In thinking about the U.S. government and how you might wish it to become, it is helpful to take a step back to consider why we need governments at all and the many things governments can do and have done.

We provide links to comparative data around the world throughout.

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PART 1: WHY DO WE NEED GOVERNMENTS?

1.       It is possible to live without a government, but few people like to do so. The absence of any kind of government is referred to as anarchy. Some people may believe anarchy is ideal because everyone has total freedom. In practice, our liberty often bumps into someone else’s freedom.

Social norms can sort some of this out, but not all. For example, everyone can get used to driving on the right side of the road. Most of us can agree that it is wrong to steal. But criminals don’t care about norms. If they can, they will threaten or outsmart you. The absence of governmental authority makes it hard for people to get justice and settle disputes peacefully. Under anarchy, justice is subjective and is achieved mainly through vigilantism. Thus, anarchy in real life is usually associated with injustice, violent conflict, and chaos.

One example comes from the country of Somalia from 1991 to 2012. Clans with enough money and arms could do as they pleased, extorting from those who were weaker. Might made right. In those years, no one clan was strong enough to form and maintain a national government, and too few were willing to collaborate to form one. A similar situation recently played out in Haiti. The country was without an elected government in 2023 following a series of escalating crises. Since then, warfare between local gangs has made it impossible to form a new government for more than a few months at a time despite several attempts. Kidnapping, murder, and sexual violence have surged. Basic services have largely collapsed.

2.       At a minimum, people create governments to avoid the problems of anarchy. Most of us want physical and economic security, predictability, freedom, and fair treatment. Unfortunately, an armed gang, or even just one person, can unfairly and suddenly take away any or all of these things. The solution is for some people to impose order, dispense justice, and manage conflict within a territory. By so doing, they become a government. At a minimum, a government requires:

1. a military to repel invaders,
2. police to catch criminals,
3. judges and jails to punish criminals,
4. some form of taxation to finance the military, police, and judiciary
5. laws to create and maintain those four institutions of government and
6. the ability to punish anyone who resists the laws – including required taxes.

Many governments do much more than the minimum. That’s especially true when they represent, and are accountable to, their citizens through regular elections rather than a small circle of powerful people and their cronies. We offer a fairly complete summary below. We start in Part 2 by reviewing several fundamental issues that all governments face. Part 3 covers most of the key functions that governments perform in the U.S. and around the world.

PART 2: FUNDAMENTAL ISSUES

RAISING REVENUES

3.       How much government do we want? For some parts of the world, this question is a luxury – for them, the question is, “How much government can we afford?” Governments cannot expect to sustainably collect much revenue in countries with little natural wealth, little to trade, and small, poorly educated populations often unable to work due to frequent illnesses. Together, these factors form a government’s tax base. After that, there is the matter of tax and tariff rates and tax compliance.

4.       How do we want to pay for the government we want? Tax and tariff rates are a matter of policy choice. In the U.S., as the table below shows, the mix of taxes and tariffs funding the federal government has changed a lot over time. Corporate and personal income taxes now dominate excise taxes and tariffs. Total federal revenue as a share of GDP increased sharply in World War Two and has stayed high ever since.

You can compare the U.S. with various other countries on tax and tariff statistics by using the links below:

• Click here to see a map from Compare Your Country showing how much revenue governments collect in various countries.
• Click here for a map from Compare Your Country showing corporate tax rates in various countries.
• Click here to see average tariff rates by country from MacroTrends.net.

5.       Some people will try to evade their government’s tax and tariff policies. Successful tax compliance depends upon government legitimacy and administrative capacity, especially if tax and tariff rates are high.

• Low government legitimacy often reduces tax compliance.
• High quality of tax administration – good customer service on the one hand and strong audit capacity backed by penalties for evasion on the other – often increases tax compliance.

6.       Government policies can help. Improvements in the tax base, tax administration, and government legitimacy will allow either of these two policy options: (1) reduce tax and tariff rates without losing revenue, or (2) spend on more or better government services. See also a third option, debt reduction, in the sub-section below.

• Tax bases can be improved, at least over the medium-term, by investing in the education and health of the population, by encouraging and rewarding innovation, and by seeking foreign trade opportunities.
  • An important consideration in this regard is whether economic growth – people’s take-home pay and business profits – is more helped than hurt by the combination of tax and tariff policies and government services.
• The quality of tax administration can be improved fairly rapidly by adequate staffing, better training, better procedures, and investments in better technology.
• Government legitimacy can be improved in several ways:
  • First and foremost, by ensuring the government represents, and is accountable to, all its citizens through regular, free and fair elections.
  • Equally important is being responsive to citizens, getting good results, and solving the problems that most matter to them. Exactly what those things are varies from country to country and can change over time.
• Of course, lower spending can also reduce the need for revenues. Spending reductions could come from efficiency gains, fewer services, or lower quality services.

