Government Spending Government Spending (Ugh!)(Ugh!)

2010 Government spending at all levels: $3 trillion2010 Government spending at all levels: $3 trillion $10,000 for each American$10,000 for each American Government spending increased because of 3 big Government spending increased because of 3 big

events: The Great Depression, World War II, and events: The Great Depression, World War II, and LBJ’s Great SocietyLBJ’s Great Society

Governments buy everything from F-22s to toilet Governments buy everything from F-22s to toilet paper for government buildingspaper for government buildings

Government spending creates competition within Government spending creates competition within the private sector. EX: Lockheed “Skunk Works” F-the private sector. EX: Lockheed “Skunk Works” F-117117

The National government gives money to local and The National government gives money to local and regional governments to spend. See next slide.regional governments to spend. See next slide.

Cooperative FederalismCooperative Federalism Ways of Distributing $ to states:Ways of Distributing $ to states: Grants-in-Aid: grants of federal mone to Grants-in-Aid: grants of federal mone to

cities (land-grant colleges too)…allows cities (land-grant colleges too)…allows Congress to become enmeshed in Congress to become enmeshed in public ed. And mental healthpublic ed. And mental health

Block grants—fewer strings. EX: TANFBlock grants—fewer strings. EX: TANF Revenue Sharing—no strings, done Revenue Sharing—no strings, done

away with in 1986 by Reaganaway with in 1986 by Reagan Federal Agency Aid--FBI aid, other Federal Agency Aid--FBI aid, other

agency aid, FEMA, Census Bureauagency aid, FEMA, Census Bureau

Establishing the Federal BudgetEstablishing the Federal Budget“The President proposes, and Congress disposes”“The President proposes, and Congress disposes”

The government’s fiscal year is Oct. 1- Sept. 30.The government’s fiscal year is Oct. 1- Sept. 30. 11stst step: President confers with his advisors and step: President confers with his advisors and

drafts a budget to submit to Congressdrafts a budget to submit to Congress Second step: Congress accepts, rejects, or Second step: Congress accepts, rejects, or

modifies. House sets budget targets and bills are modifies. House sets budget targets and bills are referred to committees and subcommittees. Full referred to committees and subcommittees. Full house must vote, and this process must be house must vote, and this process must be completed by September 15. Process is repeated completed by September 15. Process is repeated in the Senate. in the Senate.

President may approve or veto the budgetPresident may approve or veto the budget Different political parties distribute discretionary Different political parties distribute discretionary

funds VERY differently. Republicans—Military funds VERY differently. Republicans—Military spending Democrats--Welfarespending Democrats--Welfare

Now, let’s look at the results….Now, let’s look at the results….

Mandatory and Discretionary Mandatory and Discretionary SpendingSpending

Mandatory spendingMandatory spending refers to money that refers to money that lawmakers are required lawmakers are required by law to spend on by law to spend on certain programs or to certain programs or to use for interest payments use for interest payments on the national debt. on the national debt. Includes Social Security, Includes Social Security, Income Security, Income Security, Medicare, Debt Interest, Medicare, Debt Interest, Veterans benefitsVeterans benefits

Discretionary spendingDiscretionary spending is is spending about which spending about which government planners can government planners can make choices. VERY make choices. VERY small!! (Education, small!! (Education, Employment, Social Employment, Social Services, Transportation, Services, Transportation, Justice, EnvironmentJustice, Environment

Administration of JusticeAdministration of Justice

HealthHealth

MedicareMedicare

Income securityIncome security

Social SecuritySocial Security

Veteran’s benefitsVeteran’s benefits

OtherOther

Net interestNet interest

DefenseDefense

Science, space and Science, space and technologytechnology

Energy, natural Energy, natural resources,&environmentresources,&environment

AgricultureAgriculture

TransportationTransportation

EducationEducation

Note: Because of rounding, totals may be less or greater than 100%.Note: Because of rounding, totals may be less or greater than 100%.Source: Source: Statistical Abstract of the United StatesStatistical Abstract of the United States

2%2%

1%1%

2.5%2.5%

2%2%0.7%0.7%

1%1%1%1%

15%15%16%16%

3%3%

8%8%

12%12%

14%14%

23%23%

Federal SpendingFederal Spending

EntitlementsEntitlements An An entitlement programentitlement program is a government program that is a government program that

must pay benefitd to those who meet certain eligibility must pay benefitd to those who meet certain eligibility requirements. requirements.

