan’s economic policies led the

nation through the recession that had begun in the late 1970s; however the economic recovery was

beset by a soaring budget deficit that resulted from increased defense spending, as well as reduced

revenue due to the enacted tax cuts. After the dissolution of the Soviet Union in 1991, which often

symbolizes the defeat of the planned economy, free market economics – under the name of

neoliberalism – became the worldwide reigning economic model. Reagan’s successors, both Democrats

and Republicans, more or less all embraced free market doctrines.

The advent of the global financial crisis of 2008, however, led to a resurgence of Keynesian thought. 5

Economic policies undertaken in direct response to the crisis by both Republican President George W.

Bush, and Democratic President Barack Obama, reflected Keynesian theoretical underpinnings (Giles,

Atkins, and Guha 2009). Bush, for instance, used government power and finances for a massive bailout

of Wall Street. As the financial crisis quickly deepened, Obama continued the strong support of Wall

Street and expanded it to include the industrial sector (e.g., a bailout of the auto industry), main street

(along with the Federal Reserve who pressured banks to lend to small business with extraordinarily low

interest rates to big banks), and localities (stimulus funds to prevent the immediate contraction of state

and local governments struggling with a precipitous loss of tax revenues). 6

Keynesian support of the economy surely kept it from plunging into a deep recession, but the price was

a vast expansion of federal debt. The growing level of debt has renewed the forceful argument for

reductions in government expenditures, and thus a shift toward reliance on the market. See Exhibit 1.6

on the virtues and traps of Keynesian and supply-side economics for a review of some of the pertinent

issues. The next section looks more closely at the facts about the size and roles of government before

analyzing the pros and cons of the way it functions today with regard to business.

Exhibit 1.6. The Virtues and Traps of Keynesian and Supply-Side Economics In the ideal, Keynesian economics promotes a strong and large capitalist private sector with a moderately-sized government to provide a variety of ongoing national, local, and individual functions such as defense, education, and transportation. Because of the normal ups and downs of the business cycle, it also advocates strong government spending when the business cycle is down, especially in infrastructure and employment. It also advocates programs that tend to collect money over the long term, such as unemployment insurance, and that will be drawn upon more heavily in bad times. Such programs, which were absent during the Great Depression, provide economic stabilization. There is little doubt that the large Keynesian infusion of government funds into banks, select corporations, infrastructure, and state and local governments greatly softened the downfall caused by the Great Financial Crisis of 2008. Many believe that the infusion of funds, along with the programs such as the Federal Deposit Insurance Corporation (FDIC) and Social Security, averted another great depression. Supply-side economics points out the power of a growing economy. For example, the Federal government dutifully made payments on the large World War I debt and brought it down by one-third in absolute terms by 1929. However, because of economic expansion, the debt had fallen by one half as a function of the GDP. Government revenues were also up considerably in 1929, largely owing to the expansion of the economy. The central insights of supply-side economics are that, in the long term, a stable absolute debt becomes less significant as the economy grows, and a vital private sector economy becomes more important in order to maintain that growth. The challenge of Keynesian economics is one of being virtuous in good times. It is easy to spend money when it is flowing into the treasury rather than save it for a rainy day. While economic discipline at the federal level was good through 1970s, it collapsed in the 1980s. Conservatives wanted to cut government heavily except for a build-up in defense, and Liberals refused to eliminate programs. In the end, Conservatives were able to cut taxes and ratchet up defense spending, Liberals got to keep their programs, and so the deficit began to grow. While there was a round of sensible deficit reduction during the Clinton presidency when fiscal Conservatives pressured Clinton and the Democrats into paying down the debt during the economic boom, this resolve vanished thereafter, with neither Conservatives nor Liberals willing to make the necessary sacrifices. Thus, when the

recession hit in 2008, the debt was already skyrocketing, and Keynesian spending patterns took the US back to World War II highs. On the other hand, the challenge of supply-side economics at the macro-level is one of remembering that it only works on an economic upswing, and that downturns are inevitable. Indeed, the excessive enthusiasm of supply-side economics can lead to a short-term policy making perspective, unrealistic assumptions for the long-term, and excessive austerity when the economy is most fragile.

The Relative Size of Government

To get a balanced sense of the size of government, there are three primary metrics that one must

examine: the size of the workforce, the size of the budget, and the size of the debt.

In the earliest days of the country, the federal, state, and local government were all relatively small. For

example, less than one-tenth of one percent (.007 percent) of the population was employed by the

federal government (civilian) in 1800, and the bulk of those who did work in government were

employed by the Post Office; state and local governments were also very small.7 Federal civilian

employment grew to .7 percent of the population in 1940, to 1.4 percent by 1970 when it reached its

peak, and in 2010 it had shrunk to .7 percent of the population. The peacetime average employment for

all governments (local, state, and federal) grew from 4.2 percent of the population immediately after

World War II to 6.4 percent in 1970, 7.4 percent in 2000, and declined to 6.4 percent by 2012. After the

initial boost to government employment at the beginning of the 2008 fiscal crisis, which was intended to

prevent employment in both sectors from collapsing simultaneously, government was cut in

proportional and absolute numbers. By 2013, total government employment was the smallest percent

of population since 1960s. While the current level of 14 percent of the entire workforce working for

government may seem high in comparison to before the First World War when roads were largely

unpaved, street lighting was minimal, public education was rudimentary, and public health coverage

was primitive, the US remains at the bottom of the list of developed countries, with only Japan having a

smaller percentage.8

Absolute government employment has grown since World War II (see Exhibit 1.7), but it has grown very

differently among the various levels of government. Federal employment has been relatively flat in

absolute numbers, while state government has grown moderately. Outpacing federal and state levels,

local government growth has been very substantial with its focus on service provision.

Exhibit 1.7. Growth of Government Employment Since World War II

The second metric to examine for a clearer sense of the size of government is the size of budgets. The

absolute size of all government budgets has been increasing at all levels since World War II. Overall

expenditures have increased from $62 billion in 1950 to $5.13 trillion in 2010.9 However, far more useful

as an indication of the size of government is its scale in relation to the economy. Government has grown

from approximately a 23 percent share of the economy in 1950 to 36 percent in 2010. The proportional

growth rates for the federal and the state/local expenditures have been roughly equivalent, although

state and local governments are more dependent on federal grants than in the past. See Exhibit 1.8 for a

comparison of the growth of government in absolute and relative terms.

Exhibit 1.8. Absolute Growth of Government: Total Government Expenditure 1948–2012

(in billions of dollars)

Fiscal Year Total

Government Expenditures

Federal Government Outlays Addendum:

Federal Grants (NIPA

Basis)

State and Local

Government Expenditures

From Own Sources

(NIPA Basis) 1

Total On-

Budget Off-

Budget

1950 62.0 42.6 42.0 0.5 2.0 19.4

1960 135.8 92.2 81.3 10.9 4.0 43.6

1970 298.3 195.6 168.0 27.6 17.0 102.7

1980 853.5 590.9 477.0 113.9 70.9 262.6

1990 1,862.2 1,253.0 1,027.9 225.1 107.7 609.2

2000 2,830.5 1,789.0 1,458.2 330.8 244.0 1,041.5

2010 5,129.8 3,457.1 2,902.4 554.7 520.1 1,672.7

1 Net of interest receipts.

Proportional Growth of Government: Total Government Expenditures as Percentages of GDP: 1948–2012

Fiscal Year Total

Government Expenditures

Federal Government Outlays Addendum:

Federal Grants (NIPA

Basis)

State and Local

Government Expenditures

From Own Sources

(NIPA Basis) 1

Total On-

Budget Off-

Budget

1950 22.7 15.6 15.4 0.2 0.7 7.1

1960 26.2 17.8 15.7 2.1 0.8 8.4

1970 29.5 19.3 16.6 2.7 1.7 10.1

1980 31.3 21.7 17.5 4.2 2.6 9.6

1990 32.5 21.9 17.9 3.9 1.9 10.6

2000 28.8 18.2 14.8 3.4 2.5 10.6

2010 35.8 24.1 20.2 3.9 3.6 11.7

2011 35.5 24.1 20.8 3.3 3.5 11.4

2012 34.0 22.8 19.5 3.3 3.0 11.3 1 Net of interest receipts. Source: OMB historical tables.