BORROWING AND DEBT SERVICE

7.       Some national governments seek balanced budgets, but most run deficits. A fiscal deficit arises when total spending exceeds revenues. That deficit must be financed by money creation or by borrowing. Money creation is inflationary, so most governments rely on borrowing, often from domestic lenders but also from foreign lenders. The accumulation of debt from borrowing, however, brings its own problems. Governments must pay interest to lenders. Interest payment obligations can sometimes crowd out other spending when governments borrow too much without repaying their old debts fast enough.

• In the case of the U.S. government in 2024, the debt stock was nearly 121% of GDP. Net interest obligations were roughly 13.5 % of total spending. They could rise to as much as 16% of total spending by 2034, depending on Congressional policy choices between now and then. See Figure 1 below.

• Click here to see central government debt stocks as shares of GDP in various countries, as reported by the International Monetary Fund.

8.       Government deficits and borrowing can be harmful or helpful in much the same way that private debts and borrowing can be harmful or helpful. Most people borrow sometime in their lives, perhaps for a car, a house, a new business, or when they can’t pay their credit card back in full. Such borrowing is helpful when borrowing for an investment that gains you more income faster than the associated interest obligations. For example, a business might borrow to invest in new equipment if the owners are confident that doing so would allow them to earn enough to cover interest and repayments and still increase their profits. Similarly, governments can gain revenue faster than interest obligations grow when the economy’s growth rate is higher than the average interest rate, with both adjusted for inflation. This condition is sometimes called “the golden rule of investment,” which requires that spending never exceed revenues except when borrowing for investments with a sufficiently high rate of return.

9.       Wars and natural disasters are often accompanied by higher borrowing. For example, the U.S. debt stock reached 106% of GDP in 1946, just after the end of World War Two. More recently, of 203 countries reviewed, 139 national governments borrowed heavily in 2020-2022 in response to the Covid epidemic (IMF Fiscal Data). The United States increased its stock of total gross debt in 2020 to 132 percent of GDP from 108 percent in 2019. By 2024, the debt had come down to 121 percent of GDP.

10.     Government policies can help reduce deficits, borrowing, and the stock of debt. The main options are to increase revenues, reduce spending, and increase the pace of economic growth. Higher revenues can be obtained without hurting growth through more government legitimacy and better tax administration rather than increasing tax or tariff rates. Expenditures can be reduced without hurting growth through efficiency gains (see internal capacity below), by protecting investments in productivity and output, and – if politically feasible – by eliminating low-priority programs.

BUILDING INTERNAL CAPACITY

11.     Government revenue and spending policies get good or bad results depending upon the capacity of the government departments and agencies involved. That capacity comes from government employees, the quality of their education and training, the quality of the procedures they must follow, the complexity of the regulations and laws they must implement or enforce, and the quality of the software and hardware used to aid them in their work. Capacity also comes with the quality of the private firms that the government contracts with. That, in turn, depends upon the quality and competitiveness of the procurement process.

• Federal government employment fell from 3.2% of total employment in 2010 to 2.8% in 2023. Most countries employ much higher shares. State and local government workforces also fell, from 12.2% of total employment to 11.6% over the same period.   
• Click here to see the share of employee compensation in public spending for various countries in 2023. The U.S. share is lower than most.
• Many presidents prize party loyalty over expertise in deciding who the government employs. By 1881, the hiring system had gradually succumbed to corruption characterized by exchanging money and favors for political offices and the systematic purging of officeholders every time the presidency changed party hands. The system changed after President Garfield was assassinated in 1881 by a man repeatedly denied an appointed office. The 1883 Civil Service Reform Act (called “the Pendleton Act”) gradually moved most federal employees into the merit system. As of 2024, however, more than 4,000 positions remain reserved for political appointees, excluding those in the Executive Office of the President. Of those, roughly nine hundred required Senate confirmation. 

MONITORING PROGRESS

12.     Many governments invest in the ability to monitor needs, capacities, and progress. Almost all governments try to keep track of their military capacity. Most governments regularly track their economic output, foreign trade, inflation, and unemployment. Many also regularly monitor the impact of various government programs on goals they set earlier, such as access to clean drinking water, adequate nutrition, and housing. Governments that take legitimacy and accountability seriously tend to make the data they collect available to their citizens and business firms. The most fundamental among these is a regular and accurate census. For example, in the U.S., a regular and accurate census is vital for understanding our changing tax base and spending needs.

