Download Chapter 9 - McGraw Hill Higher Education

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
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F e d e ra l S p e n d in g / G D P
Federal Spending as a
Percentage of GDP
Federal Spending
as a % of GDP
24
22
20
18
16
14
12
10
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1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999
Year
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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
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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
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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.
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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
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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
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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.
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Spending in FY2000
Category
Spending in Billions
Discretionary
Defense
300
Foreign Aid
24
Domestic
326
Mandatory
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Social Security
430
Medicare
219
Medicaid
118
Welfare and Other Entitlements
123
Interest
206
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Mandatory vs. Discretionary
Mandatory vs Discretionary Spending
70
60
50
40
30
1962
1967
1972
1977
1982
Year
Discretionary
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1987
1992
1997 est. 2002 est.
Mandatory
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Non Defense Discretionary
Category
Science and Space
Natural Resources and the
Environment
Agriculture
Transportation
Education and Training
Veterans
Justice
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2000 in Billions
20
27
26
51
65
45
29
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Federal Spending by Category
Federal Spending by Category
As a % Total Federal Spending
50
40
%
30
20
10
0
1962
1967
1972
1977
1982
Year
National Defense
Means Tested Entitlements (1)
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1987
1992
1997 est. 2002 est.
Social Security
Net Interest
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Real Health Spending
Real Health Spending
R e a l $ (0 0 0 )
1982=100
200000
150000
100000
50000
0
1962 1966 1970 1974 1978 1982 1986 1990 1994 1998
Year
Medicaid
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Other Health
Medicare
Total
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International Comparisons of
Defense Spending
Country
Defense Spending/GDP 1997
United States
3.3
France
3.0
United Kingdom
2.7
Germany
1.6
Japan
1.0
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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.
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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
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