Our third important metric when considering the size and roles of government examines how much

government takes in as revenue, and how much it spends. This perspective asks whether government is

living within its means, outspending its current resources, or paying off its debts. In any given year when

expenditures and revenues match, the budget is said to be in balance. When expenditures exceed

revenues, there is a deficit, and, it follows, when revenues exceed expenditures, there is a surplus. The

amount owed in any given year that is based on unpaid deficits is called the debt. According to the

National Debt Clock, the total national debt in 2013 was approximately 17 trillion dollars and therefore

over 100 percent of GDP, representing a debt of $53,000 for every US citizen. However, since

approximately 4 trillion is held in government accounts, some economists consider the national debt to

be 13 trillion. The interest payments on the national debt are treated as an expenditure in annual

budgets. When the debt increases proportional to the size of the budget, the interest payment

becomes a significant category of expenditure; in 2011, interest payments increased to 6 percent of the

overall federal budget and will increase in the future.

Debt is generally not allowed by state constitutions as a part of the annual budget process. However,

state and local governments nonetheless borrow money for long-term obligations primarily through

bond measures. At one time, these bond measures were used largely for expensive infrastructure

improvements in which the expense was essentially being amortized (i.e., spreading out the cost of a

sewer system or bridge over a number of years). Today, local government bond issues are more

frequently used for services and, occasionally, for general fund support. State and local combined debt

stood at about 3 trillion dollars in 2013, with New York having a combined debt to GDP ratio of over 27

percent and Wyoming, at 5 percent, being the most debt free. State and local debt is projected to rise

more slowly than federal debt as of 2013, as state and local governments have cut workforces

substantially and the housing market has begun its rebound. See Exhibit 1.4 as an example of the times

in which there have been deficits and surpluses (only from 1998 to 2011). It shows the dramatic impact

of the great fiscal crisis in 2008 on debt accumulation, in which revenue dropped and expenditures

spiked.

Exhibit 1.9.

As with the workforce and budget, however, it is important to evaluate the size of the debt in relation to

the economy as a whole. The US national debt is a function of many factors, but the two most dramatic

factors are war and recession. The great wars – the American Revolution, the Civil War, and World Wars

I and II – caused huge national expenditures that took decades to pay off. In the case of World War I, for

example, there was not enough time to pay down the debt completely before the country was mired in

recession, so it was rolled into the costs of new national calamities.

There are two ways to bring down the size of debt. One way is to pay it off as one would do in a

household or business. Thus, after World War I, subsequent Presidents and Congresses ensured that

every year from 1920 through 1930 the national debt was being paid down with small but steady

surpluses, to approximately 35 percent of the absolute amount. Yet almost as important to decreasing

the size of the debt was renewed expansion of the economy. Between payments for debt reduction and

increased growth in the economy, the overall debt was reduced from a 1919 high of 32 percent to less

than 15 percent in 1929. These classic cases are well illustrated in Exhibit 1.10 below for events

through World War II.

Exhibit 1.10.

Beginning in the 1980s, different economic philosophies have affected the debt cycle. Tax rates were

perceived to be too high in the 1970s, and this led to tax reductions at all levels of government. Services

were not reduced at the same time, however, so revenue and expenditure patterns rarely matched,

pushing up annual deficits and overall debt in the same way that a war normally would. A reverse of this

pattern occurred in the latter part of the Clinton Administration when a conservative Congress and a

“new Democrat” President vied with one another in an effort to reform government. One positive

example was the Welfare Reform Act of 1996, which kept in place programs that ensured the very

poorest children and their mothers would continue to get assistance, but that reduced excessive use

and abuse of the program in order to cut costs. The pattern was again reversed under a Republican

presidency in the early 2000s, with new tax cuts and increased defense spending, raising the debt

modestly (about 1.5 trillion), even though the economy was expanding rapidly. The collapse of the

economy in 2008 triggered substantial new deficit spending, as was seen during the Great Depression in

the 1930s, which in turn further magnified the contraction of the economy.

Various people have speculated about the underlying reasons for the expansion of government budgets.

The earliest in modern times was German economist Adolph Wager, who proposed a Law of Increasing

State Activity to explain the growth of government in democratic states. He asserted that governments

have a tendency to be given new roles over time, and are asked to do those roles more intensively as

well. As governments learn to do these functions efficiently, they are asked to do yet more. Two

researchers in the UK produced an assertion which focused on the economic dynamic that was termed

the Peacock-Wiseman Hypothesis (Peacock and Wiseman 1961). They argued that the single most

powerful factor of government expansion was revenue expansion. Thus, wars greatly expand revenues,

which may decline slightly after the special exigencies of wartime economies, but which rarely return to

their lower pre-war levels. They argued, then, that psychologically the “tax tolerance” of people is very

important, and once stretched by wars and disasters, rarely completely resumes its former scope,

assuming the ongoing success of the democratic capitalist state. Also, political scientists have long

pointed out that special interest groups are highly effective in getting their needs addressed in public

policy processes because of their tenacity in their pursuit for a piece of the pie, however noble or self-

serving, from funding for developmentally disabled children to subsidies for tobacco farmers.

Other researchers have argued that the nature of modern society requires more public management

and investment, leading to a development model of government. In particular, they argue, modern

societies need mass education systems that provide the foundation for an educated workforce and a

consistently good infrastructure that provides for the transportation of goods and services. Highly

developed societies need greater management of complex modern issues such as poverty and mass

health care. Finally, government growth is most likely when government is perceived as a positive

engine of social and economic good. For example, the US governments’ reputation for repairing the

private sector economy of the Great Depression and winning World War II encouraged a favorable

environment for it to expand into new policy areas for more than 30 years afterward.

Still, there are also powerful forces limiting the growth of government. Few things are more disliked

than taxes. Daniel Defoe’s famous comment about the certainty of death and taxes is relatively typical

and reminds us of our resignation, and annoyance, with taxes. Complaints about taxes are a favorite

with humorists, too, such as Mark Twain who quipped: “What is the difference between a taxidermist

and a tax collector? The taxidermist takes only your skin.” On a more serious note, taxation without

representation was a primary cause of the American Revolution. The French Revolution was in part

caused by unrest over excessive taxes levied by the national government, local aristocrats, and the

Church. Thus, excess or unfairness can lead to real political consequences inside and outside the normal

social structure.

