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Home -> Merlin Harold Hunter -> Outlines of public finance -> Chapter 2 continue

Outlines of public finance - Chapter 2 continue

1. Preface

2. Chapter 1

3. Chapter 1 continue

4. Chapter 2

5. Chapter 2 continue

6. Chapter 3

7. Chapter 3 continue

8. Chapter 3 continue

9. Chapter 4

10. Chapter 4 continue

11. Chapter 4 continue

12. Chapter 5

13. Chapter 5 continue

14. Chapter 5 continue

15. Chapter 6

16. Chapter 6 continue

17. Chapter 7

18. Chapter 7 continue

19. Chapter 7

20. Chapter 7 continue

21. Chapter 9

22. Chapter 9 continue

23. Chapter 10

24. Chapter 10 continue

25. Chapter 10 continue

26. Chapter 11

27. Chapter 11 continue

28. Chapter 11 continue

29. Chapter 12

30. Chapter 12 continue

31. Chapter 13

32. Chapter 13 continue

33. Chapter 13 continue

34. Chapter 14

35. Chapter 14 continue

36. Chapter 14 continue

37. Chapter 15

38. Chapter 15 continue

39. Chapter 15 continue

40. Chapter 16

41. Chapter 16 continue

42. Chapter 17

43. Chapter 17 continue

44. Chapter 17 continue

45. Chapter 18

46. Chapter 18 continue

47. Chapter 18 continue

48. Chapter 19

49. Chapter 19 continue

50. Chapter 19 continue

51. Chapter 19 continue

52. Chapter 20

53. Chapter 20 continue

54. Chapter 20 continue

55. Chapter 20 continue

Extension of Credit. One other item which might be
mentioned as having influenced the increase in public
expenditures is the ease of public borrowing. Reasons for
this growth of credit have already been noted, and a
detailed study of public debts will be reserved for a later
chapter. The ease of borrowing has given a supply of
revenue which could not, perhaps, have been obtained
had the other methods of taxes and receipts from lands
and industries alone been available. So general has pub-
lic indebtedness become that nearly every governmental
unit practices the policy of deficit financiering. Citizens
are willing to lend to the government because its credit is
good, and the burden is not so apparent as when revenues
are secured through taxes. Except where political units
have reached the legal amount of indebtedness, a tendency
toward an increased use of this source of revenue is easily

23. Public Expenditures Supply the Less Material
Wants. Wants of individuals may be classed as material
and immaterial. Of these classes the individual is usually
first and most concerned with supplying himself with the
material things. Often he does not recognize the value of
other than material goods to himself, or that he will be a
better member of society for having had them. Then,
too, many of the immaterial services are so remote that
they would scarcely call forth individual effort. Many
individuals are incapable of supplying more than the
material needs even if they recognized the value of the
immaterial, while many cannot even supply the needed
material goods.

These services, valuable to the individual himself and
to his usefulness in society, which he could not or would
not supply, must be given by the state if they are to be
had. Ordinarily the state makes the supplying of these
immaterial needs a duty of first importance. A compari-
son of total expenditures for each of the classes of services
would show a much larger percentage for the immaterial,


The supplying of material goods arises either when the
individual cannot supply his needs, as in charities and
state institutions, or when the recipient pays for the
utilities in much the same way as he would if they were
supplied by an individual.

The immaterial goods supplied by the state might be
divided into a number of classes. One of the most impor-
tant is that of protection. Except in time of war the need
for protection by the army and navy seems so remote to
the ordinary individual that, even if it were possible, he
would exert no effort to secure it. The Federal govern-
ment, therefore, provides it as a common service, much
better and more effectively than would individuals if left
to supply it for themselves. The protection to person and
property given by state and city governments is also
much more effective than if it were supplied directly by

Expenditure for education, as we have seen, is an im-
portant item in the finances of each political unit. This
utility is considered so valuable to the individual and
state that its acceptance is, to a certain degree, compul-
sory. The person with a public school education is so
much better able to take his place in the world, and is
enough more valuable as a citizen, that the individual is
compelled to receive the education the public school can
give. Conservation of health, sanitation, libraries, and
parks are other sources of immaterial goods which the
citizen receives, and which would be secured in a much
smaller degree if they were not supplied by the state.

24. All Public Expenditures Cannot Be Justified.
While few would deny the value and necessity of public
expenditure, yet the desirability of some uses of public
funds may be open to question. To lay down a rule by
which the justice of every expenditure could be measured
would be impossible, because of the immaterial nature of
such a large part of the services rendered. In general,
however, a state is not justified in making an expenditure


unless more utility results than would have been secured
had the funds been left in the hands of the individuals.
There is a temptation, where a public official is dependent
upon the constituency of a particular district, to spend
public funds for the benefit of his supporters. Some of
our states recognized this when the constitutions were
formed, and attempted constitutionally to prohibit ex-
penditures the utility of which will be of less value than
the cost. Pennsylvania is an example of a state which
early had a constitutional provision of this nature. The
difficulty arises, of course, in attempting to apply this
general rule to particular cases.

It will be interesting for the student to give examples of
public expenditures which appear to him to be unjusti-
fiable. Many will be of a local nature, while others will
involve state and Federal governments. The constant
pork-barrel legislation is one of the standing criticisms
against Congress, yet every district is anxious to get an
appropriation, no matter how needless. Appropriations
for magnificent post-office buildings in small towns, and
for improvements of rivers and harbors, far in excess of
any need, are so familiar as to scarcely need mentioning.
States have squandered thousands of dollars in building
roads and making other improvements because of the
unbusinesslike methods of letting contracts. It is im-
possible to justify such expenditures on the utility basis.

