1. GOVT 2305 The Budget

2. This section focuses on Congress’ key power: The Power of the Purse If you feel ambitious, here’s a Yale Law Review article on the same topic. The Power of the PurseYale Law Review article

3. Specifically, we will be looking at the budget, as well as the appropriation process.

4. Useful Blog Tags Budgeting. The Budget. Texas Budget. National Debt. Budgeting The Budget Texas Budget National Debt

5. Recall that control over the treasury – or the ability to draw money from it – was a key power of the early British Parliament. It was able to leverage this power to increase its overall power over the monarchy.

6. Recall some history: the increasing power of Parliament over the monarch was made possible because of its power over the purse. Monarchs liked ready access to money to fund any adventures they choose to become involved in. Money could not be drawn from the treasury unless it was authorized by Parliament. This power was leveraged to establish a variety of powers for the legislature, specifically the ability to bring grievances to the king and to set the government’s agenda.

7. Parliament also developed the power to check how revenue could be obtained from the general population.

8. As we know from looking at the Constitution, Congress is given similar powers over taxation and to protect the treasury from the executive branch.

9. Note that the Constitution says nothing about budgeting.

10. This week we analyze those powers. We look at the clauses in the Constitution related to the purse and the various factors that have evolved related to this power since then.

11. This includes budgeting, taxation, the distribution of revenue, the selling of bonds and the use of fiscal and monetary policy to impact the economy.

12. Controversies over budgeting have increased over the years, so its appropriate that we spend some time going over it before we conclude our discussion of the legislative branch.

13. Several constitutional clauses touch on related issues - taxing, borrowing, and such – but there is no language tying it all together.

14. The power of taxation – to collect revenue - is granted to Congress in the first part of Section 8 of Article 1 of the constitution. This is called Taxing and Spending Clause Taxing and Spending Clause

15. Article One, Section Eight, Clause One The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United StatesClause One

16. As we will see below, a variety of taxes have been established and imposed over the course of American history. Each has its own set of controversies.

17. Note that the authority to spend is not clearly stated – it is assumed. The U.S. Government can spend money on any of the delegated powers and implied powers.

18. It is worth noting that in certain Supreme Court cases (United States v Butler for example) the power to tax has also been judged to include the power to regulate. Certain taxes may be imposed not just because they collect revenue, but because they impact economic decisions.United States v Butler

19. Other cases argued that the clause allowed for any item related to the general welfare – with its own funding course – was constitutional. This applied to Social Security as argued in Helvering v. Davis. Helvering v. Davis

20. Social Security is funded by a separate tax – the payroll tax, or FICA. Medicare is also funded by a unique tax. If you get a paycheck – look for them as line items.funded FICAfunded

21. The power to borrow money is established next. Article One, Section Eight, Clause Two Congress shall have power... “To borrow Money on the credit of the United States;” Clause Two

22. Borrowing money – or more specifically collecting money by selling bonds on the open market – pumps money into the economy that would not otherwise be collected through taxes. This creates debt.

23. An entire international market exists in purchasing these bonds. Decisions made in these markets have a major impact on the a country’s finances.international market

24. As we will see further below, establishing a strong line of credit was a goal of Alexander Hamilton and a reason why he pushed for a quick settlement of revolutionary war debt. He made his argument in his First Report on the Public Credit.revolutionary war debtFirst ReportPublic Credit

25. “When it borrows money ''on the credit of the United States,'' Congress creates a binding obligation to pay the debt as stipulated and cannot thereafter vary the terms of its agreement.”

26. Recent controversiesRecent controversies over the raising of the debt ceiling brought renewed attention to Section 4 of the 14 th Amendment.Section 4 of the 14 th Amendment

27. “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

28. There is no mention of the need to balance budgets. Hamilton argued that a degree of debt was to be expected as a consequence of the need to invest in public matters.

29. Recent efforts have been made to add a Balanced Budget Amendment – of some type – to the Constitution. Pros and Cons in a NutshellBalanced Budget Amendment Pros and Cons in a Nutshell

30. As we noted in the previous section, the constitutionally established bill making process says nothing about what happens internally, other than stating that bill for raising revenue (tax bills) must begin in the House of Representatives.

