1 Fiscal Policy Overview Keynesian Economics

2 FISCAL POLICY OVERVIEW Fiscal Policy: Deliberate use of taxes, transfer payments, and government payments for G & S to affect the level of production (GDP), income, prices & employment in the economy. (GDP), (AKA: Government tax & Spend policy)

3 FISCAL POLICY OVERVIEW 2005 Nominal GDP = $ trillion 2005 Federal Budget: $ trillion spending $ trillion revenues (taxes) $ billion deficit (~$7.9 trillion Gross National Debt, 2005)

4 Annual Federal Deficit

5 A National Debt Clock May be found on the WWW at the following URL: Or at the U.S. Treasury Public Debt site:

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7 FISCAL POLICY OVERVIEW Federal Govt. spending in 2005 was 20.1% of GDP

8 Historical Government Spending as Percent of GDP

9 What is Government Spending? Direct govt. purchases –some farm commodity programs, – defense spending –automobiles and trucks –office furniture and supplies –etc.

10 What is Government Spending? Transfer payments –Unemp. compensation benefits –Welfare and food stamp programs –Social Security and Medicare benefits –Farm price supports deficiency payments, Farm Program Transition Payments

11 Cut Welfare! What is Welfare? –Temporary Assistance for Needy Families –Women, Infant & Children’s Program (WIC) –Medicaid –Food Stamps –Supplemental Security Income (SSI) –Housing Assistance –Any others?

12 Cut Welfare! (1) Crime rate? Law enforcement cost? Prison cost? (2) Education Public Assistance

13 Breakdown of Federal Expenditures: Direct benefit payments to individuals: ~ 60.3% of the total federal budget (AKA: Entitlement Programs)

14 Breakdown of Federal Expenditures: Social Security:$523.4B Medicare Benefits:$333.8B $857.2B are ~57.5% of Entitlement Programs ~35% of total budget Voting Data

15 Breakdown of Federal Expenditures: The remainder of direct benefit payments to individuals are ~ 42.5% of entitlements ~ $633.5 billion or $.6334 trillion ~ 25.6% of total budget

16 Breakdown of Federal Expenditures: Food and Nutrition Assistance Amount% of Budget Food Stamps:$32.6B1.32% Child Nutrition & Milk Prog. 11.9B.48 % Supp. Feeding Prog. (WIC) 4.9B.20% Total 49.4B2.00%

17 Breakdown of Federal Expenditures: Public Assistance and Related Programs Amount% of Budget Supp. Sec. Inc.$35.3B1.43% Family Support Asst. (TANF) 21.3B.86% Low Income Home Energy Asst. 2.1B.085%

18 Breakdown of Federal Expenditures: Public Assistance and Related Programs Amount% of Budget E.I.T.C.E.I.T.C.$34.6B1.40% Legal Services.331B.013% Daycare Asst. 4.9B.200% Veterans Asst. 3.7B.150% Housing Asst. 31.8B1.29% Total 75.3B3.05%

19 Breakdown of Federal Expenditures: Health Care (Medicare Excluded) Amount% of Budget Medicaid$181.7B7.35% Hospital & Med. Care for Veterans$23.1B.93%

20 Breakdown of Federal Expenditures: Unemployment Assistance Amount% of Budget $33.1B1.34%

21 Breakdown of Federal Expenditures: Assistance to Students Amount% of Budget Direct Student Asst. to College Students$28.9B1.17% Veterans Education Benefits 3.2B.129%

22 Breakdown of Federal Expenditures: $314.6 B or 12.7% of total budget: Medicaid, Food Stamps, TANF, Supplemental Security Income, WIC, Assisted Housing, Home Energy Asst., Day Care Asst.

23 Breakdown of Federal Expenditures: An employee retiring at age 65 on Jan. 1, 2000 that paid the maximum amount into the social security retirement fund (OASI), and therefore receives the maximum benefit, will receive all the money they ever put into Social Security + interest in 3.78 years (46 checks)!Jan. 1, 2000 (OASI), interest Will Social Security Be There For You? Spreadsheet Used to Compute

24 Hard To Believe? From 1937 to 1949: Maximum Earnings Taxed = $3,000 OASI tax rate = 1% Max. Tax Paid = $30 per employee Plus Employer’s Share = $30 per employee Total Tax Paid = $60 per employee From: Social Security Tax Rate Table

25 Hard To Believe For the Year 1950: Maximum Earnings Taxed = $3,000 OASI tax rate = 1.5% Max. Tax Paid = $45 per employee Plus Employer’s Share = $45 per employee Total Tax Paid = $90 per employee From: Social Security Tax Rate Table

26 Hard To Believe For the Year 1960: Maximum Earnings Taxed = $4,800 OASI tax rate = 2.75% Max. Tax Paid = $132 per employee Plus Employer’s Share = $132 per employee Total Tax Paid = $264 per employee From: Social Security Tax Rate Table

