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Applying Economics to the Real World

Case1: Government Spending and Taxation

The government finances its spending through treasury bills, borrowing, and taxation. Different forms of taxation are the main sources of government revenues. Taxation allows the government to collect a common pool of funds to finance social projects which are sensitive to be left in the hands of private investors. The benefits of government spending are equally shared in the economy regardless of the amount of tax remitted by an individual or a corporate. The U.S government has gradually increased different tax categories to finance increased government spending in the recent past. However, economists argue that increasing taxes to finance government spending could negatively impact the economy. Analysis of recent trends in taxation and government spending in the U.S will help to understand the impacts of government fiscal policies in the real market.

Change in the Composition of Government Spending in Recent Decades

The U.S government spending has increased in the past decades, making up 36% of the total spending in the economy (Gwartney et al., 2018). Expansion in the size of government and population is the main reason for the continuous rise in the rate of government spending in the past decades. Today, most of the government spending occurs at the federal government level. The composition of government spending has drastically changed since the 1960s. Government spending on defense has significantly reduced while spending on healthcare, subsidy programs, and transfer payments has increased (Gwartney et al., 2018). Change in the composition of government spending is attributed to shifting priorities over time.

How Change in Government Spending and Composition will Affect Living Standards

The public expenditure policy directly influences a country’s economic growth, living standards, and economic growth. The influence of increased government spending on living standards will depend on the distribution of government spending in different social activities. Increased government spending on health and education will improve living standards, especially if it targets the needy (Zouhar et al., 2021). On the other hand, increased government spending on cash transfers will reduce the inequality in income distribution and poverty levels. Government spending on social infrastructures will result in economic growth and productivity in the long term. Economic growth is associated with secondary economic benefits like increased employment and better service delivery. An increase in U.S government spending in the recent past on social services such as health, subsidy programs, and cash transfers will help Americans achieve high living. Poor planning of government spending results in increased poverty levels and a lack of socio-economic protection for income earners.

Will Democracy Survive if Majority U.S Citizens Pay Little or Nothing in Taxes

Democracy will not survive in a situation where many U.S citizens pay little to no taxes. In a democratic political system, the government relies on revenues from taxes to fulfill promises and pledges made to voters. A democratic political system is characterized by high government spending to gain the support of the majority. Little or lack of taxation will cut the source of government income, thus the failure of the government to fulfill political promises. A lack of tangible projects and social programs will result in a loss of support from the population. Democratic political systems rely on the support and cooperation of the majority to increase levels of direct and indirect taxation to finance additional government spending (Balamatsias, 2018). Lack of zero-tax remittance by citizens will force the U.S government to resort to cruel means of raising revenues like heavy taxation on high-income earners and huge foreign borrowings. The alternatives will only provide short-term solutions. In the long run, citizens will question government policies leading to civil unrest. In a democratic political system, citizens are ready and willing to support government spending by paying taxes.

Proposed Composition of Government, Government Spending, and Taxation that will Work Best

There is a need for the U.S government to consider restructuring the government composition and priorities to should increase spending in research and development, science and technology, and emergency responses to provide a remedy in case of a global crisis. Research and development will enable the government to make long-term strategic plans to achieve desired economic growth. Increased government spending on science and technology will allow the use of scientific and technical principles in decision-making and allocation of resources. Allocating funds for emergency responses will help to cushion citizens in case of unforeseen future occurrences.

Government spending in research and development stimulates corporate innovations and helps to improve the level of creativity in the population (Tang et al., 2022). The government should offer subsidies to research and development firms to help them overcome challenges such as lack of capital. Tax incentives and low taxes will help make research and development, as well as science and technology, an attractive venture.


The change in the composition of government spending over the past decades has been necessitated by the growing size of the government and the change in the needs of society. The U.S government has significantly reduced spending on defense while spending on health, subsidy programs, and transfer payments has increased. Increased government spending on social amenities and services has helped improve the living standards of Americans. The success of a democratic political system heavily depends on the majority of voters’ support of the taxation system.

Case 2: The Economics of Social Security

The social security program in the U.S was established in 1935 to provide social upkeep and income for retired workers. Covered employees make specified contributions from their salary depending on their income level. Social security principles differ from private insurance; contributions made by active employees are used to remit payments to retirees. The increasing number of baby boomers retirees has created a deficit in the social security kitty. The current social security formula is unfavorable for low wages and workers who began working early. There is a need to structure a social security plan favoring the social protection of all races and income categories in America. A change in the approach will help solve the underlying cash deficit due to the increased number of retirees in the past decade.

