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GOVT 2305
The Budget
This section focuses on Congress’
key power:
The Power of the Purse
If you feel ambitious, here’s a Yale Law Review article on the same topic.
Specifically, we will be looking at
the budget, as well as the
appropriation process.
Useful Blog Tags
Budgeting.
The Budget.
Texas Budget.
National Debt.
Recall that control over the
treasury – or the ability to draw
money from it – was a key power
of the early British Parliament. It
was able to leverage this power to
increase its overall power over the
monarchy.
Recall some history: the increasing power
of Parliament over the monarch was made
possible because of its power over the
purse. Monarchs liked ready access to
money to fund any adventures they choose
to become involved in.
Money could not be drawn from the treasury unless it
was authorized by Parliament. This power was
leveraged to establish a variety of powers for the
legislature, specifically the ability to bring grievances to
the king and to set the government’s agenda.
Parliament also developed the
power to check how revenue could
be obtained from the general
population.
As we know from looking at the
Constitution, Congress is given
similar powers over taxation and to
protect the treasury from the
executive branch.
Note that the Constitution says
nothing about budgeting.
This week we analyze those
powers. We look at the clauses in
the Constitution related to the
purse and the various factors that
have evolved related to this power
since then.
This includes budgeting, taxation,
the distribution of revenue, the
selling of bonds and the use of
fiscal and monetary policy to
impact the economy.
Controversies over budgeting have
increased over the years, so its
appropriate that we spend some
time going over it before we
conclude our discussion of the
legislative branch.
Several constitutional clauses
touch on related issues - taxing,
borrowing, and such – but there is
no language tying it all together.
The power of taxation – to collect revenue
- is granted to Congress in the first part of
Section 8 of Article 1 of the constitution.
This is called Taxing and Spending Clause
Article One, Section Eight, Clause One
The Congress shall have Power To lay and
collect Taxes, Duties, Imposts and Excises,
to pay the Debts and provide for the
common Defence and general Welfare of
the United States; but all Duties, Imposts
and Excises shall be uniform throughout
the United States
As we will see below, a variety of
taxes have been established and
imposed over the course of
American history. Each has its own
set of controversies.
Note that the authority to spend is
not clearly stated – it is assumed.
The U.S. Government can spend
money on any of the delegated
powers and implied powers.
It is worth noting that in certain
Supreme Court cases (United
States v Butler for example) the
power to tax has also been judged
to include the power to regulate.
Certain taxes may be imposed not
just because they collect revenue,
but because they impact economic
decisions.
Other cases argued that the clause
allowed for any item related to the
general welfare – with its own
funding course – was
constitutional. This applied to
Social Security as argued in
Helvering v. Davis.
Social Security is funded by a
separate tax – the payroll tax, or
FICA. Medicare is also funded by a
unique tax. If you get a paycheck –
look for them as line items.
The power to borrow money is
established next.
Article One, Section Eight,
Clause Two
Congress shall have power . . . “To
borrow Money on the credit of the
United States;”
Borrowing money – or more
specifically collecting money by
selling bonds on the open market –
pumps money into the economy
that would not otherwise be
collected through taxes.
This creates debt.
An entire international market
exists in purchasing these bonds.
Decisions made in these markets
have a major impact on the a
country’s finances.
As we will see further below,
establishing a strong line of credit
was a goal of Alexander Hamilton
and a reason why he pushed for a
quick settlement of revolutionary
war debt.
He made his argument in his First
Report on the Public Credit.
“When it borrows money ''on the
credit of the United States,''
Congress creates a binding
obligation to pay the debt as
stipulated and cannot thereafter
vary the terms of its agreement.”
Recent controversies over the
raising of the debt ceiling brought
renewed attention to Section 4 of
the 14th Amendment.
“The validity of the public debt of
the United States, authorized by
law, including debts incurred for
payment of pensions and bounties
for services in suppressing
insurrection or rebellion, shall not
be questioned.”
There is no mention of the need to
balance budgets. Hamilton argued
that a degree of debt was to be
expected as a consequence of the
need to invest in public matters.
Recent efforts have been made to
add a Balanced Budget
Amendment – of some type – to
the Constitution.