25. Public Expenditures Have Important Economic
Effects. No phase of Public Finance, perhaps, has re-
ceived so much fallacious reasoning as the economic effects
of public expenditures. Many early statesmen and writers
favored a large expenditure because it put money into cir-
culation, increased the demand for labor, relieved the
poor by giving them employment, removed the objections
to taxes when the state returned much to the citizens, and
for similar arguments. It would be a waste of time to
elaborate upon these fallacies for modern students of eco-
nomics. Let it suffice to remind them that lavish and use-


less expenditure does not create wealth. The more a
state spends out of a given amount, the less is left for in-
dividuals to spend. The demand of the state for labor
and goods is substituted for that of the individual. When
the state demands materials and services, therefore, this
demand is not added to that of individuals, as was for-
merly believed, but exists instead of the demand of indi-
viduals. The revenue exacted from industry to pay an
army could have been used by industry to pay wages to
men in the army had they not been employed by the state.
The total demand cannot be increased by state expendi-
ture in fact, it may be materially decreased becaus^ of
expenses in administering public funds.

Public expenditures, nevertheless, do have important
economic consequences which should be kept clearly in
mind. The answers to the above fallacies indicate some
of them. When the state enters the market for materials
or labor, it becomes a competitor with its citizens for these
same commodities or services. Under normal conditions,
because of the widespread activities of governments, the
state is a large purchaser of goods and services. In an
abnormal situation, such as a war, the demands of the
state are enormous. Since states do not have to measure
cost and value of the product, the price paid for materials
and services is not based upon the same principle as in
individual industries. In cases of emergencies, especially,
as in the Great War, the state is likely to pay abnormally
high wages in order to attract labor, and abnormally high
prices for materials in order to secure the needed supply.
A hardship is thus felt among individuals who demand
similar services and materials, but who cannot pay such
high prices. The abnormal wages cannot but have an
effect on the worker. With his increased wages comes a
higher standard of living, which he is desirous of main-
taining. When the emergency is past, and the govern-
ment demand ceases, he must seek employment where
wages are determined differently. The tendency is now


toward lower wages. The dissatisfaction caused by such
shifts will have some effect in causing industrial friction.
The artificial demand of the government for goods, with a
subsequent cessation, will have much the same effect on
commodity prices in particular lines.

The Unemployed. The problem of the unemployed is
one with which the state is confronted. Some contend,
while recognizing the economic fallacy of the "make
work" idea, that, from the effect on the individual, it is
better that the state create some occupation than resort
to charity. However this may be, a more sensible and
economical scheme would be for the state to utilize labor
for its needs when unemployment is greatest hi other
fields. Cities, for example, could carry on much of their
work as well at one time as another, and would tend to
ease the whole situation by employing labor when it is
not otherwise needed, rather than by competing for it.
The same is true, in a measure, with state and Federal

26. An Accurate Comparative Study of Expenditures Is
Difficult. The comparison of expenditures, which has
been made in this chapter, is doubtless not entirely ac-
curate. A number of difficulties arise which make accu-
racy impossible. One of these difficulties is that no uni-
form system of accounting exists for the various political
bodies for which comparisons are to be made. The vari-
ous items may not have the same meaning in the different
units. For example, the items under charities, hospitals,
and corrections may not include comparative sums for
the different states or cities. Again, in our judicial sys-
tem, where fees play such a large part, and are used in
such a variety of ways, an accurate comparison of costs
would be out of the question. In some cases the fee repre-
sents the entire cost of the service; hi others it may be
only a part of the cost, or no account may be taken of it
by the treasury. Similar difficulties are found in attempts
to compare practically every item of expenditure.


The obstacles in the way of preparing a comparison of
expenditures for different countries are still more formi-
dable. The systems of government are different, and just
as different are the methods for attacking the fiscal prob-
lems. In some countries, as in the United States, a large
percentage of expenditure is given over to the local gov-
ernmental units, while in other countries, as in France, a
larger part is undertaken by the central government. In
some countries separate accounts are not maintained by
the local and central governments, and the local units are
simply agents for the expenditures of the larger bodies.
Instead of pensions for worthy citizens, many states use
public employment as a means to accomplish the same
end. Obviously, then, a comparison of gratuities for
different countries would be misleading. These sugges-
tions as to the difficulties will indicate the disappointing
results that must come from an attempt at accurate com-
parison of public expenditures.

27. Attempts to Find a Proper Proportion of Expendi-
ture to National Income Have Failed. Many writers
have attempted to ascertain what proportion of the
national income should be spent by the state. Some have
attempted a percentage relationship, and suggestions have
ranged from 5 to 25 per cent. Others have suggested a
per capita basis, and still others claim that expenditure
should be gauged by area. The nature of the factors,
however, which should control the amount of expenditures,
largely vitiates any relations such as these.

The nature of the expenditure will have much force in
the determination of the proper percentage of total in-
come to be spent by the state. If a state be engaged in a
defensive war, for example, it would be proper to go to
any length in its expenditures. A larger percentage would
be justified on some commercial enterprise which would
bring a future return than on one which would not. The
size of the income is itself an item of importance. A 15
per cent expenditure for a country with a large income


might be much less burdensome than a 10 per cent
expenditure for a country with a small income. Per
capita and area bases are still more unsatisfactory. A
per capita comparison of income and expenditure of the
state of Illinois and some of the provinces of China would
show the uselessness of such a basis. Area fails in much
the same way, as it shows neither amount of income nor
the need for state activity. Any attempt to measure what
the state should spend must consider not only the amount
of income, but also the nature of the need for the expend-
iture and the hardship it will entail.

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