How Social Security Principles Differ from Private Insurance

The social security approach differs from private insurance regarding how it handles members’ contributions. In private insurance, funds collected from members’ contributions are invested in income-generating activities such as stock, tangible assets, or bonds (Gwartney et al., 2018). The investments provide funds to cater to members’ future financial plans. On the other hand, social security relies on taxes levied on the current working population to make financial obligations to retirees. Members’ contributions are not invested in any income-generating activity or savings plan. The main aim of private insurance is to provide cover in case of unforeseen future occurrences.

In most cases, private insurance benefits are passed to third-party beneficiaries. In social security, the main aim is to provide social cover and income after retirement. In most cases, the beneficiary of social security is the individual employee, and benefits cannot be transferred after the contributor’s death.

How Social Security Affects the Economic Well-being of Blacks Relative to Other Races

The current social security system negatively affects the economic well-being of blacks compared to whites and Hispanics. The blacks comprise a vast population of low-income earners with a low life expectancy. A considerable percentage of the black population does not attain retirement age to access social security benefits. Social security benefits can be claimed from age 62 to 70; workers who claim the benefits before attaining the age receive reduced benefits. Research indicates that between 1992 and 2004, more than 50% of black workers were employed in jobs requiring much physical effort compared to 32% of whites (Moore et al., 2019). Lack of professional qualifications and low education levels among blacks is the main reason blacks make up the majority of menial laborers and low-paying jobs, even in old age. Low life expectancy and challenges in carrying out heavy jobs that require a lot of physical energy force black workers to make early claims for social security benefits. Early claims for social security funds led to reduced benefits for blacks and increased risks of poverty in old age.

On the other hand, whites and Hispanics have access to quality health care and high-paying jobs due to high educational achievements. Despite starting working later in life than blacks, whites and Hispanics contribute considerably to the social security fund. High income and education levels make whites and Hispanics afford a comfortable lifestyle; therefore, many of the population can attain retirement age and enjoy full retirement benefits.

Does Current Social Security System Promote Income Equality?

The current social security system has contributed to increased income and social inequality in America. High-earning contributors enjoy high benefits, while low-income earners receive low benefits amid the rising cost of living. High-income earners, who make up a small percentage of the whole population, end up claiming more benefits than middle and low-income earners despite being the majority contributors to social security funds. In the American economy, middle-income earners plan for retirement through wealth accumulation in the social security program, thus reducing the individual savings plan (Catherine et al., 2020). Most low and middle-income earners do not have alternative investment plans and rely on the social security program. In addition, the social security system uses slow benefits growth for contributors with minimal educational backgrounds.

Modernization of the Social Security to Ensure Long-Term Solvency and Fairness

Social security reserves soon face the risk of depletion due to a deficit between contributions received and benefits paid out. There is a need for a change of approach to revive the social security system in America and create confidence among the contributing age groups. Income from alternative investments other than employment should be subject to social security contributions (Social Security Works, 2020). Progressive taxation of alternative sources of income will help create additional funds for the social security fund and reduce income disparity.

There is a need to expand the social security system to ensure the inclusivity of all Americans, especially during times of financial difficulties and low wages. A social security system built on fairness, efficiency, and universal principles will help Americans sustain decent living standards in case of loss of employment, retirement disability, or death (Social Security Works, 2020). A rapid change in the American economy and a change in the generation’s perception of retirement necessitates a review of social security contributions and benefits systems. The review should be based on the need to build a robust social security system for the upcoming generations.


Functions of the social security system have evolved to provide social and economic cover for Americans during times of financial difficulties. However, the current social security system still encourages income disparity among low-income earners and less educated. For instance, the current system has contributed to the vast income disparity between high-income and low-income earners, encouraging income disparity among blacks. There is a need to modernize the current social security system to ensure that the current crisis of cash deficit is addressed and that the welfare of the upcoming future generations is safeguarded.


Balamatsias, P. (2018). Democracy and taxation. Economics12(1).

Catherine, S., Miller, M., & Sarin, N. (2020). Social Security and Trends in Wealth Inequality.

Gwartney, J. D., Stroup, R. L., Sobel, R. S., & Macpherson, D. A. (2018). Economics: Private and public choice (16th ed.). Cengage Learning.

Moore, K., Ghilarducci, T., & Webb, A. (2019). The inequitable effects of raising the retirement age on blacks and low-wage workers. The Review of Black Political Economy46(1), 22-37.

Social Security Works. (2020). Social Security works for the United States in 2019. NEW SOLUTIONS: A Journal of Environmental and Occupational Health Policy30(1), 57–68.

Tang, D., Li, Y., Zheng, H., & Yuan, X. (2022). Government R&D spending, fiscal instruments, and corporate technological innovation. China Journal of Accounting Research15(3), 100250.

Zouhar, Y., Jellema, J., Lustig, N., & Trabelsi, M. (2021). Public expenditure. How to Achieve Inclusive Growth, 457-496.


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