Pros and Cons in a Nutshell
As we noted in the previous
section, the constitutionally
established bill making process
says nothing about what happens
internally, other than stating that
bill for raising revenue (tax bills)
must begin in the House of
Representatives.
Article One, Section Seven, Clause One
All Bills for raising Revenue shall
originate in the House of
Representatives; but the Senate
may propose or concur with
amendments as on other Bills.
As we know from the previous
section, the Ways and Means
Committee has been developed in
the House to receive and consider
tax bills. The Senate Finance
Committee has been established to
handle the same function in the
Senate. These are two of the more
powerful committees in Congress.
The Constitution also contains the
Appropriations Clause, which
mandates that a separate process
be used to obtain the funds which
have been authorized to be spent.
Note that this creates a two step process for
spending: the authorization process and the
appropriations process.
Article One, Section Nine, Clause Seven
No Money shall be drawn from the
Treasury, but in Consequence of
Appropriations made by Law; and a regular
Statement and Account of the Receipts and
Expenditures of all public Money shall be
published from time to time.
Money cannot be spent unless it is
drawn from the treasury upon
passage of an appropriations bill.
The appropriations process is entirely separate
from the budgeting process and allows for
additional fighting over the nature of public
policy. Members of Congress who disapprove of
a spending item can try to cut off funding for it.
Appropriations Committees have
been developed in both the House
(official website) and Senate
(official website) to institutionalize
the process. Each committee has a
number of subcommittees, each
with jurisdiction over the spending
in a unique executive department.
Now for some detail on budgeting.
A budgeting process did not exist
in the early years of the Republic. It
was not considered necessary until
the level of government spending
th
began to increase in the late 19
Century.
Calls for a budgeting process
resulted in President Taft
establishing the Commission on
Economy and Efficiency which
issued a report titled The Need for
a National Budget.
The intent was to reorganize
government to make it more
efficient.
Managerial efficiency was an
ongoing issue with the progressive
movement.
Key recommendations:
1.
The President should prepare and present a budget to Congress (the executive
budget idea).
2. A budget message should accompany the budget and should outline policy
proposals of the President as well as include summary financial information.
3.
The Secretary of the Treasury should submit a consolidated financial report to
Congress.
4. Each agency should submit to Congress an annual financial report.
Agencies should establish and maintain a comprehensive accounting system(6)
5.
(Cozzetto, 1995: 20-21).
They suggested that the process
begin with the President, and that
he submit his request to Congress
that can then consider and modify
it.
This provides the basis for the
Budget and Accounting Act of
1921.
The bill established the Bureau of
the Budget – which became the
Office of Management and Budget
(the OMB) in 1970.
The OMB is an executive branch
agency which is intended to “assist
the President in overseeing the
preparation of the federal budget
and to supervise its administration
in Executive Branch agencies.”
The current process is based
largely on what was established in
the Congressional Budget and
Impoundment Control Act of 1974.
The bill establishes the
Congressional Budget Office (the
CBO), which a legislative branch
agency. It is the “scorekeeper” for
Congress. It establishes the costs of
different programs. (committee
history here)
It is to provide Congress with: (1)
objective, nonpartisan, and timely
analysis to aid in economic and
budgetary decisions on a wide
array of programs covered by the
federal budget, and (2) the
information and estimates
required by the Congressional
budget process.
The bill also established that
standing Budget Committees
would be established in both the
House (official website) and the
Senate (official website).
Note: Some past budget
committee members have gone on
to direct the Office of Management
and Budget.
Some members of Congress and
the executive branch spend their
careers on budgetary issues.
For links with further information
on the evolution of the budgeting
process click on these:
- The process outlined by the
Office of Management and Budget.
- Budget Process Law Annotated:
1993 Edition.
Here is a brief walk through of the
process.
It takes about 18 months to
complete.
Note: the United States fiscal year
begins on October 1 and ends on
the following September 30.
The process has two stages. The
first is the formulation stage in the
executive branch, the second
occurs in the legislature.
The budgeting process begins the
spring of the year before the start
of the fiscal year within the
executive branch when the Office
of Management and Budget gives
each executive branch agency
guidance for how to submit their
agency’s requests.
