WEEK OF NOVEMBER 30, 2015 ECONOMICS—CHAPTER 10 NOTES

ECONOMICS 10.1 NOTES “ PORK ” is the term that describes a line-item budget expenditure that circumvents normal budget procedures and benefits a small number of people or businesses. Many taxpayers, including former Oklahoman Senator Tom Coburn, think pork spending is a bad idea. Spending by the PUBLIC SECTOR is the part of the economy made up of local, state, and federal governments. The growth in government spending has two main causes—a larger role in everyday economic affairs and massive government spending funded the U.S. involvement in WWII. Public-sector spending has grown so large that all levels of government combined now spend more than all of the privately owned businesses in the U.S.

ECONOMICS 10.1 NOTES PRIVATE SECTOR is the part of the economy made up of private individuals and privately owned businesses. There are two broad kinds of expenditures. The first is in the form of goods and services. The government buys many goods such as tanks, planes, ships, and even space shuttles. It needs office buildings, land for parks and capital goods for schools and laboratories. Finally, it must hire people to work in its agencies and staff the military.

ECONOMICS 10.1 NOTES The second kind of expenditure is a TRANSFER PAYMENT —a payment for which the government receives neither goods nor services in return. Transfer payments can be made to individuals and include Social Security, unemployment compensation, welfare, aid for people with disabilities. A GRANT-IN-AID is another kind of transfer payment that goes from one level of government to another level and does not involve compensation. Federal highway funds can be used by states to construct, repair, or rebuild federal highways. The states will pay part of those costs. Federal aid can also be used to fund public schools.

ECONOMICS 10.1 NOTES The enormous size of the public sector gives it the potential to affect people’s daily lives in many ways. It can affect resource allocation, the distribution of income, production in the private sector, and the tax burden on people. Question 2 : The three ways in which government spending impacts the economy is: affecting resource allocation, redistributing income, and increasing the tax burden. SUBSIDIES are government payments to encourage or protect a certain economic activity. Farmers receive subsidies to assist with low crop production, crop failures, or low prices.

ECONOMICS 10.1 NOTES Government spending is also influences the DISTRIBUTION OF INCOME, the way in which income is allocated among families, individuals, or other groups. Increasing or decreasing transfer payments can directly affect the incomes of needy families who receive financial support from the government. Where the government spends money can indirectly affect many people’s incomes. The decision to buy fighter planes from one factory instead of another factory impacts the employees and town where the other factory is located.

ECONOMICS 10.1 NOTES When the government produces goods and services, it often competes with the private sector. In higher education, many public colleges and universities compete with more expensive ones. Think of OSU or OU vs. TU. The growth of government spending has not gone unnoticed by the average American. Most people would like to reduce their taxes, but most people are also reluctant to give up the many benefits that government provides.

ECONOMIC NOTES 10.1 CONCLUDED GRAPHIC ORGANIZER: GOODS/SERVICES : Ships, planes, parks, staff salaries. TRANSFER PAYMENTS : Social Security, unemployment compensation, aid for people with disabilities.

ECONOMICS 10.2 NOTES The FEDERAL BUDGET —the annual plan outlining proposed revenues and expenditures for the coming year—is an important document because it outlines the ways in which the federal government plans to spend our tax dollars. The federal budget spans a FISCAL YEAR —a 12- month financial planning period that may or may not coincide with the calendar year. The government’s fiscal year runs from October 1 and expires on September 30 of the following year. Some local governments run from July 1 to June 30.

ECONOMICS 10.2 CONTINUED The president’s Office of Management and Budget (OMB), part of the executive branch, is responsible for preparing the federal budget. By law, the budget must be sent to both houses of Congress by the first Monday in February. Once the budget request by the president is received by the House of Representatives, it breaks down the budget into 13 major expenditure categories and assigns each to a separate House subcommittee. Each of the subcommittees then prepares an APPROPRIATIONS BILL, an act of Congress that allows federal agencies to spend money for a specific purpose. An approved bill is sent from the subcommittee to the full House Appropriations Committee. If it passes then it goes before the entire House for a vote.

ECONOMICS 10.2 CONTINUED Once the final (and possibly altered) budget arrives on the president’s desk, he can veto or approve it. Congress would have to go back into session to get an budget closer to the president’s request if the president vetoes it. The approved budget then becomes official on October 1. The federal budget for 2010 fiscal year is included in your book. There was an expectation of over 2 billion dollars in revenue with a planned 3.5 billion plus in spending. This creates a BUDGET DEFICIT —a negative balance that results from an excess of expenditures over revenues. If expenditures were less than revenues then the result would be a BUDGET SURPLUS.

ECONOMICS 10.2 CONTINUED GRAPHIC ORGANIZER: Five largest federal government expenditures: Social Security National defense Income security Medicare Health Defense spending is called DISCRETIONARY SPENDING — spending that must be approved by Congress in annual budgetary process. Social Security is sometimes called MANDATORY SPENDING, spending authorized by law that continues without the need for annual approvals by Congress.

ECONOMICS 10.2 CONTINUED Income security consists of a wide range of programs that includes retirement benefits for both federal civilian employees and retired military. Other programs are designed to support people unable to fully care for themselves. MEDICARE, a health-care program available to all senior citizens regardless of income, began in 1966 and is another mandatory program. It provides an insurance plan that covers major hospital costs. MEDICAID is a joint federal-state medical insurance program for low-income persons. This is one of the mandatory expenditure programs.