• Click here to see an assessment of statistical capacities across countries as recently as 2022 from the World Bank.

PART 3: MAKING CHOICES

13.     The Constitution assigns Congress the powers to raise revenues, spend, and borrow. The executive branch, under the president, is assigned the obligation to carry out the budgets adopted by Congress and signed into law. Congress, however, has gradually delegated some of its budgetary powers to the Executive Office of the President, with the balance of power periodically shifting one way or the other. (See our short courses on the presidency – Part 4 – and on Congress.)

Together, these two branches of government are often confronted with difficult choices, especially when faced with economic depressions, global petroleum crises, financial crises, global pandemics, aging populations, or unsustainable borrowing. Which revenue policies and spending programs are likely to help the economy grow faster, which are inflationary, which are socially and politically important but could be made more efficient, and which are no longer needed, questionable, or unsustainable?

Note: Much remains beyond the reach of even the most competent governments. For example, weather and natural disasters often impact production, trade, prices, and employment.

Figure 2: Federal spending shares, FY2024.

14.     Suppose you are faced with the challenge of reducing interest payments as a share of federal spending. Figure 1 above shows that interest payments will continue to grow unless revenues are increased or spending is reduced. Suppose you prefer to reduce spending, and Congress will support any decisions you make. What would you cut? Figure 2 shows what the biggest candidates for spending cuts were in FY2024:

• The Department of Health and Human Services spent 25% of the budget, including the popular Medicaid and Medicare programs.
• The Social Security Administration was 22% of the total – would you reduce benefits or restrict who may receive them?
• The Department of Defense spent 12% of the total. Can you find ways to reduce spending without reducing our defensive capabilities?
• The Treasury Department was 9% of the total. It performs several functions essential to any government: it collects taxes through the Internal Revenue Service, handles government payments, and manages government debt. It also advises on economic policy and manages several financial assistance programs.
• The Department of Veteran Affairs spent 5% of the total. Would you reduce benefits or restrict who may receive them?
• The Department of Agriculture was 3% of the total. Its programs support farmers, ranchers, small business owners, and rural/under-served communities.

These six agencies and interest payments ate up 88% of the budget, with roughly 150 other agencies in the remaining 12%. There is another complication: some spending is mandatory, meaning the laws require such spending. Examples include interest payments, Social Security, Medicare and Medicaid, the Supplemental Nutritional Assistance Program, and veteran’s benefits. Discretionary spending is less than a third of the budget. And almost half of discretionary spending in 2023 was for defense.

Making policy choices is not easy work. The Congressional Budget Office does, however, help Congress explore these relationships and policy options. The U.S. Treasury and the Office of Management and Budget do the same for the president.

15.     You can try your hand at making some spending and revenue choices in various simulation games. One example that allows trade-offs between policies that do and do not help the economy grow comes from the Hoover Institute. Another example comes from the Bipartisan Policy Center. It lacks the growth linkages but has more revenue and spending choices.

16.     If you want to dig deeper, the next several sections offer descriptions of key budgetary functions common to many governments. In many cases, links have been provided to allow you to make comparisons across countries.

PRIORITIZING LIBERTY AND JUSTICE

17.     Liberal republican governments like ours use constitutions and laws to protect personal freedoms. By contrast, governments in some other countries are quite repressive. For example, people may not be free to speak their minds on political matters (Uzbekistan[1]); people may be told which religion to practice (Saudi Arabia[2]); or may be penalized from traveling outside their region (People’s Republic of China[3]).

Thus, many governments, particularly republics like ours, maintain constitutional courts to settle disputes between the executive and legislative branches or between the federal government and the states or the people. Constitutional courts are essential to maintaining civil and economic liberties and rights when they are competent, fiscally independent, and nonpartisan.

• Click here to see country rankings for freedom and civil rights by Freedom House.
• Click here to see country rankings from the World Justice Project for “constraints on government powers” and “fundamental rights.”

18.     Many governments use constitutions and laws to make it easier for citizens to own property and businesses. By contrast, in some countries, people are told what they must grow or produce (Myanmar[4]), they may be prohibited from owning property (former communist countries), or the government may favor some business owners with monopoly rights, subsidies, and protection from foreign competitors. In some countries, bribes are required to conduct business. Other countries not only encourage private property and competitive business activity but also manage to do so while minimizing harmful practices such as slavery, cheating on commercial contracts, and pollution.

