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ECONOMY AND EFFICIENCY IN GOVERNMENT EXPENDITURES SO M E D E V IC E S F O R IN C R E A S IN G E F F IC IE N C Y IN G O V E R N M E N T E X P E N D IT U R E O . H. Brownlee, professor o f economics, University o f Minnesota This paper treats what must be considered some comparatively minor issues associated with government spending. It is concerned with how to determine the levels o f some o f the services that govern ment ought to provide and how such services should be produced. Its proposals are applicable to State and local as well as Federal expenditures. I am almost certain that other participants in this study w ill point out that solutions to many o f the central problems o f public expenditure policy are essentially matters o f personal taste on which unanimous agreement is not to be expected. A t the present time, I am not prepared to debate this position. Instead, I shall deal with some problems whose solutions should not be arbitrary ones, even though the changes in expenditures that would follow from applying them would look small in comparison with current levels o f spend ing. . . . . The treatment provided does not point out in detail how the princi ples proposed might be applied. I shall sketch the applicability for a few examples. These examples may appear to be extreme cases and are chosen to demonstrate clearly the points I am trying to make. These proposals when applied might prompt us to do some things in ways much different from those currently employed. Although I shall argue that demand and supply relations can guide us more in determining government expenditure than currently is the usage, this argument does not support either those who believe that the best government is the one that does least nor those who believe that the scope o f governmental activities should be expanded. In many areas we don’t know whether government is spending too little or too much— even though such questions could be answered unambig uously— because we have not obtained relevant inform ation nor em ployed decision-making procedures which would permit us to use the relevant data. G overnm ent S p e n d in g to P r o v id e I S e r v ic e s and to R e d is t r ib u t e ncom e Government spends to provide services and to m odify the dis tribution o f income from that which would prevail if it were deter mined only by the pattern o f resource ownership and resource prices. The extent to which income should be redistributed— the tax and ex 223 224 ECONOMIC GROWTH AND STABILITY penditure pattern together being important instruments of redis tribution—is essentially an ethical problem and will not be discussed here. Goods and services that should be provided by government The goods and services whose provision to the population should be of interest to government and the goods and services which govern ment should produce need not be the same things. The first group includes things whose costs should be-covered to some extent from tax revenues, although the organization of the production of these things might be left completely to private enterprise. The things whose provision to the population is a legitimate governmental con cern includes those that one might call “socially beneficial.” A d ditional consumption of such a good or service by one person increases the welfare of other persons as well as that of the immediate consumer. Elementary school education is a service generally believed to be of this kind. Because Smith’s children do not capture all of the benefits of becoming literate and perhaps learning how to think and thus eventually becoming better citizens than would be the case if they were without elementary education, Jones is willing to contribute toward the education of the Smith children, i. e., to support govern mental expenditure for such education. I t is believed that if ele mentary school education were allocated among the population in the same manner as steak or beer, too little of it would be produced. Other instances of goods or services that are socially beneficial in clude services to check the spread of communicable diseases and various services associated with sanitation—sewage and garbage dis posal, for example. A second category of goods and services in whose provision gov ernment should be interested might be called public goods,1 those which can be consumed by one person without any reduction in the amounts available to other persons. For example, a radio or television transmission can be received by an additional receiving set without affecting the reception of other receivers; one’s view of a public monu ment is independent of the number of persons who have seen it pre viously. Government’s interest in socially beneficial goods is to see that their consumption is larger than would be the case if they were distributed in the same manner as other goods. This objective can be attained by subsidizing producers or by giving grants to consumers conditional upon these grants being used to purchase such goods or services. Either approach requires governmental spending. The interest of government in public goods also is akin to seeing that more is pro duced than would be the case if they were privately produced'and sold. I t costs something to produce and disseminate radio programs. Yet the best way of collecting to cover these costs is not necessarily to charge each listener according to the amount he listens but rather to charge him a flat fee for the opportunity to receive radio reception. Insofar as government may act as the intermediary in collecting and dispersing funds, government expenditure is involved. 