Some researchers have speculated about the natural limits of government size as a function of

efficiency. The British economist Colin Clark began this line of reasoning by suggesting that when

government receipts exceed 25 percent of the aggregate economic activity, the result will inevitably be

inflation (Clark 1977). Because his research was based on a fragile economic time period, and because

countries have substantially exceeded the 25 percent mark since his statement without producing

inflation, his specific thesis has been disproven. However, some still argue more broadly and

philosophically that as governments become bigger, they naturally become more inefficient, less

sensitive to market forces, and therefore tend to damage economic expansion. While difficult to prove

or disprove because of its sweeping assumptions, it is a popular theory among Anglophile business

circles, but much less so elsewhere in the world.

So all-in-all, it can be said that governments have steadily grown when:

 Complex societies place greater demands on government for high quality social and physical infrastructure, protection against risk, and improved quality of life;

 Wars and other national calamities necessitate collective action and sacrifice in terms of expanded revenue collection. This expands the people’s tax tolerance;

 Many special interests are successful in finding a place in the public sphere over time. These special interests are possible to dislodge, but it is very difficult to do so once they are integrated into the system.

The limits of government expansion have also been discussed, including that:

 The natural aversion to taxes is seemingly universal. This aversion can lead to tax revolts and even revolutions if excessive;

 As governments become larger and occupy more of the economy, the more they can become political targets if they are not successfully managed.

The Two Historic Government Roles

There are two ancient and universal roles which governments play – defense and public safety. Yet in

ancient, medieval, and into modern times, public safety and national defense were often a relatively

small part of the economy if the country was not at war. Policing was not a significant factor in the

economy because public expectations were low and enforcement was largely provided by civic

volunteers or as a part of civic duties. For example, the first modern police department was in

Philadelphia, the largest US city in colonial times, and was not created until 1828, approximately 50

years after the American Revolution. Before that, policing was a publicly-required private responsibility

(similar to jury duty today).

In colonial days, each of the city’s wards appointed a constable, and each property owner took a turn as watchman at an assigned post. There was no coordination between the wards’ constables, and while the watchmen did carry arms, they did not wear uniforms and did not even patrol throughout their ward until early in the nineteenth century. If a watchman did not appear at his assigned post on time, he was put in the stocks. Not until 1750 did constables or watchmen receive any compensation at all for their work, when the Mayor was able to hand- pick those who were to be hired.10

Many countries did not maintain standing armies, as was the case with the United States until the

1840s, when the expansion of the West began in earnest. For example, the size of the defense

department in 1805 was proportionally one ninth the size and cost of today’s standing army in 2000, or

less than one half of one percent of the nation’s GDP. By 1910, the standing army was approximately

one third the cost of the military as a percentage of GDP in a non-war military budget. While military

expenditures consumed about 3.6 percent of the GDP in 2000, by 2010 (a small-wars budget), defense

consumed about 5.8 percent of the economy.11 Today, the US spends as much as the next 13 countries

combined.

These two roles now consume a considerable portion of the government budget, with defense

constituting approximately 25 percent of the federal budget, and public safety constituting 40 to 60

percent of local government budgets, divided between police, corrections, fire, and legal services.

The Eight Government Business Roles

Today, governments do far more than the expanded defense and public safety roles discussed above.

Governments at all levels across the globe play various important roles with business. In the United

States, where governments are founded upon democratic and capitalistic principles, governments work

to preserve the public interest, to correct market failures, and to promote a positive environment for

business. Despite the popular preference of limited government throughout the nation’s history,

government has acquired and expanded its many roles with business, among them as:

 Provider of monetary and fiscal structure: governments manage the nation’s monetary and fiscal framework including the national currency, the amount of money in circulation, and taxes and tariffs. These policies affect currency values, interest rates, and the financial environment within which business enterprises carry out their operations.

 Regulator: governments affect the activities of business through various laws, rules, and regulations to enforce business contracts, protect patents, prosecute fraudulent activities, restrict monopolies, ensure worker safety, protect the environment, preserve product and consumer safety, regulate bankruptcies, and address other public concerns. Not only do laws protect business much of the time, as importantly they provide consistency and predictability so critical to business.

 A safeguard against risk: governments provide a variety of insurance programs to protect individuals and businesses against both natural and social risks as well as offer the last resort for businesses needing bailouts in financial meltdowns. This enhances the business environment by providing consistency and predictability.

 Provider of infrastructure: governments provide public infrastructure, such as vast systems of transportation, communications including regulation of the internet, and waterways and power lines which are crucial for business operations.

 Purchaser: governments purchase a large quantity of commercial goods and services from business enterprises, ranging from office supplies to military equipment.

 Social architect: governments provide the basic public education system for K-12 to community colleges and state universities, and promote an enormous agenda for research and development (R&D) through both direct subsidies and tax incentives.

 Service provider: governments provide a variety of services to the general public and businesses such as public safety, utilities, libraries, postal service, and human services. These services provide an environment more conducive for business to flourish in.

 Promoter of business: governments utilize a wide range of economic development strategies and techniques to promote business in domestic and international markets.

These eight roles are of particular interest for this book. The historical growth of these roles in the US

will be discussed more extensively in Chapter 2. But next, we look at some concrete examples of what

government does well, when it tends to do poorly, and when it receives blame through no, or little, fault

of its own.

From Debate to Analysis: Judging Governments’ Performance on Its Purpose and Merits

The private and public sectors have different purposes and merits that will affect performance. But first,

let’s look at some of the ways which business and executive branch government operate similarly in

process and in the environment.

Both private sector companies and government agencies are types of organizations. They share many

similarities in terms of general administrative functions such as planning, organizing, staffing, directing,

coordinating, and budgeting. They both have competence pressures, although the private sectors feels

competence pressures more through the market and the public sector feels it more through laws,

budget processes, legislative oversight, and the like. Both have to deal with a variety of specific legal

constraints, although public agencies are much more circumscribed than the private sector. Internal or

organizational politics are common to all organizations regardless of sector. Both private sector

companies and government agencies provide products and services, although the type of service or

product that is emphasized and how it is funded are entirely different (Rainey 2009).

The differences are as important (Perry and Rainey 1988). Typically, it is thought that the private sector

prides itself on fierce competition while the public sector is more regulated. The private sector values

dynamism and the public sector tends to ensure stability. The private sector focuses on the bottom line,

profits, and the interests of individuals and special groups (such as shareholders). The public sector has

a strong focus on good value, reasonableness, and the interests of society and the public good. Thus,

business is often perceived to be more nimble, more innovative, and very strong at providing concrete

products to meet individual demand. Government, on the other hand, is often perceived to be more

stable, better at assessing long-term social effects, and very strong at regulating for the common good.

Conversely, business is often perceived to have less of a comparative advantage at self-regulation, less

attention to externalized costs of its actions, and less attention to society’s overall needs (Markham

2006). See the ironic example of for-profit education at the end of this chapter. Government is often

perceived to be excessively rule-bound or bureaucratic, and to have more monopolistic elements that

lead to less efficiency and service variation (Yergin and Stanislaw 1998).

The Good, the Bad, and the Ugly. Let’s provide some concrete example of the public sector in action to

portray some of these comparative strengths and weaknesses, as well as to portray some times when

government seems to get conveniently blamed as a scapegoat, but is really not the source of the

problem. Let’s start with some examples where government is generally considered to do well (“the

good”) (Goodsell 2004):12

 The public sector is good at providing a system of money, regulating banking and trading,

insuring deposits, providing protection from international market manipulation, and many other

things related to the macro economy. When the economy is not well stabilized, as is the case of

many developing countries, investment is generally very low and capitalist principles cannot

work well because of the lack of public trust in the equity and durability of the system.