The budgets will be submitted for
review that September.
The OMB reviews the requests in
October and November and then
informs agencies about whether
their requests have been
approved.
Agencies can appeal decisions in
December.
By January, justifications materials
must be submitted.
In January, the Congressional
Budget Office begins the legislative
process by providing a report on
the economic and budget outlook
to the Budget Committees.
Executive activity concludes when
the budget is presented to
Congress the first Monday in
February.
The State of the Union Address is generally
delivered prior to the submission on the
budget as a way to justify the requests that
will be made.
Within six weeks of the
introduction of the President’s
budget, other committees submit
their views to the Budget
committees (you can see why
these are powerful committees).
The other committees want to
ensure that their pet projects (like
manned space flight) continue to
be funded.
BY April 15, Congress is to
complete action on the concurrent
resolution on the budget.
This is effectively Congress’ version
of the budget. The resolution is to
be finished by June 15.
After May 15, appropriations bills can
be considered. These are to be
completed by June 30.
Money cannot be drawn until the
appropriations bills are passed. This is
why those committees are important –
click here for the wikis on the House
and Senate committees.
The appropriations bills must be
passed by the start of the fiscal
year for money to be available for
government agencies.
This often does not happen – so
continuing resolutions are often
passed to provide funding for a
limited time.
The appropriations process has
turned into a common venue for
attempts to cutback spending.
There are questions whether this is
the appropriate way to do so.
Recent Budgets
Some Links:
Wikipedia: U.S. Federal Budget.
Wikipedia: 2011 U.S. Federal Budget.
Wikipedia: 2012 U.S. Federal Budget.
OMB: The President’s Budget.
WaPo: Federal Budget 2012.
Recent Facts About the
2010 U.S. Budget
Revenue: $2.381 trillion
Outlays: $3.552 trillion
Deficit: $1.171 trillion
Debt: $14.078 trillion
These numbers seem large, but
one way to put them in context is
to compare them to the Gross
Domestic Product of the country,
which in 2010 was $14.5 trillion.
Here is a graph showing how GDP and
spending (outlays) have increased since
1930, followed by one that shows how
GDP per capita grew from 1900 to 2000.
And another than shows revenue
and outlays as a percentage of GDP
since 1970.
Total Revenues and Outlays
Percentage of GDP
Gross Domestic Product (GDP): The total market value of goods and services produced domestically during a
given period.
Baseline: A benchmark for measuring the budgetary effects of proposed changes in federal revenues or spending. As
defined in the Deficit Control Act of 1985, the baseline is the projection of new budget authority, outlays, revenues, and
the deficit or surplus into the budget year and out-years on the basis of current laws and policies.
Outlays: Spending to pay a federal obligation.
Revenues: Funds collected from the public that come from a variety of sources, including individual and
corporate income taxes, excise taxes, customs duties, estate and gift taxes, fees and fines, payroll taxes
for social insurance programs, and miscellaneous receipts (such as earnings of the Federal Reserve
System, donations, and bequests).
CONGRESSIONAL
BUDGET
OFFICE
The difference between the two
lines shows us the size of the
budget deficit – when outlays are
greater than revenues - or the
surplus – when revenues are
greater than outlays.
Here’s a graph showing how they have
varied over the past few decades.
Total Budget Deficit or Surplus
Percentage of GDP
Surplus: The amount by which the federal
government’s total revenues exceed its total
outlays in a given period, typically a fiscal year.
Deficit: The amount by which the federal
government’s total outlays exceed its total
revenues in a given period, typically a fiscal year.
CONGRESSIONAL
BUDGET
OFFICE
Note that the deficit tends to shrink during
when the economy is expanding and grows
when the economy is contracting (is in
recession).
This is because when the economy is
expanding, people are making more
money, which increases tax revenues and
lowers demand for social services, while
during a recession the opposite is true.
This was especially true for the
Great Recession, the worst
recession the nation has faced
since the Great Depression.
For further info: The Great Recession in Five Charts.
The accumulation of deficits leads
to the creation of debt, which
again can be looked at in terms of
dollars, or as a percentage of GDP.