19.     Many governments also maintain courts to settle matters of civil law. Civil cases involve disputes between people or organizations, such as contract disputes, labor disputes, or insurance claims. Civil courts are especially important to thriving, competitive business sectors when they are well-informed, technically competent, fiscally independent, and nonpartisan.

• Click here to see country rankings from the World Justice Project for “absence of corruption,” “open government,” and “regulatory enforcement.”

PROVIDING SECURITY

20.     Most governments have a military to defend their territory, police to keep order, and a judicial system to prosecute people who break the law. In some countries and times, government leaders stay in power by using the military, police, and judicial system to repress the poor or various religious, racial, or ethnic groups. (Haiti under President François Duvalier is a good example.) In other countries and times, the military focuses only on national defense, the police protect citizens and their property from criminals, and the courts weigh evidence in criminal cases fairly and expeditiously framed by mutually understood rules.

• Click here to see how countries are ranked by GlobalFirePower.com.
• Click here to see how country police forces were ranked by the Institute for Economics and Peace.
• Click here to see country rankings from the World Justice Project for “criminal justice” and “order and security.”

21.     Foreign invaders and domestic criminals are not the only threats to our physical and economic security. Natural disasters such as fires, floods, earthquakes, hurricanes, and tornadoes routinely damage lives and properties. Pests can threaten our food crops, while poor sanitation during food processing can threaten our food supply. Many diseases can threaten our livestock as well as ourselves. Some jobs are dangerous. Thus, most governments have at least some capacity to manage many of these threats. They may provide fire departments, fire safety regulations, rescue units, flood control, disease control, pest control, food safety regulations, job safety regulations, and so on. Some of these, like fire codes and firefighting, reach as far back as ancient Rome.

PROMOTING NATIONAL INTERESTS ABROAD

22.     Most governments employ some form of diplomacy to advance their security and commercial interests. Allies in defense and trade can be very valuable. Governments seek such partners by establishing and staffing embassies worldwide, participating in regional and international bodies, and using media to spread their messages. Those countries with the most trade (and thus creating job opportunities for their citizens) typically have the most embassies. In 2016, the U.S. had embassies in almost every country, closely followed by China.

• Click here to see embassy networks by country (Lowy Institute).

NATURAL RESOURCE MANAGEMENT

23.     Almost all governments include offices that control the allocation of air, water, and land resources to various groups or activities. Their objectives usually include some balance between maximizing profit and the conservation of resources for future generations. In some countries (Myanmar[5]), land and water are used mainly to benefit rulers. In other countries like ours, the land and water have been divided into private use, public parks, and government use. Similarly, our air space is divided into public and private uses. Natural resource management may also include policies meant to avoid or reduce environmental harms such as air pollution and the overuse of fishing grounds.

PRODUCTIVITY AND THE QUALITY OF LIFE

24.     Most governments provide at least some public services to improve the productivity of their citizens and firms and, often, to improve the quality of life. Governments at the local level may provide some of those public services, while others may be provided at the state or national level. (See our short course on Federalism here.)

Many governments provide educational services: some to inculcate national ideology, some to build a productive workforce, and others to ensure that citizen voters are well-informed. Most provide at least some health care services to ensure a productive workforce, if not for a better quality of life. Most also provide at least some infrastructure such as drinking water, sewerage, roads and rail, airports and sea ports, a postal system, electricity, and networks for information-communications technology. Job creation is more likely when these services are in place and well maintained.

25.     Some governments aim to satisfy those with power first. For example, in Nigeria, in 2016, there was a proposal to spend more on the state house clinic (that serves the president and other high officials) than would be spent on all the country’s teaching hospitals.[6] Some governments have let much of their infrastructure deteriorate because they lacked the needed skills and sufficient finances or prioritized other expenditures. Yet, many governments have managed to extend good quality public services to most of their citizens. (For example, World Bank data on World Development Indicators such as water supplies and sanitation services.)

26.     Many governments invest in science and technology. They do this to strengthen their military, make their private sector more competitive, improve health care, and improve their capacity to manage the natural world around them (weather forecasts, for example). In the U.S.A., federal research and development spending was 5% of discretionary spending or 0.76% of GDP in 2013. Government spending as a share of GDP in other countries that same year was 0.99% in South Korea, 0.83% in Germany, 0.60% in Japan, and 0.44% in China.[7]

SOCIAL PROTECTIONS

27.     Some governments favor social protections for their citizens. Examples include maternity leave, paternity leave, unemployment compensation, disability payments, medical care, veterans’ benefits, and social security retirement benefits. These are often referred to as entitlements. Most low-income countries do not have such programs or have them only on paper.