1 Refer to Paul A. Samuelson, The Pure Theory of Public Expenditure, The Review of Econom ics and S tatistics, XXXVI, pp. 887^389. ECONOMIC GROWTH AND STABILITY 225 Goods and services that should be produced by government Whether government should produce goods and services— socially beneficial ones, public goods, or other goods— is simply a question o f whether governmental organization o f production will result in a iri ven amount being produced at a lower cost than would be achieved by private producers. Thus, there is no inherent reason for a good or service to be produced by government, even though this good is freely distributed by government, i f private producers can produce it at less cost; nor is there any reason why government should not produce any good or service and sell it in the market, even though this commodity has been produced privately, if it can do so at less cost than private producers. In this paper I shall avoid the hardest problems— those associated with how much production there should be o f public goods and goods with social benefits. Instead I shall deal with some o f the problems o f trying to assure that the costs o f producing whatever outputs are chosen is a minimum, some o f the devices that can be used fo r determining the outputs o f goods that are neither public goods nor socially beneficial but in the production o f which government has definite advantages, and with some considerations in determining whether a good is socially beneficial. M ore C W o sts id e s p r e a d of S U se of e r v ic e s i n W C o n t r a c t i n g a s a D e v ic e f o r L o w e r in g h ic h G o v e r n m en t H as a n I n ter est In the United States it is widely believed that with both types o f producers having access to the same technology and the same mar ket inform ation, private producers will produce more efficiently than government. There is relatively little pressure for government to take over the production o f steel or autos or most other goods and services that are clearly neither socially beneficial nor public goods. A foundation fo r this belief might be that i f decision makers are rewarded (or penalized) in accordance with the quality o f the deci sions which they make, the quality o f decision making will be better than if rewards and quality o f decisions are not closely related. Where profit is a good index o f the quality o f the decision, the results o f private producers’ decisions in organizing production are gen erally accepted. In many areas, government has chosen to specify the amount o f a product"to be produced and to let private producers produce the product for government. The military does not produce its own planes, tanks, etc.; the postal service hires railways and airlines to carry m ail; some school districts do not operate their own school buses, etc. The line between where government should buy goods and services and where it should produce them itself appears to have been arbitrarily drawn. I f the contention that private producers can produce more efficiently is correct, there are opportunities for reducing costs o f government— although the savings may not be large— through more widespread application o f the practice o f gov ernment specifying the task to be accomplished and letting private producers bid fo r the job. F or example, fire protection, garbage col lection, mail collection and delivery, and even many law-enforcement activities (such as checking parking violations and collecting taxes) might be contracted to private agencies. 226 ECONOMIC GROWTH AND STABILITY One cannot forecast accurately the outcome of more widespread ap plication of contracting. There should be reductions in costs of doing some of the things now done by government. But total ex penditure might be increased. F or example, with better garbage collection at the same cost as at present or the same kind of garbage collection at lower cost, people might demand more of it than cur rently is being obtained. Rather than try to guess what the expend iture pattern would be, let me try to indicate how more widespread use of contracting might be made by reference to an extreme case. One function which government performs is th at of levying and collecting taxes, the procedure whereby a person may determine his tax liability having been stated basically by legislation. There are, of course, what many people call “inequities” in the tax structure that are the results of legislation. However, there are others that are essentially administrative—in the assessment of property for tax purposes and in the undercollection of income taxes, particularly from self-employed persons. I t is claimed that these could be rem edied by devoting more resources to tax collection, yet there is no agreement as to how much more should be devoted to this purpose. One way of determining this would be to sell the right to collect a certain tax in a particular area. I f taxpayers have adequate recourse to opportunities to prove their true tax liabilities so that they will not pay more than legally prescribed and if the right to collect a tax sells for more than the net revenues (gross collec tions minus collection costs) obtained by government, greater effi ciency