 The Constitution, a vital part of our government, is ultimately a social contract. As the basis of

our political and legal systems, it provides continuity and stability. Business contracts can only

flourish when the political and legal systems are strong and reliable, which is a fundamental

purpose of government.

 While private charity—individual, religious, and corporate—makes a valuable contribution,

public welfare for the most vulnerable has become an essential social function in modern

society, especially in an age when the extended family has diminished in importance.

Government can provide rule-based welfare at a scale unmatched by the private sector.

 Often we want to share things through taxes, rather than paying for them on an individual basis.

Thus the public sector is good for providing roads, bridges, lighting, and sewers for common

usage.

 Ensuring the protection of the country can be done through mercenaries or private armies and

domestic security can be largely provided by private companies, but these avenues are not well-

thought of by democratic societies who want public power to control the use of force. While we

used mercenary fighters in the Afghan and Iraq Wars, and while the use of security guards is

common, these measures are considered both supplemental and subordinate to the authorized

use and control of power by government.

 Reducing risk is a fundamental strength of the public sector. Imagine using a “buyer-beware”

attitude without any regulation of water systems, airline security, food and drug safety, offshore

oil rigs, and so on.

 The public sector can also provide shared social infrastructure efficiently. Before the rise of state

supported education, illiteracy was rampant in the United States. Public schools provide a

foundation for wide access to quality education, from kindergarten through community colleges

and state universities. At the other end of the age spectrum, destitution and severe poverty

were common for the elderly a hundred years ago. Today, Social Security provides resources to

62 million Americans every month and the elderly have a modest, but invaluable, safety net.

Governments do not always perform well. Indeed, sometimes they function quite poorly. Below are

some of the contexts in which they do not perform well (the “bad”):

 When governments take over completely, they tend to be corrupted by their own power, even

when they believe that they are well meaning. George III of England was not nearly the tyrant

he was commonly thought to be at the time of the American Revolution. However, neither he

nor the Parliament of the day could conceive of the type of power-sharing that the American

colonies were demanding through their cries for representation. Americans, sensitive to

amassed power, initially eliminated almost all central power under the Articles of

Confederation, and then built both checks and balances into the national government in the

Constitution, and power-sharing between federal and state governments to protect it.

Presidential term limits, as well as term limits imposed in many states, are a limitation on

political power accumulated by long tenure in office. While the problem of true government

domination can sometimes be detected in exceptional cases (e.g., the extra-Constitutional

powers that presidents have assumed during wars), it is not a significant occurrence in the

American system.

 More common and problematic than unitary power in the US system is the collusion of powerful

interests, such as when big business and big government become too enmeshed and self-

supporting. The Seventeenth Amendment (1913) requiring direct election of senators was

largely due to the fact that in many states, only the wealthiest men could buy enough votes to

‘win’ legislative office. Today, the influence of the investment bank Goldman-Sachs (and Wall

Street in general), whose former employees have controlled Treasury and other important

government posts, is considered a major problem by some because it has become too fused

with government. At its peak, big labor was also a part of the oligopoly (from the 1950s through

the 1980s), but most analysts do not consider that a significant distorting factor today outside

some narrower areas such as excessive pension benefits which are receiving intense scrutiny.13

 Corruption is always a problem, both in the public and private sectors. Political corruption is

endemic to all political systems but can be curtailed by transparency laws for elected and senior

appointed officials and by sensible laws limiting conflicts of interests. Crass, non-financial vote-

trading is common and difficult to prevent (i.e., when is it self-serving and when is it a sign of

collegiality and compromise). However, outright corruption involving bribery or trading

lucrative positions for gain is less common. Yet some political contexts have a history of

corruption, such as the State of Illinois. To the State’s credit, however, they shipped 4 of seven

consecutive governors off to prison, sending a strong message of intolerance. Administrative

corruption is relatively uncommon in advanced democracies, in terms of both number of

incidents and scope. Because of their rarity and because of public transparency, small incidents

of administrative fraud are widely reported that may only involve thousands of dollars, while

private sector peccadilloes are hardly considered newsworthy if they do not involve tens or

hundreds of millions of dollars.

 Part of the beauty of democratic-capitalist systems is that when they work well, society

flourishes with sufficient discipline and fairness, all while economic competition and innovation

are encouraged. Sometimes the successes of government, the lapses of the private sector, or

the ambitiousness of policy makers can push governments to take on issues that they are not as

well suited for. This is less of a problem for the American system in which the government rarely

takes over consumer industries such as automobiles, steel, coal, and oil, as it has been for other

countries. However, by extension, excessive regulation can have the same effect, and industries

that were regulated for good reason at one time may need to be deregulated in another era.

For example, American Telephone and Telegraph (AT&T) was a private corporation that enjoyed

a monopoly that was consolidated by strong government regulation (legalized in the Kingsbury

Commitment of 1913) for a hundred years. It had served the country quite well in terms of

providing the most extensive, inexpensive local service, and most reliable telephone system in

the world. Yet by 1984, the industry was being held back by the dominance of a single

company, world-class though it was. Deregulation of the industry came at a good time, in fact

just before the wireless age really took off, and created a surge in innovation and market

expansion which continues today.

 Another problem that the public sector can run into that limits its efficiency/value and

effectiveness over the long-term is escalating complexity.14 For simplicity, we can say that an

original policy is passed with limited scope and rules. Over time, the scope of that policy is

expanded, and, as problems are discovered, they are fixed with additional rules. Sometimes

special interests get exceptions and waivers put into the regulations as time goes by. Over time,

the rules can become enormous, highly sophisticated, and off-putting to the conventional user,

and more convenient for special interests. Two famous examples are environmental regulation

and tax filing. Environmental regulation is itself a complex issue, so it is understandable that the

regulatory process would become complex in the case of industries with high pollution potential

such as those related to fuels, land use, chemicals, and wastes. Nonetheless, environmental

regulation has been less burdensome on the public. Just the opposite, it is often argued, is the

case in tax filing. Typical taxpayers often must resort to accountants for relatively simple

returns and small businesses are hard-pressed to keep track of tax records responsibilities. On

the other hand, almost all large corporations manipulate the tax code legally, with Apple

Corporation, FedEx, and Pfizer being three of the corporate leaders in effective tax “dodging.”15

Warren Buffet has famously criticized a tax code that allows him to pay a lower effective tax rate

than his secretary.16

 A related problem is special interests. Everyone is a member of special interests – parents,

mortgage holders, car owners, business owners, environmentalists, the poor, the wealthy, etc. –

so the problem is not the existence of special interests, but rather the undue influence in

passing policies with relatively obscure benefits to special groups, or in which special interests

can dominate a public process.17 Examples of such problems have already been cited, such as

when we spoke of corporate taxation. Special interests can warp sensible policies over time,

such as when some public agencies increase pension rates based on the expectation of a never-

ending boom economy, or when entitlement enhancements become unrealistic for the revenue

that taxpayers are willing to pay. This problem is endemic to democracy. Good policy making

eventually fixes these problems, but poor policy making allows these problems to fester until

there is a crisis.

 Finally, there is the typical organizational problem of agencies becoming inefficient over time, of

their mandates becoming outdated, and of their resources needing to be reallocated. While this

issue is simply called organizational change in the private sector, it is called government reform

in the public sector because it generally entails a substantial political component and potentially

new legislation to enact.

