A Case for Higher Public Spending

Yew-Kwang Ng

doi:10.1007/978-981-33-4972-8_15

Abstract

AbstractStudies by psychologists, sociologists, and economists indicate that increases in incomes beyond a moderate level are not related to happiness nor significantly with the objective quality-of-life indicators (which increase with scientific and technological breakthroughs at the global level). Yet everyone wants more money. This may be explained by environmental disruption, relative-income effects, inadequate recognition of adaptation effects, and the materialistic bias due to our accumulation instinct and advertising. These factors cause a bias towards private consumption, making public spending, especially on research and environmental protection (with their long-term and global public-good nature) well below optimal. This is made worse by economists’ emphasis on the excess burden of taxation, ignoring the negative excess burden on the spending side. As Kaplow argues, if taxes are raised in accordance to the benefits of the funded public goods at the respective income levels, no disincentive effects are involved.

Highlights

Studies by psychologists, sociologists, and economists indicate that increases in incomes beyond a moderate level are not related to happiness nor significantly with the objective quality-of-life indicators
We have discussed the failure of private consumption to significantly increase happiness after a rather low level of biological necessity and comfort (Chap. 7) and discussed some reasons and implications in other chapters
Economic growth increases the optimal share of public spending and that, without directly dealing with environmental disruption, economic growth may reduce welfare even if the shares of public spending and environmental protection are being optimized (Ng 2003)

Summary

15.1 Economists Overestimate the Costs of Public Spending

For a dollar of public spending, non-economists typically cost it at one dollar. economists typically cost it at well in excess of one dollar. Since high tax rates encourage tax avoidance and evasion and since some higher benefits of public goods are related to unobservable earning ability than observable income levels, the positive incentive effects on the spending side may not completely offset the distortive effects on the revenue side, making a dollar of public spending still in excess of a dollar taking both sides into account. The marginal benefit of private expenditure is likely to be taken to include the absoluteincome or intrinsic consumption effects plus the internal or direct relative income effect (as these two taken together constitute the worth of private consumption as it appears to each individual), but not to include the negative external or indirect relative income effects This creates an over-emphasis in favour of private expenditure, leading to a sub-optimal level of public spending (Ng 1987a). As consumers may wish to consume the value (pure diamond) aspect of the mixed good so much (such as to show off their wealth) as to incur negative utility on the intrinsic consumption aspect (such as health-threatening excessive drinking), taxes on such mixed diamond goods may make consumers better off (being able to show off to the same extent without drinking to excess) (Ng 1993)

15.2 Specific Areas of Deficient Public Spending

Findings

15.3 Concluding Remarks