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Isues in economics today 6th by guell chapter11

Chapter 11
Federal
Spending

McGraw-Hill/Irwin

Copyright © 2012 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

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©2012 The McGraw-Hill Companies, All Rights Reserved


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Federal Spending as a
Percentage of GDP

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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

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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.
• Logrolling occurs when Members of
Congress agree to support spending
programs in each other’s districts. This vote
trading increases spending.
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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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©2012 The McGraw-Hill Companies, All Rights Reserved

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Spending in FY2011

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Mandatory vs. Discretionary

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Non Defense Discretionary
Category

2012 in
Billions

Science and Space
Natural Resources and the
Environment
Agriculture
Transportation
Education and Training
Veterans
Justice
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33
37
17
144
102
129
56
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Federal Spending by Category

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Real Health Spending

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International Comparisons
of Defense Spending
Country
United States

Defense Spending/GDP
2005
4.0

France

2.4

United Kingdom

2.6

Germany

1.5

Japan

0.8

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©2012 The McGraw-Hill Companies, All Rights Reserved

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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 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.
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©2012 The McGraw-Hill Companies, All Rights Reserved

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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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©2012 The McGraw-Hill Companies, All Rights Reserved

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Obama Stimulus Plan

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Obama Stimulus Plan

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Obama Stimulus Plan

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