DEPARTMENT OF POLITICAL SCIENCE

AND

INTERNATIONAL RELATIONS

POSC 105

THE FEDERAL BUDGET

(Additional Comments)



  1. THIS MORNING:
    1. The federal budget
      1. How the federal budget differs from household, personal, or business budgets: investments versus consumption.
        1. A case for government spending.
      2. A constitutional amendment requiring a balanced budget.


  2. SUMMARY:
    1. Long standing national consensus on the need to control federal spending (i.e., work toward a balanced budget).
    2. Budgetary reforms caused by stagflation and discredited disjointed, incremental budgeting slowed growth in discretionary spending, but not mandatory.


  3. DIFFERENCES BETWEEN FEDERAL AND HOUSEHOLD OR BUSINESS BUDGETS:
    1. Reprint of last Monday's notes
    2. Politicians, editors--nearly everyone in fact--insists on comparing the federal budget with business or household budgets.
    3. How the budget differs from "ordinary" budgets
      1. Outlays are treated as consumption expenditures
        1. Expenditures are not broken down into types of funds
      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. Physical capital to enhance productivity
    4. Proposition: 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?
      2. This argument challenges the common notion that government spending is wasteful, counterproductive, slows economic growth.


  4. TAXES:
    1. Some generalizations (read these on your own; I will only highlight the main points):
      1. Revenues (i.e., taxes) as a proportion of the total economy have remained relatively stable for the past 30 years.
        1. This may not be true if one includes state and local taxes.
      2. Some analysts argue that U.S. citizens are taxed less than people in other, equally prosperous countries.
      3. Trends:
        1. Revenue from income taxes (as percent of GDP) has been more or less steady
        2. Revenue from corporate taxes (as percent of GDP) has declined.
      4. A major portion is of the middle class' tax bill consists of payroll taxes.
      5. Important: wealth is not taxed.
        1. This is why rasing income taxes on the wealthy will not produce significantly more revenue.
        2. But, the bottom line remains: enormous economic inequality characterizes the United States.
      6. Income taxes are not progressive
        1. Myth: the wealthy are getting soaked.


  5. A BALANCED BUDGET AMENDMENT? HOW BAD ARE DEFICITS AND DEBTS?:
    1. The debt in perspective:
      1. One person's debt is another's assets
      2. Net debt = gross debt minus government assets
      3. Who owns the nation's debt?
        1. Look at the table in Bernstein and Heilbroner, The Debt and Deficits.
    2. The case for deficit spending:
      1. "Pump priming" to combat recessions
        1. See Bernstein and Heilbroner for an explanation of the benefits of "deficit" spending in a recession.
          1. Also read the essay "Macroeconomic Policy" on the web site under Reserve Room Political economyMacroeconomic policy
      2. What do we get (if anything) from taxes
        1. Economic prosperity and public investment?


  6. NEXT TIME:
    1. More comments on the federal budget and political economy

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