An increasing problem for the public sector in the last 50 years is that it is often given tasks which are

nearly impossible to accomplish, or it is the target of attacks that are not based on facts. We will

provide three examples – taxation levels, foreign aid, and prison responsibilities – of this unfortunate

phenomenon (“the ugly”):

 As discussed, we love to hate taxes for a number of reasons. We may be ambivalent about paying for less-observed services like national defense and police protection, we may overlook many services we have received in the past or currently receive such as education, medical subsidies, and roads, or we may underestimate the cost of services we receive. Nonetheless, the average American breadwinner earning $100,000 has a larger family health insurance cost (albeit often largely subsidized by employers) than they do a federal tax bill.18 Although the

costs of government services are driven up by required due process rights and transparency laws, they are also reduced because of no need for profits, economies of scale, and good long- term planning. Some complain that we do not have adequate say over how our tax dollars are spent, but with approximately 88,000 governments in the US and vigorous laws requiring hearings and public input, opportunity for involvement is about as great as it can be without creating chaos. While tax complexity is a reasonable complaint, to discuss tax rates in terms of marginal rates, as is frequently done, is simply misleading; while our marginal rates are higher than many developed countries, our effective rates are among the lowest.19 The poor often pay relatively low rates in any case; the base income for most of the middle class is paid at the lower tax rates and substantially reduced by mortgage and child rearing deductions; and the wealthy have access to substantial tax breaks that make their effective rates a fraction of the publicized marginal rates.20 As Oliver Wendell Holmes once stated, ironically noting how most of us neglect to appreciate the benefits of our taxes: “I like to pay taxes. With them I buy civilization.”

 Americans criticize government vehemently for spending vast sums of money on foreign aid; some feel that just eliminating foreign aid could almost balance the budget. Sadly, this belief is simply ignorance of the facts. “In poll after poll, Americans overwhelmingly say they believe that foreign aid makes up a larger portion of the federal budget than defense spending, Social Security, Medicaid, Medicare, or spending on roads and other infrastructure. In a World Public Opinion poll, the average American believed that a whopping 25 percent of the federal budget goes to foreign aid. The average respondent also thought that the appropriate level of foreign aid would be about 10 percent of the budget — 10 times the current level.”21 Foreign aid has generally declined as a percentage of GDP in recent decades, despite the exceptional funding that has gone to post-war reconstruction in Iraq and Afghanistan, policy initiatives that were strongly supported by the American public. Even so, it is estimated that Americans spend about the cost of a single restaurant dinner for two, or about $73, on foreign aid, as opposed to $1,763 on defense.22

 The American people like to think of themselves as benevolent and kind. However, since the war on drugs and the get-tough-on-crime initiatives in the 1970s, the United States has increased incarceration rates over 700 percent, the highest in the world. The US currently houses 25 percent of the world’s total prison population.23 Government is frequently blamed for causing the rates to increase, as well as for the associated soaring costs involved. The 8th Amendment prevents cruel and unusual treatment, such as massive overcrowding, which has become common in middle and low security facilities. Government policies, enacted with strong public support, have made the US the world’s leader in imprisoning its own population, and have been efficient in carrying out the public’s demand for increased safety. Although we are far tougher on crime than the UK, incarcerating about four times as many people, the homicide rate in the UK is one quarter of that of the US. So while literacy has increased in the last 100 years, morality of individuals and of the society at large seems to have fallen when crime and society’s failed reaction to it are examined. Or, as Theodore Roosevelt noted, “to educate a man in mind and not in morals is to educate a menace to society.” To blithely blame government for this policy failure is to abnegate our civic responsibilities. We are the government.

Summary of Sectoral Differences. Although the private and public sectors – business and government –

can occasionally be seen in an adversarial light, in general it is best to think of them as complementary.

American society functions best with each playing a robust role and balancing the strengths—and

weaknesses—of the other.

The private sector harnesses the dynamic energy of market capitalism. When it works well, individuals

are incentivized to work hard, save and invest, and innovate. It is a powerful motivator for individual

wealth creation, which in turn provides social wealth. It focuses on improving the quality of life by

creating and providing products and services that are in competitive demand. It also creates demand by

the use of various marketing techniques. It handles many industries, ranging from consumer products

to housing to power distribution. It also shares some industries with government, such as risk reduction

and private security. Risk reduction, in the form of private insurance, is hundreds of years old but was a

luxury for only the wealthy until World War II when it slowly began to replace the extended family as a

major source of contingency needs. Private security is also an old, formerly narrow, industry that has

now expanded, with private security becoming common for housing developments, malls, and even

foreign embassies. Philanthropy is part of the ideal of giving back by those who are successful in the

capitalist system from which they have profited. Private charity is encouraged by the publicly shared tax

system.

The public sector has the external and internal security of the state as its foundation. It is also the

authorized source of minimum social norms through laws and administrative regulations. Part of its

regulatory responsibility is to ensure that the market has as close to ideal and fair competition as

possible, that private sector parties do not damage the common good for public gain, and that the

economic environment is stable and predictable. It is natural that some private interests, in their self-

absorbed pursuit, will define what is right to do as only what is required by law. Therefore, it is

important to ensure that everything from major issues such as fraud, racketeering, invasion of privacy,

and environmental degradation, to lesser but important issues such as zoning and code enforcement,

are carefully proscribed by government. Quality of life is seen in shared or communal terms rather than

individual terms. We share local services such as libraries and parks and much of our transportation

system, and we even want some government regulation and standardization of communication systems

in the post-“Ma-Bell” world to prevent pandemonium. The government is also society’s shared

conscience, working in a rule-based manner to provide basic human necessities for today’s most

helpless citizens. In this regard, it also ensures broad educational access and conservation of the

national heritage for all to enjoy. Finally, it plays a role in the promotion of business. The public sector is

fierce in the promotion of favorable international trade agreements, in fighting international patent

infringement, and in opening up business export and expansion opportunities. Domestically, economic

development provides competition to local communities seeking to enhance their business base and

provide jobs for local citizens.

These complementary functions are summarized below in Exhibit 1.11, contrasting the two sectors.

Exhibit 1.11. Rough Summary of the Different Emphases of the Two Sectors. (The widths of the arrows indicate major and minor emphases.)

PRIVATE GOVERNMENT

Financial values through the market and wealth creation Quality of life through individual products and services, including private education Marketing of business (self- promotion) Supplemental security and risk reduction Philanthropy and giving supported by tax deductions

National security (defense) and public safety (police, fire, etc.)

Regulation of society through shared laws

Quality of life via shared services and infrastructure

Public welfare, mass public education, and national heritage (e.g., parks)

Promotion of business interests both domestically and internationally

Reform of the Private and Public Sectors

Much reform in the private sector comes from the dynamics of the competitive market place. Old

companies that have become less efficient may find that they need to reform because of an evolving

competitive environment. Innovations must be integrated. Companies move from niche markets to

broader markets and back again as they develop and are required to reinvent themselves in light of new

opportunities, market conditions, and legal constraints. Whole new markets come into being while

others disappear. Yet it is not just profits that drive reform. Companies sometimes seek to reform

(improve) their public and internal image by acting more responsibly with regard to the environment, by

minimizing the external social costs of their actions, by acting as social leaders, or by treating their

employees more generously.

