Introduction
Thus far I have identified two of what have been described in the economic literature as the “four essential roles or functions governments perform in the economy.” There has been firstly, government spending on goods and services. As previously noted readers need to be aware that this role is not as straightforward as it might at first appear. The main reason for this is that a considerable amount of government spending does not take place in private markets (for example, spending on security). And, because of this consideration, in practice it has been very difficult to properly identify and therefore adequately measure such types of government expenditures.
As was also noted in last week’s column, the second role governments perform is to provide mechanisms and means for transferring income among different groups in the economy/society. These transfers can take what economists term as a vertical form (that is from rich to poor) or a horizontal form (for example, the provision of old age pensions irrespective of the pensioner’s income or wealth).
Furthermore, as was briefly referred to in the conclusion of last week’s column, there is a fundamental difference between the first and second roles of government, which readers need to be aware of. Government spending on goods and services in the economy both directly and indirectly affects the production of goods and services throughout the entire economy (both government and non-government sectors). However, providing mechanisms and means for transferring income, among different groups whether horizontal or vertical does not directly impact on the output of goods and services in the