Public Policy and Economics Chapter 14 Public Policy and Economics

Basic Issues of Economic Policy Should government involve itself in economic affairs at all? Laissez-faire is French for “leave things alone.” It is the belief that government should not interfere in the workings of the economy. Socialism, on the other hand, is the belief that people will be better off if economic decision-making is completely under the control of the government. If government is involved, should its role be to stabilize the economy, or should it remain neutral? Before the New Deal and Great Depression, the belief was that the government should not interfere with the natural booms and busts of the economic cycle because the economy would correct itself.

Basic Issues of Economic Policy (continued) Since then the predominant view is that government should take an active role in stabilizing the economy. The debate is further complicated with the presence of a global economy. If government is to achieve stability, which policies support that goal? Active involvement entails government adjustment of its spending or taxing decisions. Passive involvement entails the government shaping general activity in an effort to entice individuals and private companies to stimulate the economy.

Basic Issues of Economic Policy (continued) Should government promote or discourage particular types of economic activity? Protectionism is the belief that government should protect American business and industry by restricting the flow of foreign goods into the United States. Free trade, by contrast, is the belief that American interests are better served by allowing foreign producers to sell their goods without restriction. Businesses that cannot compete should die natural economic deaths.

The Deficit and the National Budget Deficit is an excess of government expenditures over revenues. Debt is the sum of the deficits of prior years. Surplus is an excess of government revenues over government expenditures.

Major Components of the National Budget (continued) National Defense – A Constitutional Responsibility Spending on defense has always consumed a significant portion of the budget. The breakup of the Soviet Union and the end of the Cold War ushered periods of decline in defense spending; however, this trend reversed as the nation refocused efforts towards combating terrorism. Payments for Individuals

Major Components of the National Budget (continued) The second major spending category in the budget includes the following social welfare programs: Social Security – monthly checks to retired and disabled citizens Medicare – medical care for the elderly and disabled Unemployment compensation – weekly check to short term unemployed Food stamps – food vouchers for the needy Medicaid – medical care for the needy Supplemental security income – supplemental cash for the needy

Major Components of the National Budget (continued) Interest Costs Net interest represents the charges that the government must pay, to the public, for the use of money borrowed. The amount of interest paid will vary with the interest rates and the time period of the loan. All Other This category includes programs such as cancer research, space exploration, highway construction, and environmental protection. Spending in this category fluctuates with the spending in the other categories.

Mandatory Programs in the Budget Mandatory programs are government programs in which spending automatically increases without any action by the Congress (for example, Social Security). Social entitlements are programs whereby eligible individuals receive benefits according to law. The concept of mandatory spending illustrates the obstacles Congress and the president face in their attempts to cut deficits.

Federal Government Expenditures Payments for individuals (identified here as human resources) and national defense are the largest categories of federal expenditures. National defense consumed just under 20 percent of the budget in 2010.

The President and Congress in the Budgeting Process Budgets are planned statements of expenditure that include specific categories of spending. Budget makers cannot accurately predict the flow of dollars into and out of the federal treasury in a given year. The budget-making process is also highly decentralized as it is shaped by a large number of individuals and groups, both inside and outside the government.

The Stages of Budgeting A presidential proposal is a compilation of agency request for funds, shaped by presidential priorities and submitted to the Congress. The congressional response is a review of the presidential proposal, which is then molded to fit in to congressional priorities. If the president agrees, then it becomes law. Agency expenditures of funds, according to the budget laws, are enacted by Congress and signed by the president. The fiscal year is a 12-month period starting October 1st and ending September 30th of the following calendar year.

Major Steps in the Budgeting Process The steps in the budgeting process for each fiscal year take two and a half years to complete. If appropriation action is not completed by September 30, Congress enacts temporary appropriations (i.e., a continuing resolution).

The President in the Budget Process The president is the single most powerful person in the budget-making process. The president has the power to propose a budget; and although the budget may not be adopted as submitted, the president sets the tone for debate in the budget process. The president also has the power to veto budget bills passed by the Congress.

Congress and Budgeting Congressional powers to make decisions on the budget are constitutionally bound. Each branch of Congress has “money” committees along with all the other committees that influence the budget. Congress must take two separate steps before money can actually be spent. Authorization is the congressional enactment that creates or continues a policy program and the agency administering it. Appropriation is the congressional enactment that funds an authorized program with a specific sum of money.

The Search for Better Budget Procedures Line-item veto: a proposed amendment to the Constitution that would give the president the power to accept some items in a bill while rejecting other items in the same bill Balanced budget amendment: a proposed amendment to the Constitution that would require the federal government to operate within a budget in which revenues equaled or exceeded expenditures

The Congressional Budget and Impoundment Control Act of 1974 This act was an effort to view the budget process through a comprehensive system rather than in a piecemeal fashion. It created budget committees. A budget decision timetable was established and allowed for “continuing resolutions”: temporary funding measures passed by Congress that permitted spending at the previous year’s levels, enacted if Congress hadn’t enacted appropriation bills by the beginning of the fiscal year. The fiscal year start date changed from July 1 to October 1 to allow more time to review. The Congressional Budget Office (CBO), which provides Congress with budgetary expertise independent of the president’s proposal and clarifies budgetary choices, was created.

Gramm-Rudman-Hollings (Balanced Budget and Emergency Deficit Control Act of 1985) Gramm-Rudman-Hollings: This act mandated progressively higher annual cuts, through sequestration, to achieve a balanced budget by 1991. In 1986, the Supreme Court declared the act’s procedure for automatic across-the-board cuts to be unconstitutional. The Budget Enforcement Act of 1990 was an effort to reduce budget deficits by placing a focus on ceilings or caps on specific categories of spending.