1. Explorations in Economics
Alan B. Krueger & David A. Anderson

2. Chapter 15: Fiscal Policy
Module 44: Government Revenue and Spending
Module 45: Deficits and the National Debt
Module 46: Managing the Business Cycle

3. MODULE 44: GOVERNMENT REVENUE AND SPENDING
OBJECTIVES:
To specify how the federal government spends its revenue.
To explain the difference between mandatory and discretionary spending.
Learn why it is hard to cut spending.
This module highlights the most visible part of government to most of us. We pay taxes to the federal, state and local governments to pay for services provided. As students grow older and take on more responsibility, the issue of taxes will be an important and perhaps controversial part of their lives.

4. THE FEDERAL BUDGET
The federal budget is a plan for how the federal government will spend money over the coming fiscal year. The fiscal year for the federal government is the period over which the federal budget applies. It begins on October 1 and ends on September 30.
Go through the steps in the budget process and stress with students that the president presents a budget.. Congress then debates and amends the budget. If no agreement is reached, a continuing resolution must be passed and signed by the president.
Look online for the federal budget. Whitehouse.gov has great resources for the budget.

5. A perspective on government spending
Take notes on the areas of government spending and the respective amounts.
You will be creating a bar chart showing each category and amount.
Perspective on U.S. Government Spending
4/12/2018
Chapter 15-Mods 44-46

6. Compare your chart to your original prediction
What is the biggest area of government spending?
What were the surprises?
4/12/2018
Chapter 15-Mods 44-46

7. Budget Vocabulary Group Topic Matt Federal budget Chris
Mandatory spending
Bennett
Entitlement programs
John
Means tested
Michael
Transfer payments
Rebecca
Appropriation bills
Josh
Discretionary spending
4/12/2018
Chapter 15-Mods 44-46

8. THE FEDERAL BUDGET SPENDING Federal Government Spending, 2012
Challenge students to explain the categories shown. Recall the goal of economic security, then discuss the items that give the elderly and others that protection.
Lead an investigation as to the changes in social security and Medicare as a percentage of the budget. This will help explain discretionary spending issues later.

9. HOW THE FEDERAL GOVERNMENT SPENDS OUR MONEY
Mandatory spending is spending that is required by existing law.
Entitlement programs are programs that people are entitled to by law if they meet certain qualifications.
Show the eligibility rules for SS and Medicare. This will give an idea of what an “entitlement” is.
These government-provided benefits that are not in exchange for goods or services are known as transfer payments.
To receive payments under the Disability Insurance program of the Old Age, Survivors, and Disability Insurance (OASDI) system, a worker must be unable to work due to a disability.
Age and past contributions are the only eligibility requirement for Social Security recipients, the other part of OASDI.
Medicaid and the Supplemental Nutrition Assistance Program, commonly referred to as food stamps are means-tested, meaning that eligibility for benefits depends on the prospective recipients’ income.

10. HOW THE FEDERAL GOVERNMENT SPENDS OUR MONEY
Transfer payments are payments for which the government receives no goods or services in return.
Those circled in red would be the transfer payments.

11. HOW THE FEDERAL GOVERNMENT SPENDS OUR MONEY
These are the specific entitlement programs at the federal level.
• Which are age eligible?
• Which are means tested?
• Which require contribution from the entitled?
•Which allow the states to set the eligibility requirements?
Age eligible? Social Security, Medicare
Means-tested? Medicaid, Supplemental Nutrition Assistance Program
Require contribution? Social Security, Disability Insurance, Medicare, Unemployment Insurance
States set eligibility? Temporary Assistance for Needy Families, Unemployment Insurance

12. HOW THE FEDERAL GOVERNMENT SPENDS OUR MONEY
Discretionary spending is government spending that is not required by law; rather, it is authorized annually by Congress and the president.
Net Interest cannot be called discretionary. We are obligated to pay the interest on the national debt. As the debt grows, the interest mount increases, Without new sources of income, discretionary spending must be cut.
Discuss the shrinking discretionary portion of the federal budget.

13. Roles – four congressmen in budget negotiation
The budget game
Roles – four congressmen in budget negotiation
Objective – get increase in your favorite programs
Favorites – A-F, G-M, N-S, TZ
Turn in one sheet with your final agreement.
4/12/2018
Chapter 15-Mods 44-46

14. Where does government spend most of its money?
Summary
Where does government spend most of its money?
Mandatory entitlement programs.
Social Security, Medicare, Medicaid.
Why is spending hard to control?
2/3’s of spending is mandated by law
Interest groups lobby for their favorite programs
4/12/2018
Chapter 15-Mods 44-46

15. History of U.S. Debt History of U.S. Spending 4/12/2018
Chapter 15-Mods 44-46

16. MODULE 45 : TAXES AND DEFICITS
OBJECTIVES:
Understand government revenues.
To identify the difference between an annual deficit and the national debt.
To analyze the effects of the national debt on individuals and firms.
Deficit spending is spending in excess of revenues. The National Debt is over $16T.

