Chapter 2: The Public Sector

When Republican lawmakers regained control of the House of Representatives in 2023, their first legislative act was to cut funding for the IRS. The Internal Revenue Service, or IRS, is the federal agency responsible for collecting taxes and enforcing tax laws in the United States. This particular move was made to counter the increase that had passed the previous year while Congress and the White House were both controlled by Democrats, however it is by no means the first time there has been a call to cut, or even eliminate the IRS.

Support for agencies like the IRS is often divided along political party lines, and the IRS in particular has never been super popular with Republicans, who tend to favor smaller government and lower taxes. Republican disdain for the tax-collecting agency has been even more pronounced since it was involved with the enforcement of the Affordable Care Act in 2010 and then was criticized in 2013 for targeting conservative groups for falsely claiming tax-exempt status. In 2014 Republican congressional leaders led the charge for a $350 million cut to the IRS budget, the cherry on top of what added up to a $1 billion reduction since 2010. Ultimately, the number of employees at the IRS dropped substantially over this time period.

The idea that we could simply cut an agency whose main job is to take some of our money away from us each paycheck is undeniably appealing in some ways. Right around the middle of April every year the Internet blesses us with jokes (that aren’t really jokes) about how people feel about taxes and the IRS.

The IRS is by no means the only agency for whom the guillotine is suggested. The departments of Education, Commerce, Energy, Housing and Urban Development and the Environmental Protection Agency face similar calls pretty regularly. But if these agencies all poofed out of existence, who would manage the United States nuclear arsenal? Who would be in charge of loaning college students money (and then making sure they pay it back)? The Department of Commerce houses the agency, the NOAA, that collects all of the weather data that we rely on for everything from choosing what outfit to wear to planning shipping routes for international trade. The Federal Housing Authority insures the loans for 20-25% of the houses that are purchased every year– largely for first-time homebuyers and people who don’t quite qualify for conventional mortgages. Would we just…stop doing that?

The notion that the government is too big and that we should take drastic measures to make it smaller is, perhaps, understandable. Popular opinion about government and public employees has declined steadily since the 1950s, with brief exceptions during the Clinton administration and right after the September 11, 2001 terrorist attacks. The federal government is too big, is not to be trusted, and needs to be cut back. Contrary to popular belief though, the size of the U.S. federal government, as a proportion of the U.S. population and economy, has significantly decreased over the past six decades.

As of January 2023 there were around 2.9 million civilian employees working directly for the federal government. This number has stayed relatively stable since 1950 at least partially due to the “Whitten Cap.” Jamie L. Whitten, a Democrat from Mississippi, introduced an amendment that year that prevented the federal government from filling vacant federal jobs with permanent employees during the Korean War. He placed the cap at 2 million employees, saying “…I thought 2 million permanent folks out to be enough to have on a permanent basis and I thought those ought to be protected in it. So what I did was fix approximately 2 million as all the permanents we are going to have.”

The Whitten Amendment was repealed, twice. First, Congress voted in 1965 to exempt US Postal Service employees from being counted as part of the 2 million. They repealed it completely in 1967. The cap lives on though, as it has become a standard campaign pledge and personnel management policy. So far we have not had any sustained time periods where federal direct employment remained over 3 million.

There are some major differences between the U.S. now and the U.S. in 1950. First, there are close to 200 million more people living here now (around 335,000,000) compared to then (around 150,000,000). In the first quarter of 1950 the Gross Domestic Product was just shy of $282 billion versus the fourth quarter of 2022 when it was over $26 trillion.

So, how are we running the government of a much larger country without increasing the number of government employees in proportion to the size of the growth? With more to manage but little political capital available to increase permanent government employment numbers, the government tends to use contracts and grant employees to get this work done. This method doesn’t appear to be going anywhere anytime soon as it appeals to politicians on both sides of the aisle. “The strategy has been attractive to many liberals because it has allowed them to expand government’s reach without making government bureaucracy bigger,” said public administration scholar Donald Kettl, and “It has been attractive to many conservatives because they have been able to swallow a larger government as long as the private sector delivered it.”

If you include everyone that is actually relying on the federal government for their paychecks there are over 9 million federal employees. That is right around 6% of the U.S. workforce. It is a lot, but it is not the biggest that it has ever been. As a percentage of the population, there was a larger federal workforce in almost every year prior.