One of the public sector’s major jobs (important for our study of business-government relations), is to

externally reform the private sector through laws in the policy sphere, and through regulations and

enforcement in the administrative sphere. In this sense, the public sector sets the boundaries to define

unacceptable behavior and practices. Since the beginning of the twentieth century, standards for

companies have increased in terms of expectations of employee working conditions, worker safety,

product safety, environmental impact of business operations and product usage, honest labeling,

reliable financial information for publicly-traded companies, and so on. American corporations have

successfully met these rising standards, have used the associated excellence to maintain their roles as

global commercial leaders, and have produced corporate wealth that has never been greater.24

Publicly-induced reform is also intended to create an environment where the longer-term good of the

private sector will not be squandered by unduly pursuing short-term gains and profits. For example, the

Glass-Steagall Banking Act of 1933 provided a stable environment for bank depositors after the massive

loss of the life-time savings of millions of Americans between 1929 and 1933 when 10,000 bank failures

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occurred.25 That banking act restricted traditional commercial banks with deposits from becoming

involved in securities activities (e.g., stock market trading) as well as limited the affiliations between

commercial banks and securities/investment firms in order to ensure that bank deposits of citizens were

not gambled on speculative activities beyond their local communities where they had direct knowledge.

The act further stabilized commercial banking by creating the Federal Deposit Insurance Corporation

(FDIC), an independent, nonprofit corporation which the government could afford to assist in a great

financial crisis because any losses would be miniscule in comparison to the vast losses caused by the

unregulated banking environment of the 1920s. Because essentially every depositor in the United

States wanted to permanently withdraw their money from all banks by 1933, this act saved the banking

industry from its own excesses and failures, and created the most stable and well-respected banking

system in the world, which in turn led to US leadership in the world banking system.

Public Sector Reforms. The public sector also reforms itself internally. Market forces are not as

significant here as they are for the private sector, but are nonetheless significant. The area in which

market competition is most keenly felt is in competition for a high-quality workforce, especially since

education requirements for the public sector tend to be higher on average than for the private sector.

There are a number of shared industries where market competition is closely watched such as

education, utilities, garbage collection, educational TV, and others. Indirect market forces work via the

authorization of budgets where legislators scrutinize the value of agency contributions in light of the

fiscal context. Executive oversight induces reforms as it does in the private sector, but radical

administrative reform is much more restricted by law.

Externally-induced reform through law occurs for the public sector, too. Low- and badly-performing

agencies can get new regulations. For example, after a series of Housing and Urban Development (HUD)

scandals, Congress required additional measures to reduce political manipulation and outright

corruption in the agency in 1989.26 Because of the policy failures associated with intensive low-income

housing projects which provided a breeding ground for crime rather than a respite for the poor,

Congress required major changes in strategy during the 1990s to de-concentrate low-income housing

and provide more resident responsibility. 27

Low- and badly-performing agencies can be subordinated to other agencies as well. After the attack on

the United States on 9/11 in which the World Trade Towers were destroyed, the Pentagon was

damaged, and an airplane was hijacked to attack the White House, there was a major governmental

reorganization of 22 agencies into the Department of Homeland Security to provide better coordination

of international and domestic public safety agencies. These agencies had been arrayed under many

departments including Treasury, Justice, Transportation, Defense, the FBI, Energy, General Services

Administration, Agriculture, and Health and Human Services. It also includes the formerly free-standing

Federal Emergency Management Agency which had once had cabinet-level status.

Low- and badly-performing agencies also risk complete elimination. A prime recent example is the

Minerals Management Service which was disbanded in 2011 after a series of administrative debacles

including the massive Deepwater Horizon oil spill in the Gulf of Mexico the year prior. It was completely

reconstituted as the Bureau of Ocean Energy Management, Regulation, and Enforcement with an

entirely new management team, new rules, and a reinvigorated mandate. Many agencies are created to

work on crises in wars or major financial crises, but are eliminated when their work is complete. The

Works Progress Administration from the Great Depression (1935-1943), the Work Production Board

from World War II (1942-1945), and the Resolution Trust Corporation from the Savings and Loan Crisis

(1989-1995) are examples of agencies that were abolished after successfully completing their time-

limited missions.

Both internal and external types of government reforms are significant for business-government

relations because the success and efficiency of the public sector should aid the private sector in

ultimately doing its business better. Every year legislative bodies institute hundreds of necessary, useful,

and successful reforms, and every so often, require major reform agendas in different policy areas such

as the 1933 Banking Act and other examples cited above. However, it should also be noted that the lack

of necessary reform, or government reform that is badly conceived or badly implemented, creates an

environment where either government draws resources from the private sector with little value added,

or agencies simply work at suboptimal levels even though they create positive value overall. An example

of lack of reform is the Savings and Loan debacle that occurred in the 1980s, causing a $250 billion

bailout where only some technical issues were corrected, ultimately allowing the much greater and

wider banking system meltdown in 2008. Special interests had pushed for changes in laws related to the

Savings and Loan industry early in the decade. These changes quickly let the industry careen out of

control, often with outright corruption, and led to a massive federal bailout and re-regulation of the

industry (Black 2005). An example of unsuccessful reform was the California deregulation in 1996 which

allowed the energy consortium Enron to use both legal and illegal means to manipulate the Western

energy market, to create market shortages and reduced services, and to extort vast sums of money from

ratepayers.

Paul Light categorizes four types of government reform (Light 1997). Reforms can focus on greater

efficiency by paying attention to the principles of good administration, and by modifying structures and

rules for optimal output. These reforms focus on reorganizations and process reengineering. An example

of this type of legislation is the Reorganization Act of 1939 which reorganized the Office of the

President, which had become unwieldy with the growth of administration.

A second type of reform focuses on less waste, especially when it is through negligence, incompetence,

or corruption. Such reforms focus on maintaining generally accepted practices, and use audits and

investigations to prevent low performance and malfeasance. A classic example of this type of reform

was the 1978 Inspector General Act, which required inspectors general in all major federal agencies to

reduce fraud and ineptitude.

A third type of reform focuses on ensuring fairness, including the balancing of rights among employees,

citizens, and taxpayers. It ensures due process, access to information, and transparency. An example of

this type of reform was the Administrative Procedures Act of 1946, which required the extensive

rulemaking and adjudication occurring in administrative agencies to follow the same principles of

openness and due process that is required in legislative and judicial proceedings.

A fourth type of reform, focused on encouraging high-performance, tends to emphasize outcomes and

results, sets high standards, and inspires group goal setting and high individual achievements. A good

example of reform with this intent was the 1993 Government Performance and Results Act which

attempted to streamline the red tape hampering many federal agencies, while simultaneously requiring

greater documentation of, and accountability for, policy results from those agencies.

American Government Institutions: Who Does What In Government?

Both sectors have tremendous variety, and it is useful to take a moment to review some of the basic

differences in the public sector when discussing business-government relations. In terms of structure,

the Constitutional democracy gives co-equal status to the federal government and state governments,

dividing power and the various types of responsibilities. Defense may be a federal responsibility, for

instance, but the penalty for various types of murder and most other crimes is largely determined by

state governments. Negotiating treaties may be another federal responsibility, but deciding what type of

building may go on a parcel of land is delegated by state governments to their local governments, which

they create and control. In the early days of the Republic, individual states probably had the lion’s share

of responsibilities and power, but that has probably shifted in favor of the federal government due to

federal grants to states and local governments, as well as the opportunity for federal preemption when

supported by the Supreme Court. In addition to power sharing between the federal government and

states, the Constitution sets up checks and balances to ensure that the three separate branches of

federal government also share power. Essentially, presidents implement and propose, Congress

authorizes, and the courts ensure that the rules and laws of the land are followed.

