X. Government Spending

A. The Economics of Government Spending

1. Government Spending in Perspective

a. Historical Growth

1. Increase since WWII

a. War

b. Regulations

c. Social entitlements

b. How Much is Too Much?

1. Social Programs

2. Foreign Programs

3.Domestic Aide and Development

4. Infrastructure

2. Two Kinds of Spending (Public vs. Private Sector)

a. Goods and Services

1. Amenities

2. Public Servants

b. Transfer Payments

1. This is a transfer of funds where there is no good or service rendered or received. It is often a payment to those who are disadvantaged.

a. Social Security

b. Welfare

c. Unemployment Compensation

d. Grant in Aid

1. Make available a bulk payment for construction of a major public work (Highways, School, etc.)

e. Subsidies

1. Farmers

3. Impact of Government Spending

a. Allocation of Resources- Where the money goes, so goes the labor force, employment, service and infrastructure

b. Distribution of Income- When the government raises or reduces transfer payments, it directly impact the people who receive it and their standard of living

c. Competition with the Private Sector-

1. Mainly Health Care

B. Federal Government Expenditures

1. Establishing the Federal Budget

a. Executive Formulation (President)

1. Fiscal (Budget) Year: October 1-September 30

2. Projected $ comes from Office of Management and Budget (OMB)

b. Congressional Action

1. Appropriations Bill- Is a law that sets federal money aside for a specific purpose.

2. Process- Sub-Committees meet, sent to House Appropriations and then to the House Floor for a vote. Once approved, the bill goes to the Senate for a final vote and then to the President for signature.

2. Major Spending Categories

a. Social Security (Largest)

b. National Defense

c. Interest of the Federal Debt

d. Income Security (Low income earner programs)- Food and Housing

e. Medicare (Medical to Seniors)

f. Health (Medicaid to low income earners)

g. Education, Training, Employment, and Social Services

h. Veterans' Benefits

i. Transportation

j. Natural Resources and Environment

k. General Science, Space, and Technology

l. Administration of Justice- DEA, FBI, INS, etc.

m. Other Spending

C. State and Local Government Expenditures

1. Approving Spending

a. Balanced Budget Amendments

b. Limitations of spending budgets (economy of scale)

2. State Government Expenditures

a. Public Welfare

1. Bulk of which is medical

b. Higher Education

c. Insurance Trust Funds

d. Highways

e. Hospitals

f. Interest of Debt

g. Other Spending

3. Local Government Expenditures

a. Elementary and Secondary Education

b. Public Utilities

c. Hospitals

d. Interest on Debt

e. Police Protection

f. Public Welfare

g. Highways

h. Other Expenditures

D. Federal Deficits and the National Debt

1. From the Deficit to the Debt (Condition of the Economy)

a. A History of Deficits

1. War

2. Tax Schedule

b. Deficits Add to the Debt

1. Fiscal year deficits add to the National Debt that is recurring

c. How Big is the Debt?

1. Should you be alarmed?

2. Is it natural to run a debt?

3. Pay or don't pay?

4. Government spending

2. Impact of the National Debt

a. Public vs. Private Debt

1. Public debt is not limited to time, whereas private is

2. Public debt uses bonds, whereas private can not

3. Theory of purchasing power

b. The Distribution of Income

1. Who does the government borrow from- the rich or middle class?

a. Burdens of debt fall on the masses

c. A Transfer of Purchasing Power

1. The greater the debt, the higher the tax burden, hence the lower the amount of purchasing power

2. Future purchases create economic atmosphere of today

d. Individuals Incentives

1. Lack of initiative if people's wages are taxed too heavily

2. Save, invest or spend are key to people's lifestyles and well-being

e. Higher Interest Rates- The production of more money via bonds

3. Dealing with the Deficit

a. Gramm-Rudman-Hollings- Balanced budget act

1. Flawed system- Economic systems/cycles

b. Budget Enforcement Act of 1990- Pay as you go method (discretionary spending)

c. Omnibus Budget Reconciliation Act of 1993- Slow the growth of the deficit but not necessarily trim the deficit

d. Line-Item Veto of 1996- Targeted cuts in pork barrel spending

e. Growth of Entitlements

1. Healthcare

2. Social Security

3. Welfare