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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