1. THIS MORNING:
1. The federal budget
1. Disjointed, incremental budgeting runs into trouble in the 1970s
2. Growth of entitlements
3. How the federal budget differs from household, personal, or business budgets.
1. A case for government spending.





2. GROWTH AND CARE OF ENTITLEMENTS:
1. Reprinted from the last set of notes
2. Changes in the composition of the budget
1. The usual way of looking at the budget can be misleading.
2. Spending by function and agency does not reveal the total picture.
3. Growth in entitlements: entitlements are characterized by:
1. Recipients or beneficiaries are entitled to benefits if they meet the programs criteria.
1. Example: if someone is unemployed and meets other standards she or he is "entitled" to unemployment compensation.
2. Congress does not annually appropriate money for them in the usual fashion. Note:
1. authorizing legislation establishes a program, including goals, guidelines, limits, and so forth but does not actually allocate any money to it.
1. Authorizations are a commitment
2. Appropriation legislation actually "puts money" in the bank so the department or agency or whatever can write checks.
3. Costs of entitlements change with number of eligible people, rate of inflation, changes in demographics, state of the economy, etc.
1. That is, once a person meets the criteria (retirement age, for example) Congress is obliged to provide benefits whether or not it has the money.
4. Interest on the debt--the cost the government incurs from borrowing money--must be paid. So, it too is a mandatory expenditure.
5. Hence, spending on entitlements is called relatively mandatory or uncontrollable.
4. Major point: since the early 1970s spending on entitlements has increased by leaps and bounds.
1. Contrary to popular belief, spending on discretionary programs has remained more or less steady; in fact, for many categories it has decreased.
2. Greatest growth has been in entitlement and mandatory spending
1. But, these programs are for the most part very popular with the public so they are difficult or even impossible to cut.
2. Third rails of American politics.
5. The first major roll back: the welfare-reform act of 1996



3. DIFFERENCES BETWEEN FEDERAL AND HOUSEHOLD OR BUSINESS BUDGETS:
1. Politicians, editors--nearly everyone in fact--insists on comparing the federal budget with business or household budgets.
2. How the budget differs from "ordinary" budgets
1. What is recorded in federal budget documents are expenditures
1. Expenditures are not broken down into funds for consumption and for assets.
2. What's in a word? Spending versus investment





1. Should investment be thought of the same way as spending for consumption?
3. Human capital
1. Education, training, health, psychological and social well-being sufficient to make the labor productive.
4. Infrastructure
1. Examples:
3. Both kinds of capital increase productivity.
1. Question: if the next generation is in jeopardy as many politicians claim, shouldn't the country invest more to increase future productivity?
4. Democrats tend to make this distinction but seldom explicitly articulate it because they are intimidated by current hostility to government spending.



4. NEXT TIME:
1. How bad is the national debt.
2. How advisable is a balanced budget amendment.
3. Reading:
1. Keep up with Heilbroner and Bernstein, The Debt and Deficits, which explains in more detail the points to be made next time..
2. Read the essays in the "Reserve Room" on "Macroeconomics."

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