We may not always be aware of it, but we “interact” with the government and its work many, many times a day. A recent Pew Foundation survey shows that 55% of Americans believe that the government isn’t doing enough to help people like them. Seven percent say the government does too much for them.. Let’s imagine a day in the life of a typical college student in the U.S. and try to identify some of the ways that the government is involved.

A Life, Lived

7:00 a.m. Your alarm goes off. You know that it really is 7:00 in the morning because the National Institute of Standards and Technology keeps the official time. Your alarm is a clock radio? Delightfully old school! You can listen to your favorite radio stations because the Federal Communications Commission regulates and organizes our telecommunications system. The FCC makes sure that multiple radio stations are not trying to use the same frequencies and that signals are not messed up by other devices, like cell phones, satellite signals, and modems, that all have signals crowding our nation’s airwaves.

7:35 a.m. Take a deep breath and prepare to greet the day. Notice that breath. You are very unlikely to choke on smog or other significant air pollution. It wasn’t always like that. In 1948, nearly two dozen people were killed and thousands injured by a cloud of air pollution from a factory in Pennsylvania. This accident marked the beginning of efforts to ensure that our air is clean and healthy. The Clean Air Act, signed into law in 1970 and strengthened in 1990, gave the federal government the authority to enforce regulations that limit air pollution.

7:36 a.m. If you are like 85% of Americans, you have a smartphone. And if you are like this author, you check it before you even get out of bed. The Food and Drug Administration (FDA) shares regulatory responsibilities for cell phones with the Federal Communications Commission (FCC). Under the law, the FDA is responsible for, among other things: Consulting with other federal agencies on techniques and programs for testing and evaluating electronic product radiation. The FCC does things like require that your provider make all of the charges in your bill clear and prevent scammers from stealing your phone number.

7:45 a.m. You stumble to the kitchen for breakfast. You pour some water into your coffeemaker. You probably don’t even consider the safety of the water, but in fact your city water department constantly monitors the quality of your water and takes measures to correct any problems.

7:46 a.m. Push the “brew” button on the coffee maker. It is unlikely that you worried about a short in the outlet or in the electrical line and the potential for fire. Why? Because when your house was being built, your local government required that the electrical system be inspected to make sure it was properly installed, and that it was installed by an electrician who was licensed by your state government to ensure their competence and your safety.

7:50 a.m. Breakfast today is a smoothie. Bananas, strawberries, dates, walnuts and almond milk, just like the fancy grocery store on Tik Tok but without the price tag. Food- borne illness affects thousands of Americans every year, but the likelihood of you getting sick from your breakfast is greatly reduced by standards on food quality set by the government and regulated by inspectors.

7:57 a.m. Maybe you were thinking of painting those ugly walls, but then you remember that you don’t actually own your house, your landlord does. You pay them rent in exchange for a lease, which gives you the right to live there. Your landlord is responsible for keeping your house safe, heated (and cooled in some places), and free of pests. Local governments provide this protection for renters and the courts are available to settle disputes in the case that someone tries to go back on the lease agreement.

7:58 a.m. Use the bathroom. Don’t forget to flush. Your local government then takes care of transporting this waste, treating it, and disposing of it in an environmentally responsible and sanitary manner.

8:00 a.m. As you are getting dressed, a glance outside the window shows some ominous clouds. You check the weather on your phone. All these weather forecasts, even ones you get from private news companies, are made possible by information gathered and analyzed by the National Weather Service (NWS), a government agency. Each day, the NWS uses its 122 weather forecast offices, 158 high resolution radar sites, 17 satellites, hundreds of weather balloons, 1,200 buoys, thousands of aircraft and ship-based observations, and tens of thousands of human observations to generate this data. And now you know what to wear today.

8:15 a.m. You drop a couple of bills in your mailbox to be mailed. For less than a dollar, a postal worker will pick up the bills directly from your house, take them to a place where they will be sorted and sent on until they are delivered in a few days to the appropriate company, even if that company is all the way across the country.

8:16 a.m. Hop in your car and pull out of your driveway. Driving can be very dangerous, but it is made safer by government laws and regulations, such as those that require that you “click it or ticket.” Seat belts save nearly 15,000 lives a year. Driving is also safer because of local government enforcement of traffic laws and safety standards on cars. Also, if you do get in an accident, it is far less likely that the effects will bankrupt you. The government requires that all drivers have auto insurance.

