Government Spending Chapter 10

Goals & Objectives Explain how and why gov’t spending has increased since the 1940’s. Describe 2 kinds of gov’t spending. Describe how gov’t spending impacts the nation’s economy. Explain the budgeting process. Describe parts of the budget process. Describe State and Local Spending categories. Explain the federal deficit & debt. Describe past attempts to lessen the debt. Relate entitlements to the national debt.

The Economics of Government Spending 2013: Federal, State, Local $4.7 Trillion Per Capita: (per person) $12,000 for every man, woman, and child in the U.S. Public Sector: 1942 Public Revenue Act WWII Public Opinion shifts toward Socialism. Success of GDP with gov’t spending.

Public Jobs & Spending

WWII Economy & Gov’t Spending

Two kinds of Spending 1. Good and Services: tanks, planes, ships, office supplies, military labor. The Federal Government is the largest American consumer. 2. Transfer Payments: “a payment for which the government receives neither goods nor services in return” (TINSTAAFL)

Types of Transfer Payments 1. Social Security 2. Welfare 3. Unemployment Compensation 4. Grant-in-aid: Grant-in-aid: one level of government to the next level: highway funds, public schools, food stamps, welfare, subsidized housing, Obamacare.

Transfer Payments & States

Discretionary Spending “Façade”

Total Federal Spending 2013

Impact of Government Spending Affecting Resource Allocation: Tanks or Milk subsidies?. Welfare or Disabled Veterans? Redistributing Income: TANF, SDI, Food Stamps, Pell Grants, NITC. Competing with Private Sector: Public College Costs increases with Pell Grant increases. Obamacare mandates and health insurance premiums/copays.

Food Stamp Nation

Entitlement Nation

Federal Government Expenditures Federal Budget: a plan on how much to spend. Mandatory Spending: without the Congress (Interest on debt, SSA, Medicare) Discretionary Spending: Military & Welfare Federal Budget Deficit: “Plan” to spend more than receipts Federal Budget Surplus: “Plan” to receive more tax revenues than expenditures.

House & Senate Budget House: Budget starts in the House of Rep. Discretionary Spending only. Appropriations Bill: act of Congress authorizing agencies to spend money. Committee/Subcommittee: Pork-Barrel Spending Senate: Conference Committee & CBO input or complete rewrite of bill.

Congress Budget Compared

State Government Expenditures Intergovernmental expenditures: Public Welfare, medical care, welfare institutions, miscellaneous welfare expenditures, higher education, highway construction.

Grant-in-aid Spending

Deficits, Surpluses, and The National Debt 1. Deficit Spending: spending in excess of revenues collected. 2. Federal Debt: total amount borrowed from investors to finance the government’s deficit spending Balanced Budget Admendment: constitutional limitation on spending

Presidential Deficits

Future Deficit Spending

17.6 Trillion -25 Trillion by 2020

Who do we owe?

Trust Funds Debt held in government trust funds: special accounts used to fund: Social Security, Medicare Al Gore’s Presidential Campaign 2000: “Lockbox”?

Trust Fund Debt

Public vs. Private Debt Private citizens borrow there is a plan to pay it back Federal Government borrows there is no thought about how, or when to pay it back: 1. Increase taxes to pay 2. Borrow more money to pay

Impact of The National Debt 1. Impacts the distribution of income: Gov’t borrows from the wealthy and taxes the middle class to pay for the interest on the debt. 2. Transfer of purchasing power from the private sector to the public sector: The larger the debt the more TAXES needed to pay off the interest.

Debt as % of GDP

Impact of the National Debt 3. Taxes needed to pay the interest on debt: creates a diminished incentive to work, save or invest. 4. Crowding-Out Effect: Government borrowing takes money out of circulation for the private sector.

Taming the Deficit 1990: BEA,(Budget Enforcement Act) pay-as-you-go provision: New spending must accompany cutbacks in other programs Gramm-Rudman-Hollings: Balanced Budget & limitation on spending failed in the Congress. Why?

Taming the Debt 3. Omnibus Budget Reconciliation Act of 1993 President Clinton: Reduce the rate of the deficit not the deficit itself. 4. Balanced Budget Agreement of 1997: Line-item veto: unconstitutional Spending caps: legal limits on annual discretionary spending.

Success---Failure 1. 2001 recession 2. 2001 Terrorist Attack 2. 2002-3 Wars in Afghanistan & Iraq ---Entitlements: Largest growth in government spending.