27 Hard To Believe For the Year 1970: Maximum Earnings Taxed = $7,800 OASI tax rate = 3.65% Max. Tax Paid = $ per employee Employer’s Share = $ per employee Total Tax Paid = $ per employee From: Social Security Tax Rate Table

28 Hard To Believe For the Year 1980: Maximum Earnings Taxed = $25,900 OASI tax rate = 4.52% Max. Tax Paid = $1, per employee Employer’s Share = $1, per employee Total Tax Paid = $2, per employee From: Social Security Tax Rate Table

29 Hard To Believe For the Year 1990: Maximum Earnings Taxed = $51,300 OASI tax rate = 5.60% Max. Tax Paid = $2, per employee Employer’s Share = $2, per employee Total Tax Paid = $5, per employee From: Social Security Tax Rate Table

30 Hard To Believe For the Year 2000: Maximum Earnings Taxed = $76,200 OASI tax rate = 5.30% Max. Tax Paid = $4, per employee Employer’s Share = $4, per employee Total Tax Paid = $8, per employee From: Social Security Tax Rate Table

31 Breakdown of Federal Expenditures: Other Expenditures: Agricultural: $26.6 B (1.08%) –A deficiency payment or transition payment is by definition an entitlement. Natural resources & environmental programs: $28.0B (1.13%)

32 Breakdown of Federal Expenditures: Transportation programs: $67.9 B (2.75%) –Highways, Air, and Water Elementary, Secondary, and Vocational Education: –$38.3 B (1.55%)

33 Breakdown of Federal Expenditures: Job training, Employment and Social Services: $24.7 B (1.00%) Community and Regional Development Programs: $26.3 B (1.06%) Space, energy, and general science programs: $23.7 B (.96%)

34 Breakdown of Federal Expenditures: Defense, veterans, and foreign affairs 24.3% 20.03% of total budget goes for national defense. 2.84% of budget goes for veteran benefits & services (an entitlement program?).

35 Breakdown of Federal Expenditures: 1.40% for foreign affairs: Military assistance to foreign countries. Economic assistance to foreign countries. Maintenance of US Embassies abroad.

36 Breakdown of Federal Expenditures: Law Enforcement:$25.9 B and General Govt.:$19.9 B Totals $45.8B or 1.85% of federal budget Net Interest on National Debt: $ B or 7.44% of federal budget

37 Federal Budget Breakdown: 2005 Defense:20.04 percent Social Security:21.17 percent Medicare:12.08 percent Medicaid: 7.35 percent Interest on National Debt: 7.44 percent All Other:31.92 percent

Federal Budget Breakdown 31.92% 20.04% 7.44% 7.35% 12.08% 21.17%

39 Sources of Federal Revenue

40 For More Information: Read: Budget of the United States Government: Fiscal Year 2007 Additional Resource: Budget of the United States Government: Fiscal Year 1999 Other Budgets of the United States Government: Fiscal Years 1996 forward

41 For More Information: Read: “A Citizens Guide to the Federal Budget, Various Fiscal Years”“A Citizens Guide to the Federal Budget, Various Fiscal Years”.

42 For More Information: Take a look at: Budget of the United States Government, Fiscal Year 2007, Historical Tables This was my primary source for the Federal Budget Presentation.

43 Consumption - Production Model (Fiscal Policy Example) Equilibrium P C = Pr Iv Id = (Gross income - all govt. obligations)

44 Consumption - Production Model (Fiscal Policy Example) Ceteris Parabus: if low unemp. P (1) taxes Id C Iv if high unemp. Pr (puts people back to work!) [Deficit?]

45 Consumption - Production Model (Fiscal Policy Example) Ceteris Parabus: if low unemp. P (1) taxes Id C Iv if high unemp. Pr (puts people back to work!) [Deficit?]

46 Consumption - Production Model (Fiscal Policy Example) low unem. Pr (puts people out of work) (2) G Id C Iv high unemp. P (maybe) [Deficit?]

47 Consumption - Production Model (Fiscal Policy Example) low unem. Pr (puts people out of work) (2) G Id C Iv high unemp. P (maybe) [Deficit?]

48 Consumption - Production Model (Fiscal Policy Example) low unemp. Pr (put people out of work) (3) taxes Id C Iv high unemp. P (maybe) [Deficit?]

49 Consumption - Production Model (Fiscal Policy Example) low unemp. P (4) G Id C Iv high unemp. Pr [Deficit?]

50 Balanced Budget Amendment Is it really in our best interest? What would happen to the fiscal policy tools of the government if such an amendment were to become reality?

51 Govt. Employees: Are They Feeding at Public Trough? $40,000/yr. salary + Benefits: ~ 20% Fed. & State income taxes. Net cost to taxpayer = $32,000/yr. + Benefits Now, what does that Govt. employee do with that $32,000?

52 Govt. Employees: Are They Feeding at Public Trough? Pays property taxes, sales taxes, and excise taxes. Buys automobiles. Buys home. Goes to Food Lion, WalMart, Dry Cleaners, etc.! Do taxpayers ultimately get their $32,000 /yr. back?