Lecture Issues in economics today - Chapter 9

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When you finish this chapter, you should: Define the key terms of economics and opportunity cost and understand how a production possibilities frontier exemplifies the trade-offs that exist in life, distinguish between increasing and constant opportunity cost and understand why each might happen in the real world, analyze an argument by thinking economically, while recognizing and avoiding logical traps.

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Nội dung Text: Lecture Issues in economics today - Chapter 9

Chapter 9 Federal Spending McGrawHill/Irwin © 2002 The McGrawHill 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 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Federal Spending as a Percentage of GDP F e d e r a l S p e n d i n g /G D P Federal Spending as a % of GDP 24 22 20 18 16 14 12 10 1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 Year McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
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 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
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 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
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. McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
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 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
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 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
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. McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Spending in FY2000 Category Spending in Billions Discretionary Defense 300 Foreign Aid 24 Domestic 326 Mandatory Social Security 430 Medicare 219 Medicaid 118 Welfare and Other Entitlements 123 Interest 206 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Mandatory vs. Discretionary Mandatory vs Discr 70 60 50 40 30 1962196719721977198219871992 19972002 est. es Year Discretionary Mandatory McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Non Defense Discretionary Category 2000 in Billions Science and Space 20 Natural Resources and the 27 Environment Agriculture 26 Transportation 51 Education and Training 65 Veterans 45 Justice 29 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Federal Spending by Category Federal Spending 50 As a % Total Federal Sp 40 30 % 20 10 0 19621967 1972 1977198219871992 19972002 est. est Year National Defense Social Security Means Tested Entitlements Net Interest (1) McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
Real Health Spending Real Health Spendi Real $ (000) 1982=100 200000 150000 100000 50000 0 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 Year Medicaid Other Health Medicare Total McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
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 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
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. McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.
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 McGrawHill/Irwin © 2002 The McGrawHill Companies, Inc., All Rights Reserved.