There are two categories of debt
(1) debt held by the public and (2)
intergovernmental debt.
When the US needs additional funding because it
intends to spend more than it collects, it sells bonds
(Treasury securities) on the open market. If investors
see it worthwhile to invest in these bonds they are
purchased at a rate of interest determined by the
market itself.
US Treasury Securities are considered to be safe places
to invest money. Some like the idea that the US
maintains a degree of debt because it allows them the
opportunity to make these investments. The point here
is: not everyone want the US to pay off all its debt.
The process for doing so is managed
by the Bureau of the Public Debt. An
entire market exists globally that
invests in the securities offered by
different countries. This industry is
referred to as the bond market.
The Bond Market.
Government Bond.
U.S. Treasury Securities.
Here are two graphs showing
federal debt held by the public as a
percentage of GDP from 1800 –
2000 (the spike you will see is due
to WWII), and from 1970 projected
to 2020. Click here for further data.
Debt Held by the Public
Percentage of GDP
CONGRESSIONAL
BUDGET
OFFICE
Intra Governmental debt is debt that the
government owes itself when it borrows
from trust funds. The US regularly borrows
from the Medicare Trust Fund and the
Social Security Trust Fund. This money
needs to be paid back at some point in
order for the beneficiaries of these
programs to receive those benefits.
The combination of debt held by
the public and intra governmental
debt is the gross debt held by the
public.
Again, some graphs to show how it
has changed over time. One shows
change in 2012 dollars, the other in
terms of % of GDP.
In 2012, the Gross Debt is $15,356
trillion, of which $10,572 trillion is
public debt and $4,784 are intra
governmental holdings.
What types of securities exist?
Who holds this debt?
Since it’s topical, currently foreign
nations hold about 46% of the US
debt (which is about $4,750
trillion). And since you want to
know, China holds about $1.2
trillion of US securities.
One way to think about the US
debt is that it is this large because
investors see the US as a safe
reliable place to put their money.
Overtime, repeated deficits have
lead to the development of a large
debt. Since 1917, Congress has set
a limit on how much debt the
government can hold – the debt
ceiling. It tends to be pushed back
when necessary.
The current debt ceiling is $16.4
Trillion. For and explanation of the
debt ceiling click here. Here is
further background from Times
Topics.
There is a controversy over whether – and to what
degree – the growing debt possess a problem for
the US, whether the problem is immediate or long
term, and what is the best way to tackle the
problem.
Are we spending too much or taxing too little or
some combination of the two? Some use impasses
over this issue as evidence that the increasing
ideological divisions between the parties in
Congress has made it difficult for the institution to
effectively address and solve problems that are
really not that complex.
An increasingly conservative Republican
Party is closely connected to interest
groups that will not agree to any increases
in taxes. For background, click here for
information about Americans for Tax
Reform, and here for information about
Grover Norquist.
And an increasingly liberal
Democratic Party will not
compromise on entitlement
reform.
Without increases in taxes, or cuts
in expenditures, the debt will
continue to expand.
Now for some detail on the
revenue side.
How is money collected?
Money is collected either through
taxes or borrowing.
Let’s look at taxes first.
This Wikipedia entry on the History
of Taxation in the U.S is a good a
place as any to get an idea of how
revenue has been collected over
US history.
Current Trivia: Revenues collections are the
lowest they have been since 1950.
Here is a list of the specific ways
that the US government collected
revenue in the Fiscal Year 2010-11
budget.
Current Sources of Tax Receipts FY11
Individual Income Taxes
Social Security Payroll Taxes
Corporate Income Taxes
Excise Taxes
Medicare Payroll Taxes
Unemployment Taxes
Capital Gains Taxes
Estate Taxes
The following graph shows what
percentage of revenues come from
different sources.
The largest source of revenue is
the income tax: 42%. This is
followed by payroll taxes (Social
Security and Medicare) at 40%,
then the corporate tax at 9%.
Income Taxes
The collection of taxes based on
income date back to the Civil War,
when they were temporarily
imposed, but there were questions
about their constitutionality that
were not resolved until the 16th
Amendment was ratified in 1913.