in tax collection would have been achieved. The tax “farm ers” (as they were called in earlier times when such procedures were followed) would be organizing their resources more efficiently than has government in collecting a given amount of revenue and/or de voting more nearly the correct amount of resources to their function. I t might be noted that such a move might prompt legislation such that taxpayers could more unambiguously determine their tax lia bilities and that there should be virtually no bribery of tax collectors. S o c ia l l y B e n e f ic ia l G oods a n d S e r v ic e s There is not complete agreement with respect to precisely which goods and services are socially beneficial. However, some of this disagreement is the result of failing to distinguish between benefits that can be rewarded through the market and those th at cannot. F or example, investment in plant and equipment th at will earn enough to pay interest and amortization costs is socially beneficial in that it results in a given amount of product being sold at a lower cost. How ever, the making of such an investment is rewarded through the market. I f a person learns to understand things that improve his decision-making ability as a citizen but do not increase his market able skills, this act is not rewarded through the market. Only the latter kind of action warrants expenditure as a socially beneficial action. I f there are unnatural impediments to investment th at pre vent the first kind of action from being carried out, such impedi ments can be removed by the establishment of governmental agen cies—for regulation or for making loans, for example—whose expenditures are relatively insignificant. ECONOMIC GROWTH AND STABILITY 227 Furthermore, as already has been indicated, goods or services that are socially beneficial need not be produced by government. Unless the government is interested in controlling the curriculum, the ap propriate stimulation to the production o f elementary education could be provided by grants to families cdriditio'n&l upon such grants being used fo r elementary schooling. Private producers could operate the schools and collect for their services through fees. A n appraisal o f current governmental aids to higher education p ro vides an opportunity to illustrate a confusion in popular notions o f so cially beneficial goods. Governmental aids to education are extended not only to elementary schooling but to secondary school training and so-called higher education— the educational services provided by col leges and universities. Yet, it cannot be argued that training a person to be an accountant, an engineer, an embalmer or a mathematician or to speak French brings significant social benefits. It is true that in creasing the number o f accountants, engineers, etc., reduces the prices fo r the services which they produce. But im proving technology or increasing the amount o f capital employed in producing varkjus goods and services also reduces their prices. Investment in higher education does not differ fundamentally from any other form o f investment in the distribution o f its returns among the persons making the invest ment and others. I f a rationalization, consistent with our general views as to how resource allocation should be made, were to be pro vided fo r public support to higher education, this rationalization might be that existing market arrangements make it possible for us to borrow to purchase a farm, a factory, or an oil well, but that borrow ing to purchase a college education usually cannot be accomplished through form al financial channels. Investment in higher education thus would be too small, if we left its determination to the same forces as are permitted to determine other investment decisions. One way to encourage more investment in higher education is to reduce its price through governmental grants to some colleges and universities. However, if it is agreed that we should be interested primarily in assuring that individuals may invest in themselves through training on the same terms as they may invest in other assets, this objective can be achieved by creating lending institutions for making loans to purchase education— perhaps in creating an F H A fo r college educa tions. Such institutions could require, considerably less Government expenditure than do current arrangements— in the long run they need not require a n y ; and, they could result in a better allocation o f educa tional opportunity than do present institutions. A t the present time, some persons who would not buy a college education i f they had the financial resources and had to pay the fu ll costs attend some Statesupported institutions. Others who would buy a college education if they could borrow the financial resources and had to pay the full costs cannot attend college. A loan program, in lieu o f present form s o f State support, would permit the second group o f individuals to attend college, and— i f educational training were priced at cost— would re sult m the training o f fewer individuals in the first group. Govern mental operation o f institutions o f higher learning might continue under the proposed arrangement. But, the reasons for such operation are the same as those for State operation o f grocery stores, filling sta tions, etc. 228 ECONOMIC GROWTH AND STABILITY I t should be noted th at pricing higher education at cost would per m it us to determine whether too much or too