Isues in economics today 6th by guell chapter11

Chapter 11 Federal Spending... Chapter Outline• A Primer on the Constitution and Spending Money • Using our Understanding of Opportunity Cost • Using our Understanding of Marginal Ana

Chapter 11 Federal Spending

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

Federal Spending as a Percentage of GDP

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

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.

Congress agree to support spending

programs in each other’s districts This vote trading increases spending.

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

Using Opportunity Cost

• Crowding Out: the

opportunity cost of

government spending is that

private spending is reduced

government program can not

be spent on another

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.

Spending in FY2011

Mandatory vs Discretionary

Non Defense Discretionary

Billions

Natural Resources and the

Federal Spending by Category

Real Health Spending

International Comparisons

of Defense Spending

2005

Using Marginal Analysis

• 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.

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

Budgeting For the Future

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

Obama Stimulus Plan

Obama Stimulus Plan

Obama Stimulus Plan