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. Logrolling occurs when Members of 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 Money spent on one 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 FY2014

Mandatory vs. Discretionary

Non Defense Discretionary Category 2014 in Billions Science and Space 30.1 Natural Resources and the Environment 40.2 Agriculture 23.5 Transportation 103.8 Education and Training 129.0 Veterans 148.2 Justice 58.7

Federal Spending by Category

Real Health Spending

International Comparisons of Defense Spending Country Defense Spending/GDP 2011 United States 4.7 France 2.6 United Kingdom 2.2 Germany 1.3 Japan 1.0

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.

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 BUDGETING: FISCAL YEAR FOR GOVERNMENT: October 1st