8:18 a.m. Your trip on the highway would be far less dangerous if not for the rules on the number of hours that truck drivers can drive without resting. Thousands of people die, and tens of thousands are injured every year from truck-related traffic accidents. These numbers would increase without the regulations that give sleepy truck drivers time to rest.

8:20 a.m. You arrive at school and take the elevator up to your floor. You just assume that the elevator is safe; and it is, thanks in part to the annual elevator inspections conducted by your state government. There is a little piece of paper inside of that elevator that tells you when it was inspected last.

8:30 a.m. Time to sit through a couple of classes. Maybe you go to a public university. Maybe you have student loans. Both of these things are provided by government entities. We have decided as a society that we all do better when we are a more educated group. And those student loans? Loans are never fun, but at least these are given at interest rates lower than regular bank loans.

Noon. For lunch you brought a sandwich and a cup of leftover soup. Why did you choose that soup when you were at the store? Perhaps you needed it to be dairy free. Gotta avoid the tummy ache. But how do you know which is the right soup for you? Because the government requires all food packaging to have a simple and honest label that contains the nutritional information necessary for consumers to make choices. Campbells and Progresso may tell you that their soups are delicious, but it is the government that makes them let you know if there is an ingredient in there that you don’t want. How concerned are you that the tomato in your sandwich is not coated in layers of pesticides? Probably not too much, because the Department of Agriculture has developed and enforces rigorous and uniform standards for pesticide residue on raw foods.

12:45 p.m. After lunch, you walk to a nearby ATM and get some cash out of your account. You don’t need to be surprised that your money is actually there. That wasn’t always true. For example, during the economic depression of the 1930s when many banks failed. But your money is safe because the government guarantees your deposits. That’s what the FDIC letters mean. And of course, those bills you withdraw are only worth something thanks to the federal government. The monetary system we use was created by and is run by the government. The value of that money is maintained because the government regulates the money supply and protects it from counterfeiters.

3:00 p.m. On a break, you call your elderly grandmother in the hospital to check on how she is recovering from her broken hip. What a good grandchild you are! Thanks to Medicare, her medical expenses are covered and she does not have to worry about this becoming a financial disaster for her. Considering her only income is her monthly Social Security check, this would be a real concern.

5:15 p.m. Whew. Time to drive home after a long day of class and studying. You stop at a local gas station to fill up. You pump 12 gallons of 87 octane gas into your car and pay for it. But how do you know that you really got 12 gallons, and not 11½? And that the gas was actually 87 octane? Because there is a sticker on the pump that indicates that it was inspected. Divisions of Weights and Measures inspect all kinds of things, like gas pumps and large animal scales, and grocery scanners. More than 50% of the U.S. Gross Domestic Product is based on things bought and sold by weight or volume, so making sure things are accurate is crucial.

5:30 p.m. As you drive home, you notice the trees next to the streets and the cute houses in your neighborhood. Thanks to zoning regulations our residential neighborhoods are generally free of, say, giant giant pork processing plants or noisy pet hotels or strip clubs. Zoning regulation keeps neighborhoods pleasant.

5:35 p.m. As you approach your house, you see an adorable child scootering down the sidewalk. The sidewalk that was paid for and laid down by the government. Not only do sidewalks give us somewhere to ride our scooters, they give us a place off the street to walk, which keeps us safe.

5:45 p.m. You go for a jog in your local public park.

6:30 p.m. A dinner date at a local pizza restaurant! You deserve it because of all of the working and jogging. The food is delicious and no one gets food poisoning. This is in large part because your local government conducts regular inspections of all restaurants to protect the health of customers.

8:00 p.m. Back at your house. You settle in for a quiet evening of studying. You are clearly an excellent and dedicated student…just a quick check of your socials first though. The internet is something that we often think of as a private enterprise, something provided through a combination of tech entrepreneurs in California and our local media companies. The internet began, however, with government programs that created ARPANET and later NSFNET, early computer networking systems that developed the software and networking infrastructure that form the foundations of today’s internet. The government also helped to fund research that led to web browsers like Internet Explorer and search engines like Google.