31. Article One, Section Seven, Clause One All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills.Clause One

32. As we know from the previous section, the Ways and Means Committee has been developed in the House to receive and consider tax bills. The Senate Finance Committee has been established to handle the same function in the Senate. These are two of the more powerful committees in Congress.Ways and Means CommitteeSenate Finance Committee

33. The Constitution also contains the Appropriations Clause, which mandates that a separate process be used to obtain the funds which have been authorized to be spent. Note that this creates a two step process for spending: the authorization process and the appropriations process.

34. Article One, Section Nine, Clause Seven No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.Clause Seven

35. Money cannot be spent unless it is drawn from the treasury upon passage of an appropriations bill. The appropriations process is entirely separate from the budgeting process and allows for additional fighting over the nature of public policy. Members of Congress who disapprove of a spending item can try to cut off funding for it.an appropriations bill

36. Appropriations Committees have been developed in both the House (official website) and Senate (official website) to institutionalize the process. Each committee has a number of subcommittees, each with jurisdiction over the spending in a unique executive department.Houseofficial websiteSenateofficial website

37. Now for some detail on budgeting.

38. A budgeting process did not exist in the early years of the Republic. It was not considered necessary until the level of government spending began to increase in the late 19 th Century.

39. Calls for a budgeting process resulted in President Taft establishing the Commission on Economy and Efficiency which issued a report titled The Need for a National Budget.President TaftCommission on Economy and EfficiencyThe Need for a National Budget

40. The intent was to reorganize government to make it more efficient. Managerial efficiency was an ongoing issue with the progressive movement.

41. Key recommendationsKey recommendations: 1. The President should prepare and present a budget to Congress (the executive budget idea). 2.A budget message should accompany the budget and should outline policy proposals of the President as well as include summary financial information. 3. The Secretary of the Treasury should submit a consolidated financial report to Congress. 4.Each agency should submit to Congress an annual financial report. 5. Agencies should establish and maintain a comprehensive accounting system (6) (Cozzetto, 1995: 20-21).

42. They suggested that the process begin with the President, and that he submit his request to Congress that can then consider and modify it.

43. This provides the basis for the Budget and Accounting Act of 1921. The bill established the Bureau of the Budget – which became the Office of Management and Budget (the OMB) in 1970. Budget and Accounting Act of 1921 Office of Management and Budget

44. The OMB is an executive branch agency which is intended to “assist the President in overseeing the preparation of the federal budget and to supervise its administration in Executive Branch agencies.”

45. The current process is based largely on what was established in the Congressional Budget and Impoundment Control Act of 1974.Congressional Budget and Impoundment Control Act of 1974

46. The bill establishes the Congressional Budget Office (the CBO), which a legislative branch agency. It is the “scorekeeper” for Congress. It establishes the costs of different programs. (committee history here) Congressional Budget Officecommittee history here

47. It is to provide Congress with: (1) objective, nonpartisan, and timely analysis to aid in economic and budgetary decisions on a wide array of programs covered by the federal budget, and (2) the information and estimates required by the Congressional budget process.

48. The bill also established that standing Budget Committees would be established in both the House (official website) and the Senate (official website). Houseofficial website Senateofficial website

49. Note: Some past budget committee members have gone on to direct the Office of Management and Budget. Some members of Congress and the executive branch spend their careers on budgetary issues.

50. For links with further information on the evolution of the budgeting process click on these: - The process outlined by the Office of Management and Budget. - Budget Process Law Annotated: 1993 Edition.process outlinedBudget Process Law Annotated: 1993 Edition

51. Here is a brief walk through of the process. It takes about 18 months to complete.

52. Note: the United States fiscal year begins on October 1 and ends on the following September 30.

53. The process has two stages. The first is the formulation stage in the executive branch, the second occurs in the legislature.

54. The budgeting process begins the spring of the year before the start of the fiscal year within the executive branch when the Office of Management and Budget gives each executive branch agency guidance for how to submit their agency’s requests.

55. The budgets will be submitted for review that September. The OMB reviews the requests in October and November and then informs agencies about whether their requests have been approved.

56. Agencies can appeal decisions in December. By January, justifications materials must be submitted.

57. In January, the Congressional Budget Office begins the legislative process by providing a report on the economic and budget outlook to the Budget Committees.

