Public output and private decisions : conceptual issues in the evaluation of Government activities and their implications for fiscal policy

In this essay, the author explores theoretical concepts behind the current debate on government growth, public sector inefficiency, and the role of fiscal policy with a view to raising the most important issues relevant for fiscal policy. He examines theories of public sector growth, the evaluation of benefits from government spending, and the response of the private sector to government activities. Three principal reasons have been suggested to explain public sector growth: conscious government choices, political pressure from interest groups, and the self-interest of bureaucracies. One may ask: is the growth of the public sector a response to public demand or the result of government waste and inefficiency? In terms of the agent-principal theory, bureaucrats who are supposed to serve as agents for citizens may not necessarily do so - which is where waste comes in. If bureaucrats are interested in the nonpecuniary benefits of their bureaus, they will have an incentive to maximize their activities and budgetary allocation rather than their operating efficiency. In discussing the evaluation of public programs, the author focuses on the"true"benefits, as perceived by citizens. Would a well-to-do citizen, who could afford private security guards, make the same evaluation about public security that a poor citizen would make? In general, what considerations affect a person's desire for a given amount of public spending, and what are the important parameters that analysts should take into account in their investigation? The author also explores the issues behind the private sector's response to government activities and argues against a mechanistic approach to the interaction between the private and public sector. Unless decisionmakers are relatively certain about how citizens evaluate government actions, citizens may respond in a way that nullifies the government action. The author concludes that more empirical work is needed on measuring citizens's response to public sector activities. And fiscal policy, especially on expenditures, should be modeled on a disaggregated basis to isolate hypotheses about potential private sector responses to individual public programs.