17. Where does Federal government revenue come from?
Download Exercise – Debt and Taxes
Save in Fiscal Policy Folder as “Exercise - Debt and Taxes Your Name”
4/12/2018
Chapter 15-Mods 44-46

18. Sources of Government Revenue
With your partner, work on Part 1:
Create a bar chart or pie chart in power point showing the types of taxes that fund the U.S. government.
Add a page on the tax rates for major income and social insurance taxes. (see exercise for details)
Save your power point in teacher’s inbox Fiscal Policy Folder as “Taxes – your names”
4/12/2018
Chapter 15-Mods 44-46

19. SOURCES OF GOVERNMENT REVENUE
All levels of government raise revenue through taxation.
Individual income taxes
payroll taxes
corporate income taxes
estate taxes
gift taxes
import taxes
This is a review from Chapter 10

20. Is borrowing good for you?
Do Now
Is borrowing good for you?
4/12/2018
Chapter 15-Mods 44-46

21. Learn differences between deficit and debt.
Today’s Objectives
Learn differences between deficit and debt.
Determine if government debt is positive or negative for the economy.
4/12/2018
Chapter 15-Mods 44-46

22. Reading
Module 45
4/12/2018
Chapter 15-Mods 44-46

23. When taxes are not enough – deficits and debt.
As you view the Paul Solomon video on deficits, take notes in Part 2 of the exercise.
Key questions:
What is the difference between deficits and debt?
How much was the federal debt when the video was made?
Is the dollar amount of the debt the most important measure?
What are the pros and cons of government deficits and government debt?
4/12/2018
Chapter 15-Mods 44-46

24. Is the deficit a positive or negative for the economy?
PROS CONS
4/12/2018
Chapter 15-Mods 44-46

25. Key concepts – Part 4 Vocabulary
Take notes in Part 4 – Vocabulary
4/12/2018
Chapter 15-Mods 44-46

26. DEBT, DEFICITS, AND SURPLUSES
A budget deficit or budget surplus is the difference between the amount of government payments and the amount of government revenues in a particular year.
Help students to understand the causes of the huge deficits created in 2000 and beyond.

27. DEBT, DEFICITS, AND SURPLUSES
The national debt is the amount of money that the federal government has borrowed over time to fund annual budget deficits and has not yet repaid.
Make the connection that the large sustained deficits have doubled the debt in the last five years.

28. DEBT, DEFICITS, AND SURPLUSES
A balanced budget is a budget designed to equate expected revenues with planned expenditures.
Reasons for Annual Deficits
Most are planned to achieve worthwhile payoffs.
As economic performance falters, social services increase and government tries to jump-start the economy with spending and assistance.
Government spending can be judged on the criteria of benefits and costs. The phrase, “worthwhile payoffs” means that our elected officials in Washington make decisions based on the these principles.

29. DEBT, DEFICITS, AND SURPLUSES
The debt limit is the highest amount that the national debt can reach, as authorized by Congress.
The debt to GDP ratio is important in evaluating a nation’ s ability to repay the debt.
Discuss the concept of the ability to repay debt. Start with a discussion of individuals and tie that to the federal government-an individual has a credit score and a government has a bond rating.
What are the major factors that changed the debt to GDP ratio? Wars, tax changes, economic contractions

30. THE EFFECTS OF THE NATIONAL DEBT - PROS
Investment for the future
Debt financing allows the government to spend more today on healthcare, education, highways and defense. These “investments” today, may bring benefits in the future.
We can afford it.
So long as debt / GDP remains reasonable, a growing economy can support a large national debt.
When the debt grows, there is a tradeoff. We must pay the interest but this means we must cut spending in another area. The discretionary budget
Find some data to show how foreign investors own about 30% of the US debt then discuss the relative importance. Check

31. THE EFFECTS OF THE NATIONAL DEBT - CONS
Higher Interest Rates
The federal government makes interest payments to US debt owners.
As investors buy the government debt, they have less funds for private investment.
The crowding- out effect is the constraint on private sector borrowing that results from higher interest rates due to government borrowing.
Crowding out can harm the economy as investment is postponed. New products and research and development spending is lacking. Crowding out is more likely to occur during contractions and when interest rates are low.

32. THE EFFECTS OF THE NATIONAL DEBT - CONS
The Burden on Future Generations
The payment of interest on the national debt is called servicing the debt. As the size of the debt grows, the amount of the interest payments must be increased.
The Risk of Financial Crisis
If the bond markets lose confidence in our ability to pay interest on the debt, financing can dry up forcing the government to make serious cutbacks. This has already happened in Greece, Spain and Portugal.
When the debt grows, there is a tradeoff. We must pay the interest but this means we must cut spending in another area. The discretionary budget
Find some data to show how foreign investors own about 30% of the US debt then discuss the relative importance. Check

33. Project – Government Spending
Open Project – Government Spending in Teacher’s Outbox.
Save in Teacher’s In-submit – Fiscal Policy Folder
As “Government Spending Project – Your Name”
4/12/2018
Chapter 15-Mods 44-46

