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