Since the start, the income tax has
been progressive, meaning that
the rate increases as one income
increases. This is done in a
marginal manner, that means a
specific rate applies to a particular
level of income.
Example: If someone right now
makes $25,000, the first $8,500 is
taxes at 10%, then the rest is taxed
at 15%.
The margins and the tax rates for
each margin have varied over
history – and are an ongoing
source of contention.
Click here for a history of marginal tax rates
from 1913 – 2011 and here for the current
marginal tax rates.
The idea that taxes ought to be progressive
taxation is controversial, some argue that it
is more efficient and proper for the
wealthy to pay at a greater rates while
others question its efficiency and argue it is
unequal treatment before the law.
Some prefer flat taxes.
There is also a controversial – and
disputed contention that higher tax
rates actually decrease tax
revenues by minimizing the
amount of money available for
private investment. The Laffer
Curve was developed to explain
this idea.
Recent controversy has been
focused on the capital gains tax,
which is a type of income tax, but
one based on earnings from
investments rather than labor. The
rate for these earnings is 15%,
which is far less than most income
tax rates.
Notice also that income taxes are
actually paid by having taxes
withheld from paychecks. Pay day
is actually tax day. The day that tax
returns are when one determines
what was actually owed. If you get
a refund that means too much was
taken out.
The collection of federal taxes is
run by – as you probably know – by
the Internal Revenue Service
(Wikipedia), which can trace its
history back to the Civil War, but
did not acquire its current role
until after the ratification of the
16th Amendment.
Payroll Taxes
As mentioned above, payroll taxes
(The Federal Insurance Contributions
Act tax) are used to fund Social
Security and Medicare. They are called
payroll taxes because they are drawn
from paychecks and are actually paid
by both employees and employers.
The total Social Security portion of
the tax is 12.4% (with 6.2% each
paid by the employee and
employer) this is applied for the
first $106,800 of compensation.
Nothing above the amount is
taxed. The maximum tax one can
pay is $6,324.
The total amount of Social Security
tax paid determine the size of the
monthly check one receives. The
number of checks, of course, is
determined by how long one lives.
The total Medicare portion is 2.9%,
again split evenly between the
employee and employer – each
pays 1.45%. There is no limit on
the salary subject to the tax.
For background regarding Social
Security click here:
The Social Security Act of 1935
Legislative History
Social Security
Click here for a similar history for
Medicare.
- A primer on Medicare financing.
- Medicare’s Financing Problems: Some
Solutions.
An ongoing question regarding
Social Security and Medicare is
whether, given how each is funded,
they are sustainable. Click here for
stories related to sustainability:
- Sustainable Social Security: Four Options.
- Making Medicare, Medicaid and Social Security
Sustainable for the Long Run.
Corporate Income Taxes
The corporate tax rate in the US is
also progressive and tops out at
35%.
Some argue the top rate drives
American businesses overseas to
nations with lower tax rates.
Excise Taxes
Excise Taxes are generally imposed
as additional charges on items to
impact (usually discourage)
behavior, or address consequences
of the action. These are also called
sin taxes and are imposed on
alcohol, cigarettes and gasoline.
- IRS info on excise taxes.
The tax serves a regulatory tool.
Proposals are regularly made to
legalize activities like drug
consumption and prostitution and
tax them as well.
