Government Spending Chapter 10. Goals & Objectives 1. Explain how and why gov’t spending has increased since the 1940’s. 2. Describe 2 kinds of gov’t.

Government Government SpendingSpending

Chapter 10Chapter 10

Goals & ObjectivesGoals & Objectives

1.1. Explain how and why gov’t spending has increased Explain how and why gov’t spending has increased since the 1940’s. since the 1940’s.

2.2. Describe 2 kinds of gov’t spending.Describe 2 kinds of gov’t spending.

3.3. Describe how gov’t spending impacts the nation’s Describe how gov’t spending impacts the nation’s economy. economy.

4.4. Explain the budgeting process. Explain the budgeting process.

5.5. Describe parts of the budget process. Describe parts of the budget process.

6.6. Describe State and Local Spending categories. Describe State and Local Spending categories.

7.7. Explain the federal deficit & debt. Explain the federal deficit & debt.

8.8. Describe past attempts to lessen the debt. Describe past attempts to lessen the debt.

9.9. Relate entitlements to the national debt. Relate entitlements to the national debt.

The Economics of Government The Economics of Government SpendingSpending

2013: Federal, State, Local $4.7 Trillion2013: Federal, State, Local $4.7 Trillion

Per CapitaPer Capita: (per person) $12,000 for : (per person) $12,000 for every man, woman, and child in the U.S.every man, woman, and child in the U.S.

Public SectorPublic Sector: 1942 Public Revenue Act: 1942 Public Revenue Act1.1. WWIIWWII

2.2. Public Opinion shifts toward Socialism.Public Opinion shifts toward Socialism.

3.3. Success of GDP with gov’t spending.Success of GDP with gov’t spending.

Public Jobs & SpendingPublic Jobs & Spending

WWII Economy & Gov’t WWII Economy & Gov’t SpendingSpending

Two kinds of Spending

1. Good and Services: tanks, planes, ships, office supplies, military labor.

The Federal Government is the largest American consumer. 2. Transfer Payments: “a payment for

which the government receives neither goods nor services in return” (TINSTAAFL)

Types of Transfer Payments

1. Social Security 2. Welfare 3. Unemployment Compensation 4. Grant-in-aid:

Grant-in-aid: one level of government to the next level: highway funds, public schools, food stamps, welfare, subsidized housing, Obamacare.

Transfer Payments & States

Discretionary Spending “Façade”

Total Federal Spending 2013

Impact of Government Impact of Government SpendingSpending

1.1. Affecting Affecting Resource Allocation: Resource Allocation: Tanks or Milk subsidies?. Welfare or Tanks or Milk subsidies?. Welfare or Disabled Veterans?Disabled Veterans?

2.2. Redistributing Income:Redistributing Income: TANF, TANF, SDI, Food Stamps, Pell Grants, NITC. SDI, Food Stamps, Pell Grants, NITC.

3.3. Competing with Private SectorCompeting with Private Sector: : Public College Costs increases with Public College Costs increases with Pell Grant increases. Obamacare Pell Grant increases. Obamacare mandates and health insurance mandates and health insurance premiums/copays.premiums/copays.

Food Stamp NationFood Stamp Nation

Entitlement NationEntitlement Nation

Federal Government Federal Government ExpendituresExpenditures

Federal BudgetFederal Budget: a plan on how much : a plan on how much to spend.to spend.– Mandatory SpendingMandatory Spending: without the : without the

Congress (Interest on debt, SSA, Medicare)Congress (Interest on debt, SSA, Medicare)– Discretionary SpendingDiscretionary Spending: Military & : Military &

WelfareWelfare

Federal Budget DeficitFederal Budget Deficit: : ““PlanPlan”” to spend to spend more than receiptsmore than receipts

Federal Budget SurplusFederal Budget Surplus: : ““PlanPlan”” to receive to receive more tax revenues than expenditures.more tax revenues than expenditures.

House & Senate BudgetHouse & Senate Budget

1.1. HouseHouse: Budget starts in the House : Budget starts in the House of Rep. of Rep. Discretionary Spending Discretionary Spending only.only.1.1. Appropriations BillAppropriations Bill: act of Congress : act of Congress

authorizing agencies to spend money.authorizing agencies to spend money.1.1. Committee/Subcommittee: Committee/Subcommittee: Pork-Barrel Pork-Barrel

SpendingSpending

2.2. SenateSenate: : Conference Committee & Conference Committee & CBO input or complete rewrite of CBO input or complete rewrite of bill.bill.

Congress Budget ComparedCongress Budget Compared

State Government Expenditures

Intergovernmental expenditures: Public Welfare, medical care, welfare institutions, miscellaneous welfare expenditures, higher education, highway construction.

Grant-in-aid Spending

Deficits, Surpluses, and The National Debt

1. Deficit Spending: spending in excess of revenues collected.

2. Federal Debt: total amount borrowed from investors to finance the government’s deficit spending

Balanced Budget Admendment: constitutional limitation on spending

Presidential Deficits

Future Deficit Spending

17.6 Trillion -25 Trillion by 2020

Who do we owe?

Trust Funds

• Debt held in government trust funds: special accounts used to fund: Social Security, Medicare

• Al Gore’s Presidential Campaign 2000: – “Lockbox”?

Trust Fund Debt

Public vs. Private Debt

Private citizens borrow there is a plan to pay it back

Federal Government borrows there is no thought about how, or when to pay it back:– 1. Increase taxes to pay– 2. Borrow more money to pay

Impact of The National Debt

1. Impacts the distribution of income: Gov’t borrows from the wealthy and taxes the middle class to pay for the interest on the debt.

2. Transfer of purchasing power from the private sector to the public sector: The larger the debt the more TAXES needed to pay off the interest.

Debt as % of GDP

Impact of the National Debt

3. Taxes needed to pay the interest on debt: creates a diminished incentive to work, save or invest.

4. Crowding-Out Effect: Government borrowing takes money out of circulation for the private sector.

Taming the DeficitTaming the Deficit

1.1. 1990: 1990: BEABEA,(Budget Enforcement Act) ,(Budget Enforcement Act) pay-as-you-go provision: New spending pay-as-you-go provision: New spending must accompany cutbacks in other must accompany cutbacks in other programsprograms

2.2. Gramm-Rudman-HollingsGramm-Rudman-Hollings: Balanced : Balanced Budget & limitation on spending failed in Budget & limitation on spending failed in the Congress. Why?the Congress. Why?

Taming the DebtTaming the Debt

3. Omnibus Budget Reconciliation Act of 3. Omnibus Budget Reconciliation Act of 19931993

1.1. President Clinton: Reduce the rate of the President Clinton: Reduce the rate of the deficit not the deficit itself.deficit not the deficit itself.

4. Balanced Budget Agreement of 1997: 4. Balanced Budget Agreement of 1997:

Line-item vetoLine-item veto: unconstitutional: unconstitutional

Spending capsSpending caps: legal limits on annual : legal limits on annual discretionary spending.discretionary spending.

Success---FailureSuccess---Failure

1. 2001 recession1. 2001 recession 2. 2001 Terrorist Attack2. 2001 Terrorist Attack 2. 2002-3 Wars in Afghanistan & Iraq2. 2002-3 Wars in Afghanistan & Iraq

------EntitlementsEntitlements: Largest growth in : Largest growth in government spending. government spending.