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Chapter 13 Federal Spending McGraw-Hill/Irwin Copyright © 2010 by 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 13-2 You Are Here 13-3 Federal Spending as a Percentage of GDP 13-4 The Budget Process • “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 • 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 13-5 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. • Logrolling occurs when Members of Congress agree to support spending programs in each other’s districts. This vote trading increases spending. 13-6 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 13-7 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 13-8 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. 13-9 Spending in FY2009 13-10 Mandatory vs. Discretionary 13-11 Non Defense Discretionary Category Science and Space Natural Resources and the Environment Agriculture Transportation Education and Training Veterans Justice 2009 in Billions 30 35 20 70 88 91 47 13-12 Federal Spending by Category 13-13 Real Health Spending 13-14 International Comparisons of Defense Spending Country Defense Spending/GDP 2005 United States 4.0 France 2.4 United Kingdom 2.6 Germany 1.5 Japan 0.8 13-15 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 cost. • 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. 13-16 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 13-17 Obama Stimulus Plan 13-18 Obama Stimulus Plan 13-19 Obama Stimulus Plan 13-20