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Lecture Issues in economics today - Chapter 9

After reading chapter 7, you should be able to: Explain why economic costs include both explicit (revealed and expressed) costs and implicit (present but not obvious) costs; relate the law of diminishing returns to a firm’s short-run production costs; describe the distinctions between fixed and variable costs and among total, average, and marginal costs; use economies of scale to link a firm’s size and its average costs in the long run. | Chapter 9 Federal Spending 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 Federal Spending as a Percentage of GDP A Primer on the Constitution “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 The Budget Process 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 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. 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 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 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. Spending in FY2000 Category Spending in Billions Discretionary Defense 300 Foreign Aid 24 Domestic 326 Mandatory Social Security 430 Medicare 219 Medicaid 118 Welfare and Other Entitlements 123 Interest 206 Mandatory vs. Discretionary Non Defense Discretionary Category 2000 in Billions Science and Space 20 Natural Resources and the Environment 27 Agriculture 26 Transportation 51 Education and Training 65 Veterans 45 Justice 29 Federal Spending by Category Real Health Spending International Comparisons of Defense Spending Country Defense Spending/GDP 1997 United States 3.3 France 3.0 United Kingdom 2.7 Germany 1.6 Japan 1.0 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 benefit. 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. 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