Federal “Budget”: Where Does the Money Go?

Section Four Objectives

In other words, by time you take your fourth test you should know/understand/be able to discuss… The difference between the economic philosophy advocated by John Maynard Keynes, and the philosophy advocated by Friedrich A. Hayek

And define fiscal policy, monetary policy, and regulatory policy.

The two interpretations of the “general welfare” clause and the result of both interpretations as it relates to social policy.

The history of healthcare in the United States, including Obamacare.

Containment, Détente, and Roll Back as foreign policy strategies.

Foreign policy tools and what it means to be at War with Terror.

“When government -- in pursuit of good intentions -- tries to rearrange the economy, legislate morality, or help special interests, the costs come in inefficiency, lack of innovation, and loss of freedom. Government should be a referee, not an active player. In the United States, government has gone far beyond the basics.” - Milton Friedman (economist, statistician, and author who taught at the University of Chicago for more than three decades, and recipient of the Nobel Memorial Prize in Economic Sciences.) Copyright © 2011 Pearson Education, Inc. Publishing as Longman Making Public Policy

Policy Agenda and Adoption 1. Constitution 2. Statute 3. Federal Register 4. Rule Congress, the President, and Bureaucracy have a role to play. The largest source of policy decisions made by the federal government is federal rules - made by Bureaucrats. Example: Health and Human Services, under the direction of President Obama and Secretary Kathleen Sebelius has issued its final rule for implementing the state exchanges created by

Copyright © 2011 Pearson Education, Inc. Publishing as Longman the PPACA. THE BUDGET PROCESS 1ST The president submits MONDAY budget to Congress. IN FEB. FEB. CBO issues budget and 15TH economic outlook report. WITHIN SIX Other committees submit “views and estimates” WEEKS OF to budget committees. PRESIDENT’S SUBMISSION

House Budget Committee EARLY Senate Budget committee creates its budget resolution APRIL creates its budget resolution and the House votes on it. and the Senate votes on it.

Budget Conference Committee reconciles House and Senate versions of the budget resolution.

BY House votes on APRIL Senate votes on After both houses approve the budget conference version. 15TH conference version. resolution, appropriations committees draft legislation authorizing expenditures. Each appropriations bill must be passed by both houses APPROPRIATIONS and signed into law by the president. If not completed by October 1st, and no temporary measure Start of the OCT (a “continuing resolution”) is in place, fiscal year. 1ST the government will shut down.

Federal Budget in Pictures

Economics: A social science concerned chiefly with description and analysis of the production, distribution, and consumption of goods and services – Webster

“Treat all economic questions from the viewpoint of the consumer, for the interests of the consumer are the interests of the human race.”

- Frederic Bastiat 19th century French Economist

Adam Smith (1723-1790): Individual Self-Interest and the Invisible Hand. ‘Laissez Faire’- Opposes government involvement in the economy.

The Wealth of Nations and “Greed” (3:57) Friedrich Hayek (1899-1992): Built on the philosophical foundation of Smith. His ‘Road to Serfdom’ (1944) was an attack on central planning. He argued that the ‘Business Cycle’ of booms and busts is always a result of an overextension of credit. John Maynard Keynes (1883-1946): Government intervention such as public works, and government spending is needed especially during ‘bust’ periods or recessions. “Fear the Boom and Bust” (6:10) Copyright © 2011 Pearson Education, Inc. Publishing as Longman Fiscal Policy: government decisions regarding taxing and spending.

How can the government bring in more revenue? - Raise Taxes on the rich (3:07) - Lower Taxes (3:53)

Economic Fallacies: The things which are not seen.

‘The Parable of the Broken Window’ (2:41) - F. Bastiat China Command Economy – Ghost Cities Phantom Malls & Theme Parks Aerial Pictures

Keynesian economics: Deliberate use of the National Government’s ‘taxing and spending’ policies to spur and maintain economic stability. Supply-side economics or “Trickle Down”: lower tax rates will stimulate the economy by encouraging people to save, invest, produce. Reagan slashed taxes for the top income tax bracket from 70% to 28% and government revenues nearly doubled! • 1981 - $599 Billion • 1989 - $1 Trillion Regressive V. Progressive Taxation? Copyright © 2011 Pearson Education, Inc. Publishing as Longman Fiscal Policy

“We must have no carelessness in our dealing with public property or the expenditure of public money. Such a condition is characteristic of undeveloped people, or of a decadent generation.” - President Calvin Coolidge Sustained a budget surplus and left office with a smaller budget than the one he inherited (5:45)

Jekyll Island and the Creation of the Federal Reserve (4:44) 1913: Congress passed the Federal Reserve Act to regulate the national banking system and provide flexibility to the money supply/manage policy. The Fed uses central monetary policy tools Reserve requirement: the minimum amount of money a bank must have on hand to back up its assets Discount rate: short-term loan interest rates banks must pay on loans from the Federal Reserve Bank Federal funds rate: the interest rate a bank pays on an overnight loan provided by a different bank Open market operations: the process used by the Fed to buy and sell securities, which influences the money supply

Should We End the Fed? (4:56) “Audit the FED” (:36) legislation - Sen. Rand Paul Copyright © 2011 Pearson Education, Inc. Publishing as Longman Tools and Theories of Economic Policy Regulatory Policy (laws that affect the economy)

High Gas Prices: No new drilling on federal lands, No new refineries since 1976, No shale development, No Keystone. Jobs outsourced: Regulations, Corporate Tax Rate. EPA : “Thanks to the ethanol mandate, more than 40 percent of the nation's corn crop now goes into the production of a useless fuel that hardly anyone would buy if the government didn't require it.” What do we get with Government Intervention/ Regulation? What about Market Forces? Automobile, Airplane, Radio, TV, Computers, Air-conditioning, Electric Cars, Solar Panels…

“Partly because of the huge costs involved, a government contract becomes virtually a substitute for intellectual curiosity. The prospect of domination of the nation's scholars by Federal employment, project allocations, and the power of money is ever present and is gravely to be regarded.”

What can the government do about inflation, unemployment? “Democrats: concerned about employment; Republicans: concerned about inflation.” Is that true? The difference is the amount of government involvement each party wants; sometimes no difference.

Subprime Mortgage Crisis (:17-5:32) ‘Community Reinvestment Act’ What did Bush 43 and Obama do in response? Labor Department spends stimulus funds on ads – no new jobs NATIONAL DEBT Deficit: Credit Card purchase Debt: Total Credit borrowed 2008: $10 Trillion 2014: $17.5 Trillion 2023: $23.7 Trillion - CBO 2013 Projection Keynes v Hayek – Round Two (8:45) (7:22) CopyrightStossel © 2011 on Pearson Keynes/Hayek Education, Inc. Publishing as Longman