Isues in economics today 6th by guell chapter11

Chapter 11 Federal Spending McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc All rights reserved Chapter Outline • A Primer on the Constitution and Spending Money • Using our Understanding of Opportunity Cost • Using our Understanding of Marginal Analysis • Budgeting for the Future McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 11-2 1-2 Federal Spending as a Percentage of GDP McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 11-3 1-3 The Budget Process • “No money shall be drawn from the treasury, but in consequence of appropriations made by law; ” • Both houses of Congress must pass identical bills • President must sign or have veto overridden • President sends Congress a proposed budget • Congress passes its version of the budget (the president does not have to sign or veto) • Congress passes Appropriations Bills • President signs or vetoes Appropriations Bills • Tax Law changes must originate in the House of Representatives McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 11-4 1-4 Shenanigans in the Process • Pork-Barrel spending guided by important committee chairs • Conference committees meet to settle differences between House and Senate versions of the appropriations bills • Members of conference committees often add provisions that were not in either bill to help their constituents • Logrolling occurs when Members of Congress agree to support spending programs in each other’s districts This vote trading increases spending McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 11-5 1-5 Dealing with Disagreements • When dealing with a disagreement • Congress can give in to the president • The president can give in to the Congress • They can stalemate and shut the government down • They can pass a Continuing Resolution • Continuing Resolution: a bill passed by Congress and signed by the president that allows the government to temporarily spend money in a fashion identical to the previous year McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 11-6 1-6 Using Opportunity Cost • Crowding Out: the opportunity cost of government spending is that private spending is reduced • Money spent on one government program can not be spent on another McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 11-7 1-7 Mandatory vs Discretionary Spending • Mandatory Spending: those items for which a previously passed law requires the money be spent • Examples (Medicare, Medicaid, Social Security, variety of welfare programs, interest on the debt) • Discretionary Spending is on those items for which a previous law does not exist McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 11-8 1-8 Spending in FY2011 McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 11-9 1-9 Mandatory vs Discretionary McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 11-10 1-10 Non Defense Discretionary Category 2012 in Billions Science and Space Natural Resources and the Environment Agriculture Transportation Education and Training Veterans Justice McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 33 37 17 144 102 129 56 11-11 1-11 Federal Spending by Category McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 11-12 1-12 Real Health Spending McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 11-13 1-13 International Comparisons of Defense Spending Country United States Defense Spending/GDP 2005 4.0 France 2.4 United Kingdom 2.6 Germany 1.5 Japan 0.8 McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 11-14 1-14 Using Marginal Analysis • The question of the size of government • The optimal size of government is where the marginal benefit of the last dollar taken from the private sector and placed in the public sector equals its marginal cost • The question of the distribution of government • The optimal distribution of government spending is where the marginal benefit of spending on one program equals the marginal benefit achieved in all other programs McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 11-15 1-15 Budgeting For the Future • Baseline Budgeting: using last year’s budgeted figure to set this year’s budgeted figure • Current Services Budgeting: using an estimate of the costs of providing the same level of services next year as last McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 11-16 1-16 Obama Stimulus Plan McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 11-17 1-17 Obama Stimulus Plan McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 11-18 1-18 Obama Stimulus Plan McGraw-Hill/Irwin ©2012 The McGraw-Hill Companies, All Rights Reserved 11-19 1-19 ... Outline • A Primer on the Constitution and Spending Money • Using our Understanding of Opportunity Cost • Using our Understanding of Marginal Analysis • Budgeting for the Future McGraw-Hill/Irwin... were not in either bill to help their constituents • Logrolling occurs when Members of Congress agree to support spending programs in each other’s districts This vote trading increases spending McGraw-Hill/Irwin... president can give in to the Congress • They can stalemate and shut the government down • They can pass a Continuing Resolution • Continuing Resolution: a bill passed by Congress and signed by the president