McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Chapter 9 Federal Spending

McGraw-Hill/Irwin © 2002 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 © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Federal Spending as a Percentage of GDP

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. A Primer on the Constitution “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

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. The Budget Process 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 © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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.

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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 © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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 © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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 © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Spending in FY2000 CategorySpending in Billions Discretionary Defense300 Foreign Aid24 Domestic326 Mandatory Social Security430 Medicare219 Medicaid118 Welfare and Other Entitlements123 Interest206

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Mandatory vs. Discretionary

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Non Defense Discretionary Category2000 in Billions Science and Space20 Natural Resources and the Environment 27 Agriculture26 Transportation51 Education and Training65 Veterans45 Justice29

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Federal Spending by Category

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. Real Health Spending

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. International Comparisons of Defense Spending CountryDefense Spending/GDP 1997 United States3.3 France3.0 United Kingdom2.7 Germany1.6 Japan1.0

McGraw-Hill/Irwin © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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 benefit. 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 © 2002 The McGraw-Hill Companies, Inc., All Rights Reserved. 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