11:00 p.m. You go to bed. During your sleep, you are protected by a smoke detector that your city requires to be installed in every residence. Maybe you would have bought one of these yourself, but this law helps to ensure that everyone is protected from the dangers of fire.

4:00 a.m. You are asleep in your comfy bed. You remain comfortably unconscious because there are noise ordinances in many cities and towns that help keep your neighbors from partying all night long and keeping you up.

It should seem pretty clear at this point that the American administrative state is pervasive. It is not, however, the largest or most pervasive in the world. As a percentage of the economy, the United States falls into the bottom third of industrialized countries for government spending. Similarly, the U.S. tends to hover around 9th or 10th on the list of 32 OECD countries in terms of the percentage of the workforce employed in government service.

Types of Governments

Special purpose governments are public entities established for a specific purpose or function, such as providing a specific service or overseeing a particular aspect of local governance. Some examples of special purpose governments in the United States include:

• Special district governments which are set up to provide a service such as water and sewer management, parks and recreation, or fire protection, in a defined geographic area.
• Authorities, which are independent government entities that have the power to issue bonds and raise revenue, often for the purpose of financing large infrastructure projects, such as transportation or housing developments.
• Public corporations, which are governmental entities created to perform specific tasks such as operating public transportation systems, managing convention centers, or providing affordable housing.

These types of governments exist alongside traditional forms of government and typically have a specific charter, mission, and budget, separate from the broader government.

The Role of Government

We often think of the United States as having a capitalist economy, otherwise referred to as a market economy or a free-market economy. In a capitalist economy, the means of production are privately owned, and economic decisions are primarily made by individuals and businesses operating in the marketplace, rather than by the government. And while the U.S. economy is characterized by a significant degree of economic freedom, with limited government intervention in most sectors of the economy, the U.S. government controls or at least partly controls many goods and services. Consider postal delivery or roads, education and emergency response. All mostly government-controlled. And no matter how much money you have, you are not legally allowed to buy or sell cocaine, machine guns manufactured after 1986, or your kidney. Food can only be sold if it meets standards set by the Food and Drug Administration. You want to fire an annoying employee? Make sure you are following the rules set out by the Fair Labor Standards Act. Almost every type of industry and exchange in the U.S. is affected by rules and regulations, and in this way we can say that the country has the elements of a mixed economy. There are elements of both capitalism and socialism in the U.S., a mixture of free market capitalism and government intervention. And it is in this context that we find the role of the U.S. government.

Why do we have all of these employees and what is the point of all of this government anyway? The answer has to do with market failure. Market failures refer to situations in which the free market fails to efficiently allocate resources in a way that benefits society as a whole. In a perfectly functioning market, prices serve as a signal for both buyers and sellers, indicating the value of goods and services and allowing for efficient allocation of resources. However, in some cases, market forces do not work as intended and lead to inefficiencies, resulting in negative consequences for society. These inefficiencies can be caused by a variety of factors such as externalities, missing markets, market power, and imperfect information.

Externalities refer to the costs or benefits of a transaction that are not reflected in the market price, such as pollution or national defense. In other words, externalities occur when a transaction harms (negative externalities) or benefits (positive externalities) a third party. Sometimes these costs or benefits are small and do not have enough of an effect to create a need for government action, but when they are large they can become problematic and begin to impact other transactions and the functioning of society as a whole.

Pollution is a commonly used example of a negative externality. Imagine a factory making something, say, fertilizer. Farmers want this fertilizer to treat their crops and increase their yield, so they purchase the product. The fertilizer factory owner makes decisions in an attempt to maximize profits–sell as much fertilizer as possible, while incurring the lowest possible costs to do so. The problem is that fertilizer and fertilizer production is a significant source of water and air pollution. Nitrogen and phosphorus runoff is the leading cause of ecological “dead zones” in waterways, and the greenhouse gasses, like methane, released during the production of fertilizers is one of the major contributors of air contamination.

Is this just the cost of doing business in a capitalist society? Maybe, but at some point pollution begins to affect other parts of the market. Pollution stunts economic growth and exacerbates poverty and inequality in both urban and rural areas. It is the largest environmental cause of disease and premature death, causing more than 9 million premature deaths per year worldwide. That is 1 in every 6 premature deaths. The World Bank recently reported that air pollution cost the world around $8.1 trillion in 2019, which is the equivalent of over 6% of global GDP. This cost is not reflected in the transaction between the fertilizer factory and the farmer.