58. Executive activity concludes when the budget is presented to Congress the first Monday in February. The State of the Union Address is generally delivered prior to the submission on the budget as a way to justify the requests that will be made.

60. Within six weeks of the introduction of the President’s budget, other committees submit their views to the Budget committees (you can see why these are powerful committees).

61. The other committees want to ensure that their pet projects (like manned space flight) continue to be funded.

62. BY April 15, Congress is to complete action on the concurrent resolution on the budget. This is effectively Congress’ version of the budget. The resolution is to be finished by June 15.

63. After May 15, appropriations bills can be considered. These are to be completed by June 30. Money cannot be drawn until the appropriations bills are passed. This is why those committees are important – click here for the wikis on the House and Senate committees.HouseSenate

64. The appropriations bills must be passed by the start of the fiscal year for money to be available for government agencies. This often does not happen – so continuing resolutions are often passed to provide funding for a limited time.

65. The appropriations process has turned into a common venue for attempts to cutback spending. There are questions whether this is the appropriate way to do so.

66. Recent Budgets

67. Some Links: Wikipedia: U.S. Federal Budget. Wikipedia: 2011 U.S. Federal Budget. Wikipedia: 2012 U.S. Federal Budget. OMB: The President’s Budget. WaPo: Federal Budget 2012.U.S. Federal Budget2011 U.S. Federal Budget2012 U.S. Federal BudgetThe President’s BudgetFederal Budget 2012

68. Recent Facts About the 2010 U.S. Budget Revenue: $2.381 trillion Outlays: $3.552 trillion Deficit: $1.171 trillion Debt: $14.078 trillion Revenue Outlays Deficit Debt

69. These numbers seem large, but one way to put them in context is to compare them to the Gross Domestic Product of the country, which in 2010 was $14.5 trillion. Here is a graph showing how GDP and spending (outlays) have increased since 1930, followed by one that shows how GDP per capita grew from 1900 to 2000.

72. And another than shows revenue and outlays as a percentage of GDP since 1970.

73. CONGRESSIONAL BUDGET OFFICE Total Revenues and Outlays Percentage of GDP Revenues: Funds collected from the public that come from a variety of sources, including individual and corporate income taxes, excise taxes, customs duties, estate and gift taxes, fees and fines, payroll taxes for social insurance programs, and miscellaneous receipts (such as earnings of the Federal Reserve System, donations, and bequests). Gross Domestic Product (GDP): The total market value of goods and services produced domestically during a given period. Outlays: Spending to pay a federal obligation. Baseline: A benchmark for measuring the budgetary effects of proposed changes in federal revenues or spending. As defined in the Deficit Control Act of 1985, the baseline is the projection of new budget authority, outlays, revenues, and the deficit or surplus into the budget year and out-years on the basis of current laws and policies.

74. The difference between the two lines shows us the size of the budget deficit – when outlays are greater than revenues - or the surplus – when revenues are greater than outlays. Here’s a graph showing how they have varied over the past few decades.

75. CONGRESSIONAL BUDGET OFFICE Total Budget Deficit or Surplus Percentage of GDP Deficit: The amount by which the federal government’s total outlays exceed its total revenues in a given period, typically a fiscal year. Surplus: The amount by which the federal government’s total revenues exceed its total outlays in a given period, typically a fiscal year.

76. Note that the deficit tends to shrink during when the economy is expanding and grows when the economy is contracting (is in recession). This is because when the economy is expanding, people are making more money, which increases tax revenues and lowers demand for social services, while during a recession the opposite is true.

77. This was especially true for the Great Recession, the worst recession the nation has faced since the Great Depression. For further info: The Great Recession in Five Charts. Great RecessionGreat DepressionThe Great Recession in Five Charts

78. The accumulation of deficits leads to the creation of debt, which again can be looked at in terms of dollars, or as a percentage of GDP. There are two categories of debt (1) debt held by the public and (2) intergovernmental debt.debt

79. When the US needs additional funding because it intends to spend more than it collects, it sells bonds (Treasury securities) on the open market. If investors see it worthwhile to invest in these bonds they are purchased at a rate of interest determined by the market itself. US Treasury Securities are considered to be safe places to invest money. Some like the idea that the US maintains a degree of debt because it allows them the opportunity to make these investments. The point here is: not everyone want the US to pay off all its debt.Treasury securities

80. The process for doing so is managed by the Bureau of the Public Debt. An entire market exists globally that invests in the securities offered by different countries. This industry is referred to as the bond market. The Bond Market. Government Bond. U.S. Treasury Securities.Bureau of the Public Debt The Bond Market Government Bond U.S. Treasury Securities

81. Here are two graphs showing federal debt held by the public as a percentage of GDP from 1800 – 2000 (the spike you will see is due to WWII), and from 1970 projected to 2020. Click here for further data.Click here for further data.