little is being produced. When a good or service is not socially beneficial and is priced below cost, the fact th at more of this good or service is demanded than is available is not sufficient to claim th at a true shortage exists. In the long run, there would be “shortages” (excess demand) of all such goods and services if they were priced in this manner. Information about the quantities of socially beneficial goods and services that would be purchased at various prices also is required to determine how much should be produced. Because, at some arbitrary price, there is excess demand for such a good or service does not necessarily mean that too little is available. Excess demand for this good also may mean only that the price is too low. P u t t in g D e c is io n s S W it h upply R espec t to and D em and H ig h w a y B S e r v ic e s o n a a s is Among the goods in which government should act as collector and disperser—if not producer—are those in which costs of collecting from each user in accordance with the amounts used are high relative to production costs. W ater or electricity would be such a good, if either good were cheap but meters were very expensive. A classic example is highway services. W ith the exception of a few limited access highways and bridges, the costs to private producers of col lecting from highway users directly in accordance with use are so high relative to construction and maintenance costs that unless gov ernment provided highways and streets, there would be too few of them. For more than three decades, there has been much argument re lating to how much should be spent on highways and who should pay the bill. The question of who should pay the bill hinges on whether highway service is socially beneficial. Although improved highways cut transport costs and hence the prices of things con sumed by persons not directly using the highways, there are many other activities that result in reduced prices and for which no special means of compensation are provided. Except for potential m ilitary uses of the highways—for which the m ilitary services should pay— the case for attributing social benefits to highway services is a weak one. In addition to attributing social benefits to highways, further re sistance to conceptually applying the usual market criteria to deter mining how much of such service should be produced has arisen from viewing highway services as public goods. I f using a highway im posed no maintenance costs and if there existed no problems of high way congestion, such a view might be legitimate. However, it is not economic to construct highways so th at there are not maintenance costs (at least for some vehicles), and street and highway congestion is one of our most widely discussed problems. I f difference in qual ity of service is considered—quality might be defined in terms of op portunity to travel at a certain speed, with a certain comfort and some specified probability of accident—much of the service offered by the street and highway system is not a public good. ECONOMIC GROWTH AND STABILITY 229 I f it is agreed that highway services are neither socially beneficial nor public goods it would be desirable to try to ration these services among users and to determine the amounts th at should be produced in the same general way as these problems are solved for other goods. The practical problems are those of attaching appropriate prices to highway services, collecting from highway users according to the amounts of each of the services used and employing highway-use data to determine the amounts of roads of various qualities to con struct. Some of these problems have been explored in more detail else w here2 and I will state only some of the implications of these ex plorations here. Collecting from highway users in accordance with the amount of service obtained can be accomplished by reliance upon motor-fuels taxes for passengers’ care with supplementary weightdistance taxes for trucks and buses. Revenues could be allocated to each section of the highway system in accordance with the traffic pattern and comparisons of revenues and costs would be employed to guide the construction and maintenance patterns. Encourage ment to toll roads would be provided by imputing revenues to them in the same fashion as for other roads. Thus, decisions about how much of various kinds of highway service to provide could be based on whether such changes would pay. We would be able to know more clearly than we can at the present time how adequate is our highway system. S um m ary The devices that have been suggested in this paper—more wide spread use of contracting in the production of services provided by government, a loan program to prospective college students rather than an expanded State role in the production of higher education, and the provision of highway services in accordance with market cri teria—are all designed to make it possible for us to know more ac curately whether the right amounts of certain kinds of services are being provided and if the least-cost methods for providing various amounts are being employed. The changes in government expendi tures th at would result from using such devices might not be large, but some improvement in resource use would result. 2 See O. H. Brownlee and W alter W. Heller, Highway F inancing and Development, American Economic Review, May 1956, pp. 232-250.
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