Social SecuritySocial Security– Social Security is the largest category of government Social Security is the largest category of government

spending.spending.MedicareMedicare

– Medicare pays for certain health benefits for people Medicare pays for certain health benefits for people over 65 or people who have certain disabilities and over 65 or people who have certain disabilities and diseases.diseases.

MedicaidMedicaid– Medicaid benefits low-income families, some people Medicaid benefits low-income families, some people

with disabilities, and elderly people in nursing homes. with disabilities, and elderly people in nursing homes. Medicaid costs are shared by the federal and state Medicaid costs are shared by the federal and state governments.governments.

Discretionary SpendingDiscretionary SpendingDefense SpendingDefense Spending

Spending on defense accounts for about half of the federal Spending on defense accounts for about half of the federal government’s discretionary spending.government’s discretionary spending.

Defense spending pays military personnel salaries, buys Defense spending pays military personnel salaries, buys military equipment, and covers operating costs of military military equipment, and covers operating costs of military bases.bases.

Other Discretionary SpendingOther Discretionary Spending Other discretionary spending categories include:Other discretionary spending categories include: educationeducation trainingtraining environmental cleanupenvironmental cleanup national parks and monumentsnational parks and monuments scientific researchscientific research land managementland management farm subsidiesfarm subsidies foreign aidforeign aid

Section Review—Federal Gov’t Section Review—Federal Gov’t SpendingSpending

1. All of the following are examples of mandatory 1. All of the following are examples of mandatory spending exceptspending except(a) defense spending.(a) defense spending.(b) Medicare.(b) Medicare.(c) Social Security.(c) Social Security.(d) Medicaid.(d) Medicaid.

2. An entitlement program is2. An entitlement program is(a) a program to provide benefits paid to everyone.(a) a program to provide benefits paid to everyone.(b) a program to provide benefits paid to government (b) a program to provide benefits paid to government

employees only.employees only.(c) a program to provide benefits to people who meet (c) a program to provide benefits to people who meet

certain requirements.certain requirements.(d) a program to provide benefits to illegal aliens.(d) a program to provide benefits to illegal aliens.

State Government SpendingState Government Spending

State governments work pretty much the same State governments work pretty much the same wayway

Some states, however, have a balanced budget Some states, however, have a balanced budget amendment. Michigan does. Why can a balanced amendment. Michigan does. Why can a balanced budget amendment be both good and bad?budget amendment be both good and bad?

Local governments empower residents (Mayor, Local governments empower residents (Mayor, County Executives, etc.) to approve the budgetCounty Executives, etc.) to approve the budget

State/Local Government ExpendituresState/Local Government Expenditures 805 of state spending goes to public welfare, 805 of state spending goes to public welfare,

insurance trust funds, higher education, highways, insurance trust funds, higher education, highways, hospitals, etc.hospitals, etc.

Is higher education an appropriate expense for the Is higher education an appropriate expense for the State of Michigan?State of Michigan?

The other 20% is spent on corrections, health, The other 20% is spent on corrections, health, natural resources, and utilitiesnatural resources, and utilities

Michigan spends slightly more on highways because Michigan spends slightly more on highways because of freeze-thaw cycleof freeze-thaw cycle

Michigan is a net donor state when it comes to Michigan is a net donor state when it comes to highways—who’s to blame?highways—who’s to blame?

State governments spend 2/3 of their money on State governments spend 2/3 of their money on schools, public utilities, hospitals, police and fire schools, public utilities, hospitals, police and fire protection, interest on debt. 1/3 is left for housing protection, interest on debt. 1/3 is left for housing and community development and parks and and community development and parks and recreationrecreation

The National DebtThe National Debt

The The national debtnational debt is the total amount of money the is the total amount of money the federal government owes. The national debt is federal government owes. The national debt is owed to anyone who holds U.S. Savings Bonds or owed to anyone who holds U.S. Savings Bonds or Treasury bills, bonds, or notes.Treasury bills, bonds, or notes.

The Difference Between Deficit and DebtThe Difference Between Deficit and Debt The deficit is amount the government owes for The deficit is amount the government owes for

one fiscal year. The national debt is the total one fiscal year. The national debt is the total amount that the government owes.amount that the government owes.

