Slide 1CHAPTER OUTLINEFederal Spending as a Percentage of GDPThe Budget ProcessShenanigans in the ProcessDealing with DisagreementsUsing Opportunity CostMandatory vs. Discretionary SpendingSpending in FY2014Mandatory vs. DiscretionaryNon Defense DiscretionaryFederal Spending by CategoryReal Health SpendingInternational Comparisons of Defense SpendingUsing Marginal AnalysisBudgeting For the Future11-1©2015 McGraw-Hill Education. All Rights Reserved ©2015 McGraw-Hill Education. All Rights Reserved Chapter 11Federal Spending11-2©2015 McGraw-Hill Education. 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 Future11-3©2015 McGraw-Hill Education. All Rights Reserved Federal Spending as a Percentage of GDP0.05.010.015.020.025.030.0YearFe de ra l Spending/GDP11-4©2015 McGraw-Hill Education. All Rights Reserved 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 Representatives11-5©2015 McGraw-Hill Education. 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.•Logrolling occurs when Members of Congress agree to support spending programs in each other’s districts. This vote trading increases spending.11-6©2015 McGraw-Hill Education. 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 year11-7©2015 McGraw-Hill Education. 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 another11-8©2015 McGraw-Hill Education. 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.11-9©2015 McGraw-Hill Education. All Rights Reserved Spending in FY201411-10©2015 McGraw-Hill Education. All Rights Reserved Mandatory vs. Discretionary0%10%20%30%40%50%60%70%80%Discretionary Mandatory Discretionary est. 2014-2018 Mandatory est. 2014-2018YearP e rc e n ta g e o f fe d e r a l sp e n d i n g11-11©2015 McGraw-Hill Education. All Rights Reserved Non Defense DiscretionaryCategory 2014 in BillionsScience and Space 30.1Natural Resources and the Environment40.2Agriculture 23.5Transportation 103.8Education and Training 129.0Veterans 148.2Justice 58.711-12©2015 McGraw-Hill Education. All Rights Reserved Federal Spending by Category05101520253035404550Social Security Net Interest Means tested entitlementsNational defense Soc.Sec. 2014-2018 est. Net Int. 2014-2018 est.M.T.E 2014-2018 est. Nat. Def. 2014-2018 est.YearP e rc e n ta g e o f fe d e ra l sp e n d in g11-13©2015 McGraw-Hill Education. All Rights Reserved Real Health Spending196219641966196819701972197419761978198019821984198619881990199219941996199820002002200420062008201020122014201620180100200300400500600Medicaid Medicare Total Medicaid 2014-2018 est.Medicare 2014-2018 est. Total 2014-2018 est.YearReal $ billions11-14©2015 McGraw-Hill Education. All Rights Reserved International Comparisons of Defense Spending Country Defense Spending/GDP 2011United States 4.7France 2.6United Kingdom 2.2Germany 1.3Japan 1.011-15©2015 McGraw-Hill Education. 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 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.11-16©2015 McGraw-Hill Education. 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
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