Chapter 9 Federal Spending

Chapter 9Federal SpendingChapter OutlineA Primer on the Constitution and Spending MoneyUsing our Understanding of Opportunity CostUsing our Understanding of Marginal AnalysisBudgeting for the FutureFederal Spending as a Percentage of GDPA 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 overriddenThe Budget ProcessPresident sends Congress a proposed budgetCongress passes its version of the budget (the president does not have to sign or veto)Congress passes Appropriations BillsPresident signs or vetoes Appropriations BillsTax Law changes must originate in the House of RepresentativesShenanigans in the ProcessPork-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.Dealing with DisagreementsWhen dealing with a disagreementCongress can give in to the presidentThe president can give in to the CongressThey can stalemate and shut the government downThey can pass a Continuing ResolutionContinuing 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 yearUsing Opportunity CostCrowding Out: the opportunity cost of government spending is that private spending is reducedMoney spent on one government program can not be spent on anotherMandatory vs. Discretionary Spending Mandatory Spending: those items for which a previously passed law requires the money be spentExamples (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 FY2000CategorySpending in BillionsDiscretionaryDefense300Foreign Aid24Domestic326MandatorySocial Security430Medicare219Medicaid118Welfare and Other Entitlements123Interest206Mandatory vs. DiscretionaryNon Defense DiscretionaryCategory2000 in BillionsScience and Space20Natural Resources and the Environment27Agriculture26Transportation51Education and Training65Veterans45Justice29Federal Spending by CategoryReal Health SpendingInternational Comparisons of Defense Spending CountryDefense Spending/GDP 1997United States3.3France3.0United Kingdom2.7Germany1.6Japan1.0Using Marginal AnalysisThe question of the size of governmentThe 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 governmentThe 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 FutureBaseline Budgeting: using last year’s budgeted figure to set this year’s budgeted figureCurrent Services Budgeting: using an estimate of the costs of providing the same level of services next year as last