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GOVT 2305 The Budget Hamilton Recommended a series of measures to Congress intended to spur commercial development First Report on the Public Credit. – PowerPoint PPT presentation

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Title: GOVT 2305


1
GOVT 2305
  • The Budget

2
This section focuses on Congress key power
The Power of the PurseIf you feel ambitious,
heres a Yale Law Review article on the same
topic.
3
Specifically, we will be looking at the budget,
as well as the appropriation process.
4
Useful Blog TagsBudgeting.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 governments 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
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 States
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.
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.
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.
21
The power to borrow money is established
next.Article One, Section Eight, Clause
TwoCongress shall have power . . . To borrow
Money on the credit of the United States
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 countrys
finances.
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.
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 controversies over the raising of the debt
ceiling brought renewed attention to Section 4 of
the 14th 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 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.
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.
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.
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.
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.
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 19th 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.
40
The intent was to reorganize government to make
it more efficient. Managerial efficiency was an
ongoing issue with the progressive movement.
41
Key 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.
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.
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)
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).
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.
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 agencys
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.
59
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60
Within six weeks of the introduction of the
Presidents 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.
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
Presidents Budget.WaPo Federal Budget 2012.
68
Recent Facts About the 2010 U.S.
BudgetRevenue 2.381 trillionOutlays 3.552
trillion Deficit 1.171 trillion Debt 14.078
trillion
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.
70
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71
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72
And another than shows revenue and outlays as a
percentage of GDP since 1970.
73
Total Revenues and Outlays
Percentage of GDP
Gross Domestic Product (GDP) The total market
value of goods and services produced domestically
during a given period.
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.
Outlays Spending to pay a federal obligation.
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).
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. Heres a
graph showing how they have varied over the past
few decades.
75
Total Budget Deficit or Surplus
Percentage of GDP
Surplus The amount by which the federal
governments total revenues exceed its total
outlays in a given period, typically a fiscal
year.
Deficit The amount by which the federal
governments total outlays exceed its total
revenues 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.
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.
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.
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.
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.
82
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83
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.
86
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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?
88
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89
Who holds this debt?
90
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91
Since its 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.

92
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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.
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.
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.
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.Lets 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.
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 FY11Individual
Income TaxesSocial Security Payroll
TaxesCorporate Income TaxesExcise
TaxesMedicare Payroll TaxesUnemployment
TaxesCapital Gains TaxesEstate Taxes
104
The following graph shows what percentage of
revenues come from different sources.
105
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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.
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 16th Amendment was ratified in 1913.
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.
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.
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.
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.
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.
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
16th Amendment.
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.
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
hereThe Social Security Act of
1935Legislative HistorySocial Security
123
Click here for a similar history for Medicare.
- A primer on Medicare financing.- Medicares
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.
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.
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 TaxesEstate Taxes
131
Outlays(Expenditures)
132
Here is a diagram showing where money was spent
in 2010
133
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134
Heres a more detailed graphica bit tough to
read though
135
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136
Let outline the numbers
137
Mandatory spending 2.173 trillion
138
695 billion Social Security571 billion
Unemployment/Welfare/Other mandatory
spending453 billion Medicare290 billion
Medicaid164 billion Interest on National Debt
139
Discretionary spending 1.378 trillion
140
663.7 billion Department of Defense78.7
billion Department of Health and Human
Services72.5 billion Department of
Transportation52.5 billion Department of
Veterans Affairs51.7 billion Department of
State and Other International Programs47.5
billion Department of Housing and Urban
Development46.7 billion Department of
Education42.7 billion Department of Homeland
Security
141
26.3 billion Department of Energy26.0
billion Department of Agriculture23.9 billion
Department of Justice18.7 billion National
Aeronautics and Space Administration13.8
billion Department of Commerce13.3 billion
Department of Labor13.3 billion Department of
the Treasury12.0 billion Department of the
Interior10.5 billion Environmental Protection
Agency9.7 billion Social Security
Administration7.0 billion National Science
Foundation
142
5.1 billion Corps of Engineers5.0 billion
National Infrastructure Bank1.1 billion
Corporation for National and Community
Service0.7 billion Small Business
Administration0.6 billion General Services
Administration0 billion Troubled Asset Relief
Program 0 billion Financial stabilization
efforts11 billion (275-NA) Potential
disaster costs19.8 billion (3.7) Other
Agencies105 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-Defens
e 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.
149
Its 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.Heres an example.
150
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151
The Budget and the Economy
152
Before we wade into that, lets 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 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. Heres a great source for recent data
about fluctuations in the GDP.
154
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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.
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.
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
19th Century. Heres one person guess which were
the top five. These have consequences, the
Panic of 1907 led to the creation of the Federal
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.
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.
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.
163
The primary instruments of fiscal policy are
members of Congress and congressional committees.
164
Ways and Means CommitteeFinance CommitteeBudget
Committees (H,S)Appropriations Committees (H, S)
165
The stimulus bill (The American Recovery and
Reinvestment Act) passed a few years back was
based on this theory.
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.
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.
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.
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.
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Key Legislation The Federal Reserve Act
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Three key instruments1 setting short term
interest rates2 buying and selling bonds3
setting the reserve 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
Unemployment 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.
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.
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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.
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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.
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.
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.
186
Inflation
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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.
188
Inflation (Nov 2010) 1.1 GDPLatest numbers
can be found at the Bureau of Labor Statistics.
189
Overview of BLS Statistics on Inflation and
PricesHistorical Inflation Data.
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What impact can government policies have on
inflation?
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It is argued that an inverse relationship exists
between inflation and unemployment.The Philips
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 - 2010
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Recent Facts About Houstons BudgetRevenueOutla
ysDeficitDebt
197
Recent Facts About Alvins BudgetRevenueOutlays
DeficitDebt
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 Philips 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.
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The United States economy is mixed. It contains a
balance between goods and services provided by
the public and private sectors.
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?
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Examples of publicly provided services
military protectionpolice and fire
protectioneducationpublic utilities
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Social SecurityMedicareMedicaidK 12
Educationetc
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Examples of privately provided servicesDesign,
manufacturing and sale of consumer
productsAgriculture
211
WalMartMicrosoftAppleExxon-Mobil
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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.
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These also happen to be some of the most
expensive programs run by government.
219
Social SecurityMedicareMedicaid
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
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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
BankruptcyUniform Weights and MeasuresPatent
ProtectionPost Offices
226
Hamilton Recommended a series of measures to
Congress intended to spur commercial development
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First 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.
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Protectionism
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Technological development has often been
subsidized by the national government.Often
through the military.
230
FinanceSteamshipsTelegraphRailroads
ElectricityAirplanesRadioTelevisionComputerA
erospaceThe Internet
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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 Eisenhowers 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)
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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.
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