1. McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 11 Federal Spending

2. 1- 2 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-2 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

3. 1- 3 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-3 Federal Spending as a Percentage of GDP

4. 1- 4 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-4 The Budget Process “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 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

5. 1- 5 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-5 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. Logrolling occurs when Members of Congress agree to support spending programs in each other’s districts. This vote trading increases spending.

6. 1- 6 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-6 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

7. 1- 7 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-7 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

8. 1- 8 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-8 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.

9. 1- 9 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-9 Spending in FY2011

10. 1- 10 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-10 Mandatory vs. Discretionary

11. 1- 11 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-11 Non Defense Discretionary Category2012 in Billions Science and Space33 Natural Resources and the Environment 37 Agriculture17 Transportation144 Education and Training102 Veterans129 Justice56

12. 1- 12 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-12 Federal Spending by Category

13. 1- 13 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-13 Real Health Spending

14. 1- 14 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-14 International Comparisons of Defense Spending CountryDefense Spending/GDP 2005 United States4.0 France2.4 United Kingdom2.6 Germany1.5 Japan0.8

15. 1- 15 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-15 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 cost. 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.

16. 1- 16 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-16 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

17. 1- 17 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-17 Obama Stimulus Plan

18. 1- 18 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-18 Obama Stimulus Plan

19. 1- 19 ©2012 The McGraw-Hill Companies, All Rights ReservedMcGraw-Hill/Irwin 11-19 Obama Stimulus Plan