83. CONGRESSIONAL BUDGET OFFICE Debt Held by the Public Percentage of GDP

84. Intra Governmental debt is debt that the government owes itself when it borrows from trust funds. The US regularly borrows from the Medicare Trust Fund and the Social Security Trust Fund. This money needs to be paid back at some point in order for the beneficiaries of these programs to receive those benefits.

85. The combination of debt held by the public and intra governmental debt is the gross debt held by the public. Again, some graphs to show how it has changed over time. One shows change in 2012 dollars, the other in terms of % of GDP.

87. In 2012, the Gross Debt is $15,356 trillion, of which $10,572 trillion is public debt and $4,784 are intra governmental holdings. What types of securities exist?

89. Who holds this debt?

91. Since it’s topical, currently foreign nations hold about 46% of the US debt (which is about $4,750 trillion). And since you want to know, China holds about $1.2 trillion of US securities.46% of the US debt$1.2 trillion

93. One way to think about the US debt is that it is this large because investors see the US as a safe reliable place to put their money.

94. Overtime, repeated deficits have lead to the development of a large debt. Since 1917, Congress has set a limit on how much debt the government can hold – the debt ceiling. It tends to be pushed back when necessary.the debt ceiling

95. The current debt ceiling is $16.4 Trillion. For and explanation of the debt ceiling click here. Here is further background from Times Topics.the debt ceilingTimes Topics

96. There is a controversy over whether – and to what degree – the growing debt possess a problem for the US, whether the problem is immediate or long term, and what is the best way to tackle the problem. Are we spending too much or taxing too little or some combination of the two? Some use impasses over this issue as evidence that the increasing ideological divisions between the parties in Congress has made it difficult for the institution to effectively address and solve problems that are really not that complex.

97. An increasingly conservative Republican Party is closely connected to interest groups that will not agree to any increases in taxes. For background, click here for information about Americans for Tax Reform, and here for information about Grover Norquist.Americans for Tax Reform Grover Norquist

98. And an increasingly liberal Democratic Party will not compromise on entitlement reform. Without increases in taxes, or cuts in expenditures, the debt will continue to expand.

99. Now for some detail on the revenue side. How is money collected?

100. Money is collected either through taxes or borrowing. Let’s look at taxes first.

101. This Wikipedia entry on the History of Taxation in the U.S is a good a place as any to get an idea of how revenue has been collected over US history. Current Trivia: Revenues collections are the lowest they have been since 1950.History of Taxation in the U.SRevenues collections are the lowest they have been since 1950

102. Here is a list of the specific ways that the US government collected revenue in the Fiscal Year 2010-11 budget.

103. Current Sources of Tax Receipts FY11 Current Sources of Tax Receipts FY11 Individual Income Taxes Social Security Payroll Taxes Corporate Income Taxes Excise Taxes Medicare Payroll Taxes Unemployment Taxes Capital Gains Taxes Estate Taxes

104. The following graph shows what percentage of revenues come from different sources.

106. The largest source of revenue is the income tax: 42%. This is followed by payroll taxes (Social Security and Medicare) at 40%, then the corporate tax at 9%.income tax

107. Income Taxes

108. The collection of taxes based on income date back to the Civil War, when they were temporarily imposed, but there were questions about their constitutionality that were not resolved until the 16 th Amendment was ratified in 1913.16 th Amendment

109. Since the start, the income tax has been progressive, meaning that the rate increases as one income increases. This is done in a marginal manner, that means a specific rate applies to a particular level of income.