28.     Aging populations put pressure on governments that offer medical and retirement benefits. The importance of retirement benefits varies, of course, with older adults’ share of the population. According to the U.S. Census Bureau, the population aged 65 and older was almost 5% of the total U.S. population in 1920. By 2024, it was almost 18%. This growth puts pressure on age-related entitlements and, together with interest obligations, crowds out some other kinds of spending. For example, spending on the Department of Health and Human Services plus the Social Security Administration increased from 24% of total spending in 1970 to almost half (47%) by 2024.

• Click here to explore the elderly share of populations around the world.

29.     Some governments seek to reduce the number of people living in poverty and the degree of inequality within their populations. They typically do this by trying to accelerate growth (China, India, South Korea), by enacting regulations to protect workers from predation (Norway, Denmark, and Iceland stand out),[8] by requiring universal health care (62 countries in 2018),[9] and universal secondary education (most governments succeed on this one: laggards include Afghanistan, Bangladesh, Laos, Pakistan, and much of Africa),[10] through fiscal transfers to households (most of Europe), and by using progressive taxation (Australia, Denmark, and Belgium).[11]

• Click here to see poverty rates by country as reported by Wikipedia.

***

Congratulations! You have reached the end of this short course!

You have learned why we need governments, why what they can do is determined by the resources they government can obtain through revenues and borrowing, by the impact of their policy choices on growth and legitimacy, and by their investments in internal capacity. Finally, you reviewed what governments typically do with the resources they have.

If you found this material useful, please share it and our website with your friends.

You can find more short courses here – check them out anytime!

We appreciate your ideas for new topics and your suggestions to improve what we have. Please write to us at team@CFFAD.org

SOURCES:

Congressional Budget Office.

Congressional-Executive Commission on China. (2005). China’s Household Registration System.

Freedom House (2018). Freedom in the World.

Institute for Economics and Peace.

International Monetary Fund.

Lowy Institute.

Oxfam (2018). The commitment to reducing inequality index.

Premium Times (Nigeria).

UNICEF.

U.S. Government (2024). Policy and Supporting Positions (Plum Book).

USAID (2017). Freedom to Farm.

U.S. Treasury Department (1915, 1970, and 2024).

Wikipedia.

WorldAtlas.com.

World Bank, World Development Indicators.

World Justice Project.

 END NOTES

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[1] Freedom House. Uzbekistan, 2019. See item D4.

[2] See https://en.wikipedia.org/wiki/Freedom_of_religion_in_Saudi_Arabia

[3] Congressional-Executive Commission on China. (2005). Special Topic Paper: China’s Household Registration System: Sustained Reform Needed to Protect China’s Rural Migrants. https://www.cecc.gov/publications/issue-papers/cecc-special-topic-paper-chinas-household-registration-system-sustained

[4] See USAID (2017). Freedom to Farm: Agricultural Land Use, Crop Selection, Fallowing, and Proposed Changes to the Myanmar Farmland Law Necessary to Strengthen Land Tenure Security. https://www.land-links.org/research-publication/world-bank-2017-paper-freedom-farm-agricultural-land-use-crop-selection-fallowing-proposed-changes-myanmar-farmland-law-necessary-strengthen-land-tenure-security/

[5] See USAID (2017). Freedom to Farm: Agricultural Land Use, Crop Selection, Fallowing, and Proposed Changes to the Myanmar Farmland Law Necessary to Strengthen Land Tenure Security. https://www.land-links.org/research-publication/world-bank-2017-paper-freedom-farm-agricultural-land-use-crop-selection-fallowing-proposed-changes-myanmar-farmland-law-necessary-strengthen-land-tenure-security/

[6] See https://www.premiumtimesng.com/news/headlines/197827-2016-budget-buhari-to-spend-more-on-state-house-clinic-than-on-all-federal-teaching-hospitals.html

[7] Data are from UNESCO, Gross domestic expenditure on R&D (GERD) and GERD by source of funds.

[8] Oxfam (2018). The commitment to reducing inequality index. https://www.oxfamamerica.org/static/media/files/The_Commitment_to_Reducing_Inequality_Index_2018.pdf

[9] See https://en.wikipedia.org/wiki/List_of_countries_with_universal_health_care

[10] UNICEF data.

[11] Oxfam (2018).