Measuring the National DebtMeasuring the National Debt In dollar terms, the debt is extremely large: $5 In dollar terms, the debt is extremely large: $5

trillion at the end of the twentieth century. trillion at the end of the twentieth century. Economists often measure the debt as a percent Economists often measure the debt as a percent of GDP.of GDP.

How big is the National Debt?How big is the National Debt?

About $9 Trillion, but the government owes About $9 Trillion, but the government owes $2 Trillion to itself, so throw that out$2 Trillion to itself, so throw that out

It’s about three weeks of income for It’s about three weeks of income for everyone in the United Stateseveryone in the United States

Is the Debt a Problem?Is the Debt a Problem?Problems of a National DebtProblems of a National Debt To cover deficit spending the government sells bonds. Every To cover deficit spending the government sells bonds. Every

dollar spent on a government bond is one fewer dollar that is dollar spent on a government bond is one fewer dollar that is available for businesses to borrow and invest. This available for businesses to borrow and invest. This encroachment on investment in the private sector is known as encroachment on investment in the private sector is known as the the crowding-out effect.crowding-out effect.

The larger the national debt, the more interest the government The larger the national debt, the more interest the government owes to bondholders. Dollars spent paying interest on the debt owes to bondholders. Dollars spent paying interest on the debt cannot be spent on anything else, such as defense, education, cannot be spent on anything else, such as defense, education, or health care.or health care.

Other Views of a National DebtOther Views of a National Debt Keynesian economists argue that if government borrowing and Keynesian economists argue that if government borrowing and

spending help the economy achieve its full productive capacity, spending help the economy achieve its full productive capacity, then the national debt outweighs the costs.then the national debt outweighs the costs.

How Gov’t Debt is Different from How Gov’t Debt is Different from Private DebtPrivate Debt

We owe most of the federal debt to We owe most of the federal debt to ourselvesourselves

No repayment deadlineNo repayment deadline Private debt means someone gives up Private debt means someone gives up

purchasing power, but when the federal purchasing power, but when the federal government repays a debt, funds transfer to government repays a debt, funds transfer to others who get purchasing powerothers who get purchasing power

Debt and Deficit Reduction PlansDebt and Deficit Reduction PlansLegislative SolutionsLegislative Solutions

In reaction to budget deficits In reaction to budget deficits during the 1980s, Congress during the 1980s, Congress passed the Gramm-Rudman passed the Gramm-Rudman laws which would have laws which would have automatically cut spending automatically cut spending across-the-board if spending across-the-board if spending increased too much. They were increased too much. They were declared uncon-stitutional in declared uncon-stitutional in the early 1990s.the early 1990s.

The Budget Enforcement Act The Budget Enforcement Act required that Congress must required that Congress must “pay as it goes” by cutting “pay as it goes” by cutting spending in one area when spending in one area when spending is raised in another.spending is raised in another.

Line-Item Veto (shot down ’98)Line-Item Veto (shot down ’98)

Constitutional SolutionsConstitutional Solutions In 1995 Congress came close In 1995 Congress came close

to passing a Constitutional to passing a Constitutional amendment requiring amendment requiring balanced budgets. balanced budgets.

Proponents of such a Proponents of such a measure argue that a measure argue that a balanced budget is balanced budget is necessary to make the necessary to make the government more government more disciplined about spending. disciplined about spending.

Opponents of the measure Opponents of the measure argue that it is not flexible argue that it is not flexible enough to deal with rapid enough to deal with rapid changes in the economy.changes in the economy.

Review—Debt and DeficitsReview—Debt and Deficits1. A balanced budget is 1. A balanced budget is

(a) a budget in which expenditures equal revenues.(a) a budget in which expenditures equal revenues.(b) a budget in which expenditures do not equal revenues.(b) a budget in which expenditures do not equal revenues.(c) a budget in which the government spends money.(c) a budget in which the government spends money.(d) a budget in which revenues equal taxes.(d) a budget in which revenues equal taxes.

2. Which of the following are problems associated with a 2. Which of the following are problems associated with a national debt?national debt?(a) increased spending on defense and education (a) increased spending on defense and education (b) the crowding-out effect and interest payments on the (b) the crowding-out effect and interest payments on the

debtdebt(c) interest payments on the debt and too much individual (c) interest payments on the debt and too much individual

investmentinvestment(d) increased individual investment and decreased (d) increased individual investment and decreased

government spendinggovernment spending