110. Example: If someone right now makes $25,000, the first $8,500 is taxes at 10%, then the rest is taxed at 15%.

111. The margins and the tax rates for each margin have varied over history – and are an ongoing source of contention. Click here for a history of marginal tax rates from 1913 – 2011 and here for the current marginal tax rates.history of marginal tax rateshere for the current marginal tax rates

112. The idea that taxes ought to be progressive taxation is controversial, some argue that it is more efficient and proper for the wealthy to pay at a greater rates while others question its efficiency and argue it is unequal treatment before the law. Some prefer flat taxes.progressive taxationflat taxes

113. There is also a controversial – and disputed contention that higher tax rates actually decrease tax revenues by minimizing the amount of money available for private investment. The Laffer Curve was developed to explain this idea.The Laffer Curve

114. Recent controversy has been focused on the capital gains tax, which is a type of income tax, but one based on earnings from investments rather than labor. The rate for these earnings is 15%, which is far less than most income tax rates.capital gains tax

115. Notice also that income taxes are actually paid by having taxes withheld from paychecks. Pay day is actually tax day. The day that tax returns are when one determines what was actually owed. If you get a refund that means too much was taken out. withheld

116. The collection of federal taxes is run by – as you probably know – by the Internal Revenue Service (Wikipedia), which can trace its history back to the Civil War, but did not acquire its current role until after the ratification of the 16 th Amendment.Internal Revenue ServiceWikipedia

117. Payroll Taxes

118. As mentioned above, payroll taxes (The Federal Insurance Contributions Act tax) are used to fund Social Security and Medicare. They are called payroll taxes because they are drawn from paychecks and are actually paid by both employees and employers.payroll taxes

119. The total Social Security portion of the tax is 12.4% (with 6.2% each paid by the employee and employer) this is applied for the first $106,800 of compensation. Nothing above the amount is taxed. The maximum tax one can pay is $6,324.

120. The total amount of Social Security tax paid determine the size of the monthly check one receives. The number of checks, of course, is determined by how long one lives.

121. The total Medicare portion is 2.9%, again split evenly between the employee and employer – each pays 1.45%. There is no limit on the salary subject to the tax.

122. For background regarding Social Security click here: The Social Security Act of 1935 Legislative History Social Security The Social Security Act of 1935 Legislative History Social Security

123. Click here Click here for a similar history for Medicare. - A primer on Medicare financing. - Medicare’s Financing Problems: Some Solutions. Medicareprimer on Medicare financingMedicare’s Financing Problems: Some Solutions

124. An ongoing question regarding Social Security and Medicare is whether, given how each is funded, they are sustainable. Click here for stories related to sustainability: - Sustainable Social Security: Four Options. - Making Medicare, Medicaid and Social Security Sustainable for the Long Run.Sustainable Social Security: Four OptionsMaking Medicare, Medicaid and Social Security Sustainable for the Long Run

125. Corporate Income Taxes

126. The corporate tax rate in the US is also progressive and tops out at 35%. Some argue the top rate drives American businesses overseas to nations with lower tax rates.

127. Excise Taxes

128. Excise Taxes are generally imposed as additional charges on items to impact (usually discourage) behavior, or address consequences of the action. These are also called sin taxes and are imposed on alcohol, cigarettes and gasoline. - IRS info on excise taxes. sin taxes cigarettesgasolineIRS info on excise taxes

129. The tax serves a regulatory tool. Proposals are regularly made to legalize activities like drug consumption and prostitution and tax them as well.

130. Smaller sources of revenue include: Unemployment Taxes Estate Taxes Unemployment Taxes Estate Taxes

131. Outlays (Expenditures)

132. Here is a diagram showing where money was spent in 2010

134. Here’s a more detailed graphic: a bit tough to read though

136. Let outline the numbers

137. Mandatory spending: $2.173 trillion

138. $695 billion – Social Security $571 billion – Unemployment/Welfare/Other mandatory spending $453 billion – Medicare $290 billion – Medicaid $164 billion – Interest on National Debt

139. Discretionary spending: $1.378 trillion

140. $663.7 billion – Department of Defense $78.7 billion Department of Health and Human Services $72.5 billion – Department of Transportation $52.5 billion – Department of Veterans Affairs $51.7 billion – Department of State and Other International Programs $47.5 billion – Department of Housing and Urban Development $46.7 billion – Department of Education $42.7 billion – Department of Homeland Security