There are also positive externalities, and here the issue is the difference between private and public gains. For example, it is impossible to create a military defense system that only protects those who choose to pay for it. Military defense creates general security for everyone, even if some people would like to not to pay for it. Because of this, there is little reason for a private company to create a military to defend the country–because you can’t really exclude anyone from getting the benefits, there is no impetus for people to pay for the service.

The tragedy of the commons highlights the importance of managing shared resources in a way that ensures their sustainable use and preservation. This may involve the establishment or regulations, property rights, or other mechanisms that encourage cooperation and collaboration among users of the resource, as well as strategies to prevent or mitigate the negative effects of overuse or depletion.

Market power, or market control refers to the ability of a seller or group of sellers to influence the price or quantity of a good or service in a market. When a seller or group of sellers has market control, they have the power to set prices higher than they would in a competitive market, resulting in higher costs for the consumer and higher profits for the sellers.

There are various types of market control, including monopoly, oligopoly, and monopolistic competition. In a monopoly, there is only one seller in the market, giving them complete market control. In an oligopoly, a small number of sellers dominate the market, giving them some degree of market control. In monopolistic competition, there are many sellers in the market, but each seller offers a slightly different product, giving them some market control over their particular product.

Picture it like this: say that there are 3 different pizza restaurants in your area, Tony’s, Pizza John’s Pizza, and Punky’s. In order to get customers to eat at Punky’s, rather than at either of the other two options, Punky’s has to do something to compete. They either need to be the tastiest or the cheapest (or the best balance between these things). They probably will also need to do things like have a nice, clean facility and friendly employees, because if they don’t do all of this, customers will just hop on over to Pizza John’s Pizza or Tony’s. The competition between the restaurants encourages a quality product and a good price. But now say that Pizza John’s Pizza and Tony’s close and there is only one pizza restaurant left in town. People like pizza and will want to eat pizza, but Punky’s management might decide that they want more profits at some point. So, they reduce the amount of cheese that goes on each pizza by a little bit. Then, a while later they change brands of pizza sauce to a cheaper, but less tasty brand. And then they raise prices by 10%. Customers who want to eat pizza (which they do, because it is pizza), are left with an inferior product that costs more money.

This might not seem like a big deal when we are talking about pizza. After all, people don’t need to eat pizza. Sometimes, though, it can actually be something more like a life or death situation. For instance, in 2015 an entrepreneur named Martin Shkreli purchased the rights to an older medication called Daraprim. Daraprim is used to treat toxoplasmosis, which is a parasitic infection that largely impacts pregnant people, babies and people with HIV. It is the only drug approved by the FDA to fight this parasite. Prior to Shkreli’s purchase of the drug, it cost around $13.50 per tablet, however as soon as he acquired it Shkreli raised the price to $750 per tablet. His company then changed the way the medication was distributed and made moves to prevent competition from other drug companies. In 2022 the U.S. District Court for the Southern District of New York ruled that Shkreli had violated state and federal antitrust laws and had harmed consumers who were trying to obtain treatment for life-threatening diseases. Shkreli was fined $64.6 million and was barred for life from the pharmaceutical industry.

Imagine that Melvin finds two used cars that are similar in terms of mileage, body condition, and age. One car costs $6,000 and the other costs $7,000. If Melvin were car shopping in a world of perfect information, it would be pretty obvious what Melvin: buy the cheaper car. However, he is operating in a world of imperfect information, and the sellers most likely know more about the cars and their problems than Melvin does. What’s more, sellers have an incentive to hide the information. After all, the more problems the cars have, the cheaper they will need to be.

One might wonder, again, if this is just the risk one takes when doing business. After all, “caveat emptor”, or “let the buyer beware.” Potential buyers need to take responsibility for doing their research and making wise decisions, right? Well, yes and no. A capitalist economy such as the one in the U.S. requires the circulation of capital, and the presence of an information imbalance can discourage both buyers and sellers from participating in the market. Buyers may become reluctant to participate because they cannot determine the product’s quality or fear being ripped off. Sellers, especially those of high and medium quality goods, may be reluctant to participate because it is difficult to demonstrate the quality of their goods to buyers in order to sell them at a fair price.