Federal Budgets and Public Policy

1
Federal Budgets and Public Policy
2
Exhibit 1 Percentage Composition of Federal
Outlays Since 1959 (Share of Total)
Source Developed based on budget figures in
Economic Report of the President, February 1999.
3
Philosophies of Budget

• Annually Balanced Budget- Balance the budget each
  year
  
• Cyclically Balanced Budget- Balance the budget
  each business cycle
  
• Functional Finance- do what it takes to achieve
  GDP growth

4
Exhibit 2 U.S. Federal Budget Deficits and
Surplus Relative to GDP
Source Developed based on budget figures in
Economic Report of the President, February 1999.
5
From Previous Classes

• Government has a choice- active or passive
• The if active- fiscal or monetary policy
• Todays Federal Reserve pursues an active policy,
  using primarily monetary policy.

6
Effect of Deficit Spending

• Crowd out- high government expenditures act to
  increase G and GDP. Affecting interest rates
  upward.
  
• Crowd in- government expenditures can stimulate
  private investment

7
Exhibit 3 Deficits and Other Measures of the
Economys Performance
8
Exhibit 4 Federal Debt Held by the Public as
Percent of GDP
Source Computed using data from Economic Report
of the President, February 1996.
9
Exhibit 5 Government Debt at All Levels as
Percent of GDP in 1998
Source Developed from data found in OECD
Economic Outlook, Vol. 64 (December 1998), Annex
Tables 34 and 35.
10
Who bears the debt?

• Interest on the debt is 31 this year.
• We owe it to ourselves
• Younger Americans will owe the debt but will
  receive the interest payments
  
• Foreign Owners
• Younger Americans will pay they will pay
  interest, but will get no interest
  
• 20 of interest owed

11
Debt Components

• Capital Expenditures
• Roads, bridges, etc have a benefit over a long
  period of time
  
• Non-durable expenditures will have no benefit
  over a long period of time
  
• The choices of government will affect the future
  standard of living