141. $26.3 billion – Department of Energy $26.0 billion – Department of Agriculture $23.9 billion – Department of Justice $18.7 billion – National Aeronautics and Space Administration $13.8 billion – Department of Commerce $13.3 billion – Department of Labor $13.3 billion – Department of the Treasury $12.0 billion – Department of the Interior $10.5 billion – Environmental Protection Agency $9.7 billion – Social Security Administration $7.0 billion – National Science Foundation

142. $5.1 billion – Corps of Engineers $5.0 billion – National Infrastructure Bank $1.1 billion – Corporation for National and Community Service $0.7 billion – Small Business Administration $0.6 billion – General Services Administration $0 billion – Troubled Asset Relief Program $0 billion – Financial stabilization efforts $11 billion (+275%-NA) – Potential disaster costs $19.8 billion (+3.7%) – Other Agencies $105 billion – Other

143. The bulk of spending is in three areas: Medicare and Medicaid (23%), Social Security (20%) and Defense (19%).

144. A key point: There is a distinction between discretionary and non- discretionary spending. Discretionary spending refers to spending that is optional, that means it has to be renewed one a yearly basis. The largest category of discretionary spending is defense.

145. Non-Discretionary spending refers to spending that is mandated by law. Some are entitlements such as Social Security and Medicare. Some, such as interest payments on the national debt are necessary in order for the nation to remain solvent.

146. While it is common for people to want to decrease spending, the amount that can readily be cut is far less than the size of the deficit. Non-Defense discretionary spending is 19% of the budget.

147. Note that some of the largest programs are also some of the most popular. It is very difficult to propose cutting Defense, Social Security and Medicare without strong constituencies coming out to stop them.

148. For historical tables click here and here.here

149. It’s been suggested that people may have a clearer idea of what their money is being spent on if their tax bill comes with a receipt. Here’s an example.

151. The Budget and the Economy

152. Before we wade into that, let’s look at recent numbers to figure out how the economy is doing currently and where you can look for numbers in the future. The major indicators of the health of economy are Gross Domestic Product, unemployment, and inflation.

153. Gross Domestic ProductGross Domestic Product: GDP is the measure of goods and services produced within a country for a given period. Changes in the GDP are taken to be the clearest sign of the health of the economy. Here’s a great source for recent data about fluctuations in the GDP.about fluctuations in the GDP

155. Notice that GDP tends to fluctuate. This is called the business cycle. The upward swings indicate that the economy is expanding, the downward swing indicates that the economy is contracting. Some fluctuations are considered normal – and even inevitable considering the seasons. Occasionally, shifts in the economy, especially downward shifts, can lead the general public to want governmental action to relieve the problems they pose.business cycle

156. A moderate contraction – two consecutive quarters of decline - is called a recession, a major contraction is called a depression. Note: the term “recession” was coined in order to stop calling contractions “crises.”recessiondepressioncrises

157. In 2010, the GDP was $14.6 trillion. From the chart above you can see that GDP has increased 2.8% in the last quarter of 2011. There is debate about what level of growth is best. Rapid, high levels of growth may be inflationary, indicative of a bubble which can suddenly pop, leading to a recession. Many recent recessions have been preceded by a bubble of some sort. Most recently the housing bubble, but the Great Depression was preceded by a stock market bubble (some argue the connection between the stock market crash and the Great Depression is not direct).

158. Click here for a brief history of recent recessions, as well as financial panics in the 19 th Century. Here’s one person’ guess which were the top five. These have consequences, the Panic of 1907 led to the creation of the Federal Reserve. recent recessions financial panicstop five Panic of 1907Federal Reserve

159. One consequence of the Great Depression was the development of Keynesianism, by the British economist John Maynard Keynes. Simply put it held that increases in spending and reductions in taxes are intended to provide the revenue necessary to maintain the economy that evaporates during recessions. Keynesianism John Maynard Keynes

160. The basic theory is that during contractions in the economy budget deficits have be run in order to maintain the economy. It also argues that during expansions in the economy, budget surpluses have to be run in order to both prevent bubbles and to pay down debt developed during the recession.