Smaller sources of revenue
include:
Unemployment Taxes
Estate Taxes
Outlays
(Expenditures)
Here is a diagram showing where
money was spent in 2010
Here’s a more detailed graphic:
a bit tough to read though
Let outline the numbers
Mandatory spending: $2.173 trillion
$695 billion – Social Security
$571 billion – Unemployment/Welfare/Other
mandatory spending
$453 billion – Medicare
$290 billion – Medicaid
$164 billion – Interest on National Debt
Discretionary spending: $1.378 trillion
$663.7 billion – Department of Defense
$78.7 billion Department of Health and
Human Services
$72.5 billion – Department of Transportation
$52.5 billion – Department of Veterans Affairs
$51.7 billion – Department of State and Other
International Programs
$47.5 billion – Department of Housing and
Urban Development
$46.7 billion – Department of Education
$42.7 billion – Department of Homeland
Security
$26.3 billion – Department of Energy
$26.0 billion – Department of Agriculture
$23.9 billion – Department of Justice
$18.7 billion – National Aeronautics and Space
Administration
$13.8 billion – Department of Commerce
$13.3 billion – Department of Labor
$13.3 billion – Department of the Treasury
$12.0 billion – Department of the Interior
$10.5 billion – Environmental Protection
Agency
$9.7 billion – Social Security Administration
$7.0 billion – National Science Foundation
$5.1 billion – Corps of Engineers
$5.0 billion – National Infrastructure Bank
$1.1 billion – Corporation for National and
Community Service
$0.7 billion – Small Business Administration
$0.6 billion – General Services Administration
$0 billion – Troubled Asset Relief Program
$0 billion – Financial stabilization efforts
$11 billion (+275%-NA) – Potential disaster costs
$19.8 billion (+3.7%) – Other Agencies
$105 billion – Other
The bulk of spending is in three
areas: Medicare and Medicaid
(23%), Social Security (20%) and
Defense (19%).
A key point: There is a distinction
between discretionary and nondiscretionary spending. Discretionary
spending refers to spending that is
optional, that means it has to be
renewed one a yearly basis. The
largest category of discretionary
spending is defense.
Non-Discretionary spending refers
to spending that is mandated by
law. Some are entitlements such as
Social Security and Medicare.
Some, such as interest payments
on the national debt are necessary
in order for the nation to remain
solvent.
While it is common for people to
want to decrease spending, the
amount that can readily be cut is
far less than the size of the deficit.
Non-Defense discretionary
spending is 19% of the budget.
Note that some of the largest
programs are also some of the
most popular. It is very difficult to
propose cutting Defense, Social
Security and Medicare without
strong constituencies coming out
to stop them.
For historical tables click here and here.
It’s been suggested that people
may have a clearer idea of what
their money is being spent on if
their tax bill comes with a receipt.
Here’s an example.
The Budget and the Economy
Before we wade into that, let’s look at
recent numbers to figure out how the
economy is doing currently and where
you can look for numbers in the
future.
The major indicators of the health of
economy are Gross Domestic Product,
unemployment, and inflation.
Gross Domestic Product: GDP is
the measure of goods and services
produced within a country for a
given period. Changes in the GDP
are taken to be the clearest sign of
the health of the economy.
Here’s a great source for recent data about
fluctuations in the GDP.
Notice that GDP tends to fluctuate. This is
called the business cycle. The upward
swings indicate that the economy is
expanding, the downward swing indicates
that the economy is contracting. Some
fluctuations are considered normal – and
even inevitable considering the seasons.
Occasionally, shifts in the economy,
especially downward shifts, can lead the
general public to want governmental
action to relieve the problems they pose.
A moderate contraction – two
consecutive quarters of decline - is
called a recession, a major
contraction is called a depression.
Note: the term “recession” was
coined in order to stop calling
contractions “crises.”
In 2010, the GDP was $14.6 trillion. From the chart
above you can see that GDP has increased 2.8% in the
last quarter of 2011. There is debate about what level
of growth is best. Rapid, high levels of growth may be
inflationary, indicative of a bubble which can suddenly
pop, leading to a recession.
Many recent recessions have been preceded by a
bubble of some sort. Most recently the housing bubble,
but the Great Depression was preceded by a stock
market bubble (some argue the connection between
the stock market crash and the Great Depression is not
direct).
Click here for a brief history of
recent recessions, as well as
th
financial panics in the 19 Century.
Here’s one person’ guess which
were the top five.
These have consequences, the
Panic of 1907 led to the creation of
the Federal Reserve.
One consequence of the Great
Depression was the development of
Keynesianism, by the British economist
John Maynard Keynes.
Simply put it held that increases in
spending and reductions in taxes are
intended to provide the revenue
necessary to maintain the economy
that evaporates during recessions.
The basic theory is that during
contractions in the economy budget
deficits have be run in order to
maintain the economy.
It also argues that during expansions in
the economy, budget surpluses have
to be run in order to both prevent
bubbles and to pay down debt
developed during the recession.