In terms of size, there are 89,055 governments in the United States (see Exhibit 1.12). The federal

government is the largest, both in terms of employees and budget, but only in terms of budget when

the federal government is contrasted with all other governments. The number of states, counties, and

townships has been quite stable for the last 50 years. The number of school districts declined

considerably over the last century through consolidations. At one time, essentially every high school

was its own district. On the other hand, incorporated municipalities have steadily increased along with

the growing population. The explosion of special districts represents a great change in the last fifty

years. These districts provide specialized tax areas to support specific functions. In addition to schools,

special districts are incorporated to address these functions: airports, air pollution control, cemeteries,

community colleges, conservation, diking and drainage, emergency medical services, fire protection,

flood control, health, irrigation and reclamation, libraries, mosquito and pest control (often called vector

control), parks, ports, public housing, public utilities, solid waste, transportation, and water, among

others. Taxes charged by each of these districts are individually small, but do add up, and are normally

collected by the local county assessor where a typical taxpayer may be required to pay for three to eight

special districts. An important new type is the business improvement district of which there are now

about 1,000 in the US. For example, a portion of a downtown area may incorporate to have

supplemental lighting, landscaping, and police presence, and almost always a joint marketing function.

Exhibit 1.12. Number of Governments in the United States in 2012

Unit of government

Federal States Counties Municipal Townships School districts

Special districts

Total

1 50 3,031 19,522 16,364 12.884 37,203 89,055

Source: U.S. Census 2012 Note: Excludes a number of special governments such as Tribal Governments (566), the District of Columbia, 5 territories, independent agencies which nonetheless have considerable autonomy, etc.

Approximately 45 percent of the federal government budget goes to individual entitlements including

Medicare, Medicaid, and Social Security (see Exhibit 1.13). Net interest is currently at 6 percent.

However, these four categories are projected to grow substantially over the next few decades, even if

the Patient Protection and Affordable Care Act of 2013 (aka Obamacare) does most of what it is

designed to do. Additionally, another 13 percent are mandatory expenses to international

organizations, federal pensions, and a variety of other governmental functions. Defense spending, at 19

percent, is relatively high because of the recent wars, and does not include supplemental appropriations

for the wars.

Exhibit 1.13.

This means that true discretionary expense has been reduced to 17 percent of the total budget (see

Exhibit 1.14 for a breakdown of discretionary spending); at one time it was the majority of the budget.

Note that the Social Security Administration budget, including the expensive-to-administer

Supplemental and Disability programs, issued $768 billion in benefits but only cost $12 billion to

administer, representing about 1.5 percent in overhead, which contrasts with health insurance

overhead estimated at over 20 percent.28

Exhibit 1.14.

State government spending priorities are similar in some ways (See Exhibit 1.15 for an example). If

health care and welfare are likened to Medicare, Medicaid, and Social Security, they take up about 50

percent of the budget. In other ways, the federal and state budgets are quite different. Public safety

(protection) typically represents about 8 percent of state budgets, which is far less than the national

defense. Because state government is more labor intensive, pension costs are higher than the federal

budget. The most dramatic difference is in the cost of education, which consumes less than one half

percent of the budget at the federal level and 14 percent at the state level. Fortunately, interest

payments at the state and local government level are only about 4 percent and not projected to

increase substantially because of a stronger balanced budget mentality.

Exhibit 1.15.

Example of State Spending: California

Source: US Spending-101.com

At the local government level, welfare and health care is a much smaller portion of the budget (as

demonstrated in Exhibit 1.16). Protection is about 12 percent or somewhat in line with the state and

federal levels. Transportation expenses are significantly higher at 8 percent. But the most substantial

expense and difference with the other levels of government is education, at 31 percent of the local

government budget, because of the enormous cost of K-12 education.

Exhibit 1.16. Example of Local Government Spending: Cities, Counties and Special Districts in California

Source: US Spending-101.com

Analytical Case: The Changing Face of Higher Education with For-Profit Education Education has long been considered both a public and private supported activity. In ancient and medieval times, it was private and exclusive. In the reformation and enlightenment eras, education was increasingly considered necessary to a good society, and thus more of a public necessity. Uneducated masses could not adequately govern themselves and were often denied the vote in the United States well into the twentieth century. Thus, while soldiers of the Continental Army all fought against the tyranny of British taxation without representation, since three quarters of them signed their name with an “X” indicating illiteracy, they still could not vote after the American Revolution. Colonies, and then states such as Massachusetts, were more aggressive in setting up public education

schemes, but many Southern and Western states had illiteracy rates encompassing one quarter to one third of their adult males as late as the 1870s. From 1850 to the 1970s, private education became more limited to (a) religious-based education (especially Catholic and Quaker grade and high schools), and (b) exclusive higher education such as Harvard and localized liberal arts colleges. However, it is important to note that this was invariably a nonprofit model. In the 1970s, this nonprofit model of higher education began to change when a variety of for-profit institutions expanded greatly with more flexible approaches and the maturation of online education. Examples are the Apollo Group (which includes the University of Phoenix), American Public Education, Education Management Corporation, Kaplan Higher Education, ITT Educational Services, Strayer Education, and Walden University. To their credit, these universities as a group helped expand educational opportunities by lowering standards and giving students a second or third chance. They expanded flexible arrangements for working students by providing an anywhere-anytime philosophy to the degree possible. They also used programmed education techniques for maximum efficiency where possible, encouraging students to engage in activity- and group-based education more than was common in traditional higher education institutions. Such methods reduce the amount of instructor time and energy, but when well planned on a mass basis, can still provide a good technical education. Of course, this prodded many traditional institutions to become more flexible and innovative, especially in online education. The success and massive growth of for-profit institutions from primarily technical and certificate institutions has also fueled their problems related to low standards, fraudulent recruitment practices, and profiteering. Investigated by the US Senate in 2012, the industry had turned from a specialized, vibrant, flexible alternative, to one that utilized armies of recruiters (i.e., over 35,000 for 30 for-profit institutions in 2010) and depended on federal loan guarantees and other types of federal financing for over 80% of their funding. Sadly, the dropout and default rates have been very high at for-profit institutions, and nearly half the students annually leave with large loans but without a degree. Questions:

1. Should for-profit universities be more highly regulated? If so, should the regulation be based on more protection for students or less waste of federal funds? If not, why?

2. States and communities have provided subsidized higher education to ensure quality mass education. Has that rationale for a public subsidy to ensure an educated electorate changed in the last twenty years? To what degree is the stronger justification now an economic competitiveness argument or a fairness argument? Should subsidies to community colleges be decreased?

Source: Committee on Health, Education, Labor, Pensions, United States Senate. For Profit Higher Education: The Failure to Safeguard the Federal Investment and Ensure Student Success.

Practical Skill: Researching Government Jobs Government is a wonderful source of jobs, benefits, and services. We will focus on jobs for this skill tip. Jobs are located at the federal, state, county, and special district levels. Some common examples of some of the best job sites are:

 USAJOBS (federal)

 jobs.ca.gov

 caljobsource.com/cagov

 cityjobinfo.com

Look at jobs at the local government, state government, and federal government levels, and report on one at each level that you would find interesting to consider.

Summary and Conclusion

1. Business-government relations vary widely from country to country and are defined by how the private and public sectors interact in their numerous complementary, cooperative, and conflicting roles. They also vary by the differences in strategies used to implement public policy, monetary policy, fiscal policy, the amount of government protection for society’s most vulnerable, the amount of promotion of the business sector domestically and internationally, the amount of prohibition of government competition, and the influence of the private sector on government policy making.