ECONOMICS 10.2 CONTINUED The sixth-largest category of federal spending is interest payments on loans to lower the federal debt. Other broad categories of the federal budget includes education, training, employment and social services, veterans’ benefits, transportation, administration of justice, natural resources and the environment. Some states have a BALANCED BUDGET AMENDMENT, a constitutional provision requiring that annual spending not exceed revenues. QUESTION 2: The two largest areas that state budgets focus on are INTERGOVERNMENTAL EXPENDITURES- -funds that one level of government transfers to another level for spending and public welfare.

ECONOMICS 10.2 CONCLUDED Other areas of expenditures for state budgets are insurance plans and retirement payments for state employees; funding for state colleges and universities; along with other expenditures like state parks, highways, utility regulation, etc. QUESTION 3: Local governments spend their funds on elementary and secondary education, utilities, public safety and health, and other expenditures such as highways, roads, and street repairs.

ECONOMICS 10.3 NOTES In the past 45 years, the federal budget has shown a surplus only five times. The first was in 1969 and the last four occurred in the years 1998 to Since 2001 more than $4.2 trillion in debt has been added, bringing the total national debt to about $11.9 trillion. DEFICIT SPENDING is spending in excess of revenues collected. Sometimes the government plans deficit spending and at other times, the government is forced to spend more than it collects because unexpected developments cause a drop in revenues or a rise in expenditures.

ECONOMICS 10.3 CONTINUED The government projected a $1.26 trillion deficit for the fiscal year Sometimes changes in the economy affect budget projections. For example, in 2009 the largest deficit on record occurred—$1.4 trillion! The NATIONAL DEBT is the total amount borrowed from investors to finance the government’s deficit spending. QUESTION 2 : The national debt is the cumulative amount of funds borrowed by the federal government. The deficit is the amount that exceeds government revenue in a given year.

ECONOMICS 10.3 CONTINUED A BALANCED BUDGET is an annual budget in which expenditures equal revenues. This would not cause the national debt to either raise or lower. The national debt was at $1.3 billion in 1900, $16.9 billion in 1929 and by 1940 it was $50.7 billion. By late 2009 the total national debt had reached about $11.9 trillion. TRUST FUNDS are special accounts used to fund specific types of expenditures such as Social Security and Medicare. When the government collects the FICA or payroll tax, it puts the revenues in these trust accounts. The money is then invested in government securities until it is paid out.

ECONOMICS 10.3 CONTINUED PER CAPITA is the total of national debt (or whatever is being figured) divided by the population. Several important differences exist between public and private debt. One is that we owe most of the national debt to ourselves—whereas private debt is owed to others. Secondly, private debts have to be paid by a certain date whereas the government issues new bonds to pay off the old bonds. Thirdly, private individuals give up purchasing power to repay debts while the federal government does not give up purchasing power.

ECONOMICS 10.3 CONTINUED GRAPHIC ORGANIZER : National debt: Possible effects on the economy 1) Transferring purchasing power 2) reducing economic incentives 3) Increase interest rates 4) CROWDING-OUT EFFECT —the higher-than-normal interest rates and diminished access to financial capital faced by private borrowers when they compete with government borrowing in financial markets. 5) Redistributing income

ECONOMICS 10.3 NOTES CONTINUED There have been several attempts to control the federal deficit. The Balanced Budget and Emergency Deficit Control Act of 1985, or Gramm- Rudman-Hollings, failed because Congress discovered that it could get around the law by passing spending bills that took effect two or three years later. In 1990 Congress passed the Budget Enforcement Act. Its chief feature was the “ PAY-AS- YOU-GO” PROVISION, a requirement that new spending proposals or tax cuts must be offset by reductions elsewhere in the budget.

ECONOMICS 10.3 CONTINUED In 1996 Congress gave the president a LINE-ITEM VETO, the power to cancel specific items without rejecting the entire budget. The Supreme Court found it unconstitutional. The Balanced Budget Agreement of 1997 featured rigid SPENDING CAPS, legal limits on annual discretionary spending, to assure that Congress balanced the budget by The caps were also abandoned because of the unpopular cuts that occurred in education, health, and science. President Clinton’s Omnibus Budget Reconciliation Act of 1993 was an attempt to trim $500 billion from the deficit in a five- year period. Higher tax rates, along with strong economic growth, combined to produce four consecutive years of federal budget surpluses. Rather than pay down the debt, Congress cut tax rates while also increasing spending.

ECONOMICS 10.3 CONCLUDED Another way to control the deficit is by reducing federal spending. The terrorist attacks on 9/11 caused an increase in government spending so record federal budget deficits returned in Spending is also had to reduce because of ENTITLEMENTS, broad social programs with established eligibility requirements to provide health, nutritional, or income supplements to individuals. Although most entitlements are classified as mandatory spending, Congress can revise them. Still, this is difficult to do for members of Congress because the programs are so popular. QUESTION 3 : Most government efforts to reduce deficits have failed. The Clinton Omnibus Budget Reconciliation Act had brief success.