Doing so is said to help avoid boom
and bust cycles.
This is fiscal policy, it is the use of
outlays and revenue collection to
influence the economy.
Most of the major decisions
regarding fiscal policy are made by
Congress.
The primary instruments of fiscal
policy are members of Congress
and congressional committees.
Ways and Means Committee
Finance Committee
Budget Committees (H,S)
Appropriations Committees (H, S)
The stimulus bill (The American
Recovery and Reinvestment Act)
passed a few years back was based
on this theory.
Remember that Congress has the
power to tax (at whatever rate it
chooses) and to spend (at
whatever rate it chooses). It is
subject only to the restrictions
placed on it by voters.
This creates a problem because
there will always be political
pressure to run deficits (keep taxes
low and expenditures high)
Others – notably Milton Friedman argued
that it was better to impact the economy
by using monetary policy, which involves
the manipulation of interest rates in order
to encourage or discourage people from
borrowing.
This is called monetary policy and it refers
to the use of the money supply to similarly
affect the economy.
Most of the major decisions
regarding monetary policy are
made by the Federal Reserve,
which is the closest the United
States has to a central bank.
The Federal Reserve was
established following the Panic of
1907 to ensure that liquidity would
be made available in case future
economic crises would cause the
monetary system to dry up.
It is composed of various
individuals appointed to serve as a
board – including a Fed chairman –
which is argued to remove them
from political influence.
Key Legislation:
The Federal Reserve Act
Three key instruments
1 – setting short term interest rates
2 – buying and selling bonds
3 – setting the reserve requirement
This is an important point – do we
want economic policymaking
(which requires a degree of
technical expertise) to be driven by
the branch most closely tied to the
democratic branch, or the
autocratic branch?
Unemployment: The
unemployment rate is not a
measure of the total number of
people without work, but of the
total number of people in the work
force, that is people who are
actively looking for work.
Persons are classified as
unemployed if they do not have a
job, have actively looked for work
in the prior 4 weeks, and are
currently available for work. – from
the Bureau of Labor Statistics.
The current unemployment rate is 8.3% - 12.8
million people are out of work. The rate has
fallen in previous months, and jobs have been
created, but some suggest that this might also
be due to more people dropping out of the
workforce and a large number of people who
are working part-time but who would rather
work full time.
The unemployment rate also varies significantly
based on race and level of education.
Here are two graphs showing the
unemployment rate in different
ways. First, the rate since 1960 –
notice how it increases during
recessions. This also contains the
participation rate.
The second shows the declines in
the unemployment rate from the
beginning of each of the recessions
since the Great Depression.
Notice how the current recession is
by far the worst for
unemployment.
How is the unemployment rate
calculated?
One way: the Bureau of Labor
Statistics conducts monthly surveys
of households – the Current
Population Survey – to determine
how many unemployed there in
those homes.
People who become unemployed
without cause are entitled to
unemployment compensation, which
was established in the Social Security
Act in 1935.
This is considered to be part of the
“safety net,” the slew of social welfare
programs designed to provide
assistance to the disadvantaged.
An ongoing controversy associated
with unemployment compensation
is whether it discourages workers
from actively seeking work, or
making tough choices to relocate
to find work.
Controversy: What responsibility
does the national government
have to promote employment?
Is this fully a state concern? Click
here for a list of labor related
legislation.
Inflation
Inflation is defined as a rise in the
general level of prices of goods and
services in an economy over a
period of time.
Specifically as determined by the
Consumer Price Index.
Inflation (Nov 2010) : 1.1%
GDP
Latest numbers can be found at the
Bureau of Labor Statistics.
Overview of BLS Statistics on
Inflation and Prices
Historical Inflation Data.
What impact can government
policies have on inflation?
It is argued that an inverse
relationship exists between
inflation and unemployment.
The Philip’s Curve.
High levels of unemployment are
argued to correlate with low levels
of inflation and vice versa. When
unemployment is high, the cost of
labor is low.