161. Doing so is said to help avoid boom and bust cycles.boom and bust cycles

162. This is fiscal policy, it is the use of outlays and revenue collection to influence the economy. Most of the major decisions regarding fiscal policy are made by Congress.fiscal policy

163. The primary instruments of fiscal policy are members of Congress and congressional committees.

164. Ways and Means Committee Finance Committee Ways and Means Committee Finance Committee Budget Committees (H,S) Appropriations Committees (H, S)HSHS

165. The stimulus bill (The American Recovery and Reinvestment Act) passed a few years back was based on this theory.stimulus bill

166. Remember that Congress has the power to tax (at whatever rate it chooses) and to spend (at whatever rate it chooses). It is subject only to the restrictions placed on it by voters.

167. This creates a problem because there will always be political pressure to run deficits (keep taxes low and expenditures high)

168. Others – notably Milton Friedman argued that it was better to impact the economy by using monetary policy, which involves the manipulation of interest rates in order to encourage or discourage people from borrowing. This is called monetary policy and it refers to the use of the money supply to similarly affect the economy.Milton Friedmanmonetary policymoney supply

169. Most of the major decisions regarding monetary policy are made by the Federal Reserve, which is the closest the United States has to a central bank.Federal Reserve

170. The Federal Reserve was established following the Panic of 1907 to ensure that liquidity would be made available in case future economic crises would cause the monetary system to dry up.Panic of 1907

171. It is composed of various individuals appointed to serve as a board – including a Fed chairman – which is argued to remove them from political influence.

172. Key Legislation: The Federal Reserve Act The Federal Reserve Act

173. Three key instruments 1 – setting short term interest rates 2 – buying and selling bonds 3 – setting the reserve requirementshort term interest ratesbuying and selling bondsreserve requirement

174. This is an important point – do we want economic policymaking (which requires a degree of technical expertise) to be driven by the branch most closely tied to the democratic branch, or the autocratic branch?

175. UnemploymentUnemployment: The unemployment rate is not a measure of the total number of people without work, but of the total number of people in the work force, that is people who are actively looking for work.

176. Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. – from the Bureau of Labor Statistics.Bureau of Labor Statistics

177. The current unemployment rate is 8.3% - 12.8 million people are out of work. The rate has fallen in previous months, and jobs have been created, but some suggest that this might also be due to more people dropping out of the workforce and a large number of people who are working part-time but who would rather work full time. The unemployment rate also varies significantly based on race and level of education.

178. Here are two graphs showing the unemployment rate in different ways. First, the rate since 1960 – notice how it increases during recessions. This also contains the participation rate.

180. The second shows the declines in the unemployment rate from the beginning of each of the recessions since the Great Depression. Notice how the current recession is by far the worst for unemployment.

182. How is the unemployment rate calculated? One way: the Bureau of Labor Statistics conducts monthly surveys of households – the Current Population Survey – to determine how many unemployed there in those homes.Bureau of Labor Statisticsmonthly surveysCurrent Population Survey

183. People who become unemployed without cause are entitled to unemployment compensation, which was established in the Social Security Act in 1935. This is considered to be part of the “safety net,” the slew of social welfare programs designed to provide assistance to the disadvantaged. unemployment compensationsafety net

184. An ongoing controversy associated with unemployment compensation is whether it discourages workers from actively seeking work, or making tough choices to relocate to find work.

185. Controversy: What responsibility does the national government have to promote employment? Is this fully a state concern? Click here for a list of labor related legislation.Click here for a list of labor related legislation

186. Inflation

187. Inflation is defined as a rise in the general level of prices of goods and services in an economy over a period of time. Specifically as determined by the Consumer Price Index.level of priceseconomy Consumer Price Index

188. InflationInflation (Nov 2010) : 1.1% GDP Latest numbers can be found at the Bureau of Labor Statistics. GDP Bureau of Labor Statistics

189. Overview of BLS Statistics on Inflation and Prices Historical Inflation DataOverview of BLS Statistics on Inflation and Prices Historical Inflation Data.

191. What impact can government policies have on inflationWhat impact can government policies have on inflation?

192. It is argued that an inverse relationship exists between inflation and unemployment. The Philip’s Curve. The Philip’s Curve

193. High levels of unemployment are argued to correlate with low levels of inflation and vice versa. When unemployment is high, the cost of labor is low.