34. Produce a report on a government department or program.
Project – 12 points
Produce a report on a government department or program.
Report should answer list questions:
Size, mandatory vs. discretionary
Services and benefits
Means tested or entitlement
How easy to cut spending in this area? Why? Why not?
Your sources
Due next Thursday 1/23.
4/12/2018
Chapter 15-Mods 44-46

35. When debt gets out of control – the Greek experience.
The Bankrupt State - Greece - YouTube
4/12/2018
Chapter 15-Mods 44-46

36. History of U.S. Debt History of U.S. Spending 4/12/2018
Chapter 15-Mods 44-46

37. # 13 = treasury inflation protected securities
Do Now – Econ Crossword
# 11 = dividends
# 13 = treasury inflation protected securities
# 1 = intragovernmental debt
# 5 = monetizing the debt
4/12/2018
Chapter 15-Mods 44-46

38. Reading & Housekeeping
Module 46 – Fiscal Policy
Government spending projects due next Thursday 1/23.
4/12/2018
Chapter 15-Mods 44-46

39. Tax revenue < spending = Deficit
Debt and Taxes
Tax revenue < spending = Deficit
Total U.S. gov’t borrowing = National debt
Pros of debt – “invest” in security, education, health, transportation that have future benefits.
Cons of debt – interest, burden on future generations, crowding out, financial crisis
4/12/2018
Chapter 15-Mods 44-46

40. _debt/GDP_______ratio measures whether economy can “afford” the debt.
Debt and Taxes
_debt/GDP_______ratio measures whether economy can “afford” the debt.
U.S. Debt to GDP now 73%. Greece is 156%.
4/12/2018
Chapter 15-Mods 44-46

41. MODULE 46: MANAGING THE BUSINESS CYCLE
KEY IDEA:
The federal government has several tools that sometimes help smooth out contractions and expansions in the economy.
OBJECTIVES:
To explain the difference between contractionary and expansionary fiscal policies.
To convey the difference between discretionary fiscal policies and automatic stabilizers.

42. LOOKING FOR MACROECONOMIC EQUILIBRIM
Fiscal policy is the use of government spending and taxation to pursue economic growth, full employment, and price stability.
Challenge students to come up the board or in notebooks to practice drawing an economy in equilibrium. Review with students what may move the aggregate supply or aggregate demand curves.

43. Fiscal Policy
Government seeks to accelerate (gas pedal) or decelerate (brakes) the economy.
4/12/2018
Chapter 15-Mods 44-46

44. Fiscal Policy Reality
But because of the economy’s size and delays implementing fiscal changes, it can be more like driving a Mack truck.
4/12/2018
Chapter 15-Mods 44-46

45. Look at the recession and inflation scenarios in 8.1
Your Turn to Drive
Partners:
Look at the recession and inflation scenarios in 8.1
What should the government do?
Hit the brakes?
Put the pedal to the floor?
How would they do it using tax or spending?
4/12/2018
Chapter 15-Mods 44-46

46. Government Response to Economic Problems
Show graphically using Aggregate Supply and Aggregate Demand model.
4/12/2018
Chapter 15-Mods 44-46

47. LOOKING FOR MACROECONOMIC EQUILIBRIM
Expansionary fiscal policy is any combination of government spending and tax cuts meant to spur the economy.
The rightward shift of the AD results in a higher price level but higher RGDP.
To expand the economy we need to increase disposable income (lower taxes) and/or to increase government spending (deficit spending). This is fiscal policy to correct a recessionary phase of the business cycle. We need to “pump” up the economy with stimulus spending and/or lower taxes.

48. LOOKING FOR MACROECONOMIC EQUILIBRIM
Contractionary fiscal policy is any combination of government spending cuts and tax increases meant to slow the economy down.
The leftward shift of the AD results in a lower price level but lower RGDP.
To contract the economy we need to reduce disposable income (increase taxes) and/or decrease government spending. This is fiscal policy to correct an inflationary economy, The price level is too high and robbing consumer of spending power. We need to “slow down” the economy with lower government spending and/or higher taxes.

49. AUTOMATIC STABILIZERS
Automatic stabilizers are changes in taxation and transfer payments that moderate changes in GDP and do not require authorization from the government.
Tax Revenues rise in expansionary periods and fall in recessionary periods
Transfer Payments rise in recessionary period and fall in expansionary periods
Discuss the idea of automatic stabilizers occurring without any vote or discretion necessary by Congress.
Why do tax revenues rise in expansionary periods? Why do they fall in recessionary periods?
Why do transfer payments increase in recessionary periods? Why do they fall in expansionary periods?

50. THE LIMITS OF FISCAL POLICY
Mandatory Spending
Controversial to change the very popular entitlement programs like Social Security and Medicare. Congress must change the law.
Strong lobbying efforts for specific spending like national defense, medical research, environmental protection and others.
Explain to students why fiscal policy is far from perfect. Even the time to recognize we are in a recession is a recognition lag.

51. Expansionary policy to fight recession.
Summary
Fiscal policy – controlling the economy thru government spending and taxes.
Expansionary policy to fight recession.
Contractionary policy to fight inflation.
When 2/3’s of spending is mandatory, how much control do we really have?
4/12/2018
Chapter 15-Mods 44-46