Local Budgetary Process
Alvin: Annual Budget 2009 - 2010
Recent Facts About Houston’s
Budget
Revenue
Outlays
Deficit
Debt
Recent Facts About Alvin’s Budget
Revenue
Outlays
Deficit
Debt
Houston City Budget
Study Guide Questions
- Be able to answer questions about the data
presented in the graphs.
- Be familiar with the fluctuations in GDP and
what they means for the economy.
- Also be familiar with Keynesianism and
Monetarism.
- What is a stimulus bill?
- What does the Constitution say and not say
about the budget?
- be able to answer questions about the
budgetary process.
- Be able to answer questions about the US
Budget, including outlays, revenues and
borrowing.
- Be able to describe the different types of taxes.
- What is discretionary and non-discretionary
spending?
- Be able to field a few questions about the
Texas budget and where its funds come from.
- Be able define and describe GDP,
unemployment, and inflation.
- What is the Philip’s Curve and what doe sit tell
us about unemployment and inflation?
For Spring 2012: You can ignore the
following slides.
Some background on the U.S.
economy.
The United States economy is
mixed. It contains a balance
between goods and services
provided by the public and private
sectors.
Striking that balance is a source of
constant conflict. Conservatives –
generally support private
enterprise – liberals (with
exceptions) support the public
provisions of good and services.
Question: Are certain goods and
services best provided by the
public sector? And are other goods
and services best provided by the
private sector?
More importantly, how can it be
determined which is which?
And is that decision made
dispassionately on objective
criteria or is it driven by political
self insterest?
Examples of publicly provided
services:
military protection
police and fire protection
education
public utilities
Social Security
Medicare
Medicaid
K – 12 Education
etc…
Examples of privately provided
services:
Design, manufacturing and sale of
consumer products
Agriculture
WalMart
Microsoft
Apple
Exxon-Mobil
An advantage of the private sector
is its efficiency and rapid response
to changing circumstances.
An advantage of the public sector
is stability and that goods and
services are provided equally.
Some items can be provided by
both the public and private sector,
which can lead to conflict.
The recent fight over health
insurance is a perfect example.
Should the market, solely,
determine who gets health
insurance, or can government step
in and ensure that insurance
should be made available to
everyone?
Over the course of American
history, national, state and local
governments have expanded the
range of services they provide.
Since the 1930s, government has
stepped in to provide services the
private sector had no interest in
providing.
This will be a subject we will cover
in more depth when we discuss the
executive branch.
These also happen to be some of
the most expensive programs run
by government.
Social Security
Medicare
Medicaid
Some arguments (political and
economic) are made that these
services ought to be provided by
the private sector because they
can perform them cheaply and
more efficiently.
For example: In Iraq, could private
contractors do a better job than
the military?
Blackwater
Can the private sector provide old
age pensions and postal service
better than government?
One of the economic functions of
the federal government has been
the promotion of the private
sector.
The commercial powers in the
Constitution were intended in may
ways to foster business
development by providing a solid
financial foundation, basic security,
and policies meant to absorb risk.
Bankruptcy
Uniform Weights and Measures
Patent Protection
Post Offices
Hamilton Recommended a series
of measures to Congress intended
to spur commercial development
First Report on the Public Credit.
Operations of the Act Laying Duties on
Imports.
Second Report on Public Credit.
Report on the Establishment of a Mint.
Report on Manufactures.
Protectionism
Technological development has
often been subsidized by the
national government.
Often through the military.
Finance
Steamships
Telegraph
Railroads
Electricity
Airplanes
Radio
Television
Computer
Aerospace
The Internet
For many industries, the national
government is their largest client.
Proponents of these expenditures
argue that they enhance basic
research and establish the
foundation on which consumer
products can evolve.
Example: the web.
Opponents argue that private
enterprise can fund basic research,
and that this funding fosters the
development if sub governments
and issue networks.
Chief example: Eisenhower’s
Military Industrial Complex.
An additional fight concerns
whether transactions in the
marketplace should be subject to
regulations.
The private sector tends to not like
regulations since they can limit
profits.
(unless they can capture the
regulatory agency and regulate
themselves)
As additional services are provided.
The costs of government increases.
This leads to problems associated
with budgeting.
As we will see, over the past few
decades, an imbalance has
emerged between federal
revenues and expenditures.