194. Local Budgetary Process

195. Alvin: Annual Budget 2009 - 2010Annual Budget 2009 - 2010

196. Recent Facts About Houston’s Budget Revenue Outlays Deficit Debt

197. Recent Facts About Alvin’s Budget Revenue Outlays Deficit Debt

198. Houston City Budget

199. Study Guide Questions

200. - Be able to answer questions about the data presented in the graphs. - Be familiar with the fluctuations in GDP and what they means for the economy. - Also be familiar with Keynesianism and Monetarism. - What is a stimulus bill? - What does the Constitution say and not say about the budget? - be able to answer questions about the budgetary process.

201. - Be able to answer questions about the US Budget, including outlays, revenues and borrowing. - Be able to describe the different types of taxes. - What is discretionary and non-discretionary spending? - Be able to field a few questions about the Texas budget and where its funds come from. - Be able define and describe GDP, unemployment, and inflation. - What is the Philip’s Curve and what doe sit tell us about unemployment and inflation?

202. For Spring 2012: You can ignore the following slides.

203. Some background on the U.S. economy.

204. The United States economy is mixed. It contains a balance between goods and services provided by the public and private sectors.publicprivate

205. Striking that balance is a source of constant conflict. Conservatives – generally support private enterprise – liberals (with exceptions) support the public provisions of good and services.

206. Question: Are certain goods and services best provided by the public sector? And are other goods and services best provided by the private sector?

207. More importantly, how can it be determined which is which? And is that decision made dispassionately on objective criteria or is it driven by political self insterest?

208. Examples of publicly provided services: military protection police and fire protection education public utilities

209. Social Security Medicare Medicaid K – 12 Education etc…

210. Examples of privately provided services: Design, manufacturing and sale of consumer products Agriculture

211. WalMart Microsoft Apple Exxon-Mobil

212. An advantage of the private sector is its efficiency and rapid response to changing circumstances.

213. An advantage of the public sector is stability and that goods and services are provided equally.

214. Some items can be provided by both the public and private sector, which can lead to conflict.

215. The recent fight over health insurance is a perfect example. Should the market, solely, determine who gets health insurance, or can government step in and ensure that insurance should be made available to everyone?

216. Over the course of American history, national, state and local governments have expanded the range of services they provide.

217. Since the 1930s, government has stepped in to provide services the private sector had no interest in providing. This will be a subject we will cover in more depth when we discuss the executive branch.

218. These also happen to be some of the most expensive programs run by government.

219. Social Security Medicare Medicaid

220. Some arguments (political and economic) are made that these services ought to be provided by the private sector because they can perform them cheaply and more efficiently.

221. For example: In Iraq, could private contractors do a better job than the military? Blackwater

222. Can the private sector provide old age pensions and postal service better than government?

223. One of the economic functions of the federal government has been the promotion of the private sector.

224. The commercial powers in the Constitution were intended in may ways to foster business development by providing a solid financial foundation, basic security, and policies meant to absorb risk.

225. Bankruptcy Uniform Weights and Measures Patent Protection Post Offices

226. Hamilton Recommended a series of measures to Congress intended to spur commercial development

227. First Report on the Public CreditFirst Report on the Public Credit. Operations of the Act Laying Duties on Imports. Second Report on Public Credit. Report on the Establishment of a Mint. Report on Manufactures. Operations of the Act Laying Duties on Imports Second Report on Public Credit Report on the Establishment of a Mint Report on Manufactures

228. Protectionism

229. Technological development has often been subsidized by the national government. Often through the military.

230. Finance Steamships Telegraph Railroads Electricity Airplanes Radio Television Computer Aerospace The Internet Telegraph Railroads Airplanes Radio Computer Aerospace The Internet

231. For many industries, the national government is their largest client.

232. Proponents of these expenditures argue that they enhance basic research and establish the foundation on which consumer products can evolve. Example: the web.

233. Opponents argue that private enterprise can fund basic research, and that this funding fosters the development if sub governments and issue networks.

234. Chief example: Eisenhower’s Military Industrial Complex.Eisenhower’s Military Industrial Complex

235. An additional fight concerns whether transactions in the marketplace should be subject to regulations.

236. The private sector tends to not like regulations since they can limit profits. (unless they can capture the regulatory agency and regulate themselves)

238. As additional services are provided. The costs of government increases. This leads to problems associated with budgeting.

239. As we will see, over the past few decades, an imbalance has emerged between federal revenues and expenditures.