2. Business-government relations constitutes a necessary skill set for modern business people because government in modern society is large and thoroughly integrated into our lives. Further, our contract-based government contributes enormously to the highest quality of life that the world has ever experienced, but it is by knowledgeable and thoughtful citizens who understand the strengths and weaknesses of government that we can make it perform at its best, rather than at its worst.

3. The debates about the scope and robustness of government have been extensive since the beginning of the country. How active a role should government play in shaping the economy? How large should government become in terms of employees and budget? Has the growth of government been an appropriate function of a complex society and a contributor to a higher quality of life and/or has the growth become excessive? And what exact roles should government play? Ten roles it currently plays were identified.

4. Some of the examples widely thought to be good included providing a system of money, regulating

banking and trading, insuring deposits, and providing protection from international market

manipulation; providing our social contract through a system of authorized laws; providing public

welfare for the most vulnerable in society; providing roads, bridges, lighting, and sewers for

common usage; ensuring the protection of the country; reducing risk with regulation of water

systems, airline safety, and food and drug safety; and providing shared social infrastructure

efficiently such as education.

5. Areas where government is not working well include when governments take over completely;

when there is the collusion of powerful interests, such as when big business and big government

become too enmeshed and self-dealing; when corruption becomes common; when policy makers

push governments to take on issues that they are not as well suited for; when the public sector runs

into the limits of its efficiency/value and effectiveness over the long-term because of escalating

complexity or when agencies become inefficient over time or their mandates become outdated; and

when special interests take advantage of a system that is not aware of the real costs and benefits

accruing to the few.

6. An increasing problem for the public sector in the last 50 years is that it is often given tasks which are nearly impossible to accomplish, or it is the target of attacks that are not based on the facts such as accurate perceptions on taxation levels, foreign aid, and prison responsibilities.

7. Both the private and public sector need to find internal ways to reform, and must be prepared to be externally reformed from time to time. Paul Light categorizes four types of government reform. Reforms can focus on greater efficiency, less waste, ensuring fairness, and encouraging high- performance.

8. There are over 89,000 governments. Different levels of government focus on different functions. The federal government has a special focus on national security, and now individual security, through insurance and entitlements. State and local government have a focus on domestic safety, education, transportation and infrastructure, and civil regulation.

Key Terms

Active government

Central planning

Fiscal policy

Free market philosophy (laissez-faire)

Glass-Steagall Banking Act

Government-business relations

Keynesian economics

Monetary policy

National defense

Public safety

Savings and Loan debacle

Special interests

Supply-side economics

Types of government reform

Government roles

US debt versus US deficit

Study Questions

1. How is business-government relations defined? Is it similar in most countries? 2. What forces have caused the growth of government in modern times? What forces have

constrained even more growth? 3. What are the 10 contemporary roles of American government? 4. What are examples of good government? What are examples of when government functions

poorly? When does government commonly get blamed, either inaccurately or unfairly? 5. What are commonly thought of as sectoral strengths for the public and private sectors? 6. What are the types of reform that are made in the public sector? 7. What are the major foci of each level of American government?

Endnotes:

1 Valerie Marcel. National Oil Companies Control 80% of the World’s Oil. Foreign Policy. September/October 2009. 2 The famous OMB Circular 76 reads:

The longstanding policy of the federal government has been to rely on the private sector for needed

commercial services. The competitive enterprise system, characterized by individual freedom and

initiative, is the primary source of national economic growth. The federal government has grown to

perform a myriad of commercial activities, in addition to providing citizens with a range of programs

from law enforcement to stewardship of federal lands. Services in these and other areas are provided by

a blend of federal government and private sector sources. For the American people to receive maximum

value for their tax dollars, all commercial activities performed by government personnel should be

subject to the forces of competition, as provided by this Circular.

3 Robert Pear. Bill to Let Medicare Negotiate Drug Prices Is Blocked. New York Times. April 18, 2007. 4 Anti-trust policies are laws and rules that prohibit private sector monopolies from dominating and manipulated the market.

5 See for example, Paul Krugman, 2012, End This Depression Now!. New York: W. W. Norton. 6 The Economist, End-of-Term Report: The Economy Is better than the Woes of America’s Economy Suggests. September 1, 2012. 7 The statistics come from the U.S. Census. 8 Messaoud Hammouya, 1999. Statistics on Public Sector Employment: Methodology, Structures and Trends. (SAP 2.85/WP.144). Geneva: Bureau of Statistics, International Labour Office. 9 This data comes from the While House historical tables. http://www.whitehouse.gov/omb/budget/historicals. 10 The Committee of Seventy, Philadelphia Police Department Governance Study, June, 1998. 11 See the website: www.usgovernmentspending.com; List of government budgets by country, Wikipedia. 12 See also the many articles at: www.governmentisgood.ecom. 13 Steven Greenhouse. Share of the Work Force in a Union Falls to a 97-Year Low, 11.3%. New York Times. January 29, 2013. 14 Samuel Goldman. Big Government, Complex Government, and the Future of Conservatism. The American Conservative. January 4, 2013. 15 Robert McIntyre, Matthew Gardner, Rebecca Wilkins, and Richard Phillips. Corporate Taxpayers & Corporate Tax Dodgers 2008-2010. Washington, DC: Citizens for Tax Justice. 16 Conor Clarke, Why Buffett Pays Less than his Secretary. The Atlantic, March 18, 2009. 17 A recent example discussing this problem is Alan L. Moss. 2008. Selling Out America’s Democracy: How Lobbyists, Special Interests, and Campaign Financing Undermine the Will of the People. Westport, CT:

Praeger. The classic argument can be read in Amatai Etzioni. 1985. Special Interett Groups versus Constituency Representation. Research in Social Movements, Conflicts and Change 8: 171-195. 18 John Fritze, Average Family Health Insurance policy: $23,375 up 5%. USA Today, September 16, 2009. 19 Chuck Marr and Nathaniel Frentz. Federal Income Taxes on Middle-Income Families Remain Near Historic Lows. Center on Budget and Policy Priorities. April 11, 2013. 20 The IRS reports (according to the Tampa Bay News, Barack Obama Says that Some Billionaires Have a Tax Rate as Low as 1 Percent, December 6, 2011).

The IRS offers a breakdown of what the 400 top earners paid in effective tax rates: 0 percent to 10 percent: 30 filers 10 percent to 15 percent: 101 filers 15 percent to 20 percent: 112 filers 20 percent to 25 percent: 52 filers 25 percent to 30 percent: 46 filers 30 percent to 35 percent: 59 filers

21 John Norris, Five Myths about Foreign Aid, New York Times, April 28, 2011. 22 See the Borgen Project. http://borgenproject.org/ 23 U.S. Incarceration Rates. Wikipedia. 24 Catherine Rampell, Record Corporate Profits, New York Times, November 29, 2012. 25 Bank Failures. Wessels Living History Farm. http://www.livinghistoryfarm.org/ 26 Jason DeParle, ‘Robin HUD’ Given A Stiff Sentence, New York Times, June 23, 1990; Housing and Reform Act of 1989. 27 The Housing Opportunity Program Extension Act of 1996 gave public housing authorities the tools to screen out and evict residents who might endanger other existing residents due to substance abuse and criminal behavior. In 1998, Congress allowed local housing authorities to open up more public housing to the middle class. 28 Uwe E. Reinhardt. Why Does the U.S. Health Care Cost So Much? New York Times. November 21, 2008

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