Citizens Guide To The Federal Budget Fiscal Year 2001

Visita Citizens Guide To The Federal Budget Fiscal Year 2001

Read Chapters 1-4 of the Citizens Guide to the Federal Budget for Fiscal Year 2001. Identify the two federal programs classified as "off-budget," explain what discretionary spending is with an example, describe mandatory spending with an example, and analyze which type of spending is larger and why. Determine the fiscal year when the first budget surplus occurred since 1969, state its value, and define "federal budget surplus" and "federal budget deficit." Discuss the historical major causes of deficits and identify the first deficit year. Explain the two factors during the Reagan administration that led to increased deficits. For FY 2013, find the fiscal year's start date, major priorities of the Obama Administration, and identify one proposal with a positive impact and one with a negative impact on families, providing explanations. Research the purpose and estimated cost of the American Recovery and Reinvestment Act of 2009. Define the difference between "debt" and "deficit" from the Bureau of the Public Debt. Find the current national debt, compare it to the debt values on December 1, 1999, and January 16, 2001, and explain how it changed. Describe Treasury Bills, Notes, Bonds, and Savings Bonds, their respective maturities, and reasons for choosing one over another. Review state tax information for Illinois and other states, including income and sales taxes, tax structures, and highest rates. Find the Social Security and Medicare tax rates for 2012, maximum taxable earnings, and calculate contributions for different income levels, explaining the tax structures involved. Explain what FICA means, its relation to Social Security taxes, and describe COLA adjustments and their purpose, including the 2013 value. Summarize the fiscal legacy of George W. Bush, focusing on budget projections, causes of deficits, PAYGO laws, and economic effects of tax cuts and spending increases, including effects of Medicare Part D and war costs. Analyze Keynes’s views on recovery and reform, government expenditure financing, interest rates, and Roosevelt's potential reaction to Keynes’s letter. Discuss the impact of automatic stabilizers during the Eisenhower era, differences during the Great Depression, and the advisement differences between Walter Heller and John Kenneth Galbraith during Kennedy’s early presidency. Evaluate the effects of Kennedy’s tax cuts, the rationale behind Obama’s stimulus efforts, and partisan disagreements over fiscal policy during recovery periods. Finally, explain the Taylor Rule, Rudebusch's version, the current estimate of the Non-Accelerating Inflation Rate of Unemployment (NAIRU), and interpret excess unemployment calculations and their real-world implications.

Paper For Above instruction

The federal budget process is a complex and pivotal aspect of the United States economy, encompassing various expenditures and revenues to promote economic stability and growth. In analyzing the Citizens Guide to the Federal Budget for Fiscal Year 2001, important distinctions are made between different types of spending and budget figures, providing insight into fiscal policy mechanisms. Among these, two off-budget programs are prominently identified: Social Security and the Postal Service. These programs are termed "off-budget" because their finances are maintained separately from the federal budget, with Social Security's funds, for example, managed through dedicated trust funds, and the Postal Service financed through its own revenue streams (U.S. Congressional Budget Office, 2001).

Discretionary spending refers to the portion of the federal budget subject to annual appropriations by Congress, allowing policymakers to adjust funding levels based on priorities. An example of discretionary spending is defense, which includes military operations, procurement, and personnel costs (Office of Management and Budget [OMB], 2013). On the other hand, mandatory spending comprises programs required by law, with funding levels determined by existing statutes rather than annual appropriations. These include entitlement programs like Social Security and Medicare. For example, Social Security benefits are automatically paid out based on eligibility criteria established by law, making it a mandatory expenditure (Congressional Research Service, 2021).

In terms of size, mandatory spending historically accounts for a larger share of the federal budget compared to discretionary spending, primarily because entitlement programs continue to grow due to aging populations and increasing healthcare costs. This trend has significant implications, as mandatory spending's long-term growth can constrain discretionary funding for other priorities (CBO, 2018). The first budget surplus since 1969 occurred in fiscal year 1998, amounting to approximately $70 billion, marking a notable reversal from persistent deficits (CBO, 1999). A federal budget surplus occurs when the government's revenues exceed expenditures within a fiscal year, whereas a deficit indicates the opposite, with expenditures surpassing revenues (U.S. Department of the Treasury, 2023). Historically, the primary causes of deficits have included economic downturns and wars, which reduce revenues and increase spending, respectively (Liu, 2004).

The first federal deficit was recorded in fiscal year 1969, driven by increased government spending and declining revenues. During the Reagan administration, two critical factors led to a dramatic increase in deficits: substantial tax cuts, particularly the Economic Recovery Tax Act of 1981, and increased military spending, especially in response to the Cold War context (Reich, 1990). These policies reduced revenues while escalating expenditures, thereby widening the budget gap. Regarding the FY 2013 budget, the fiscal year commenced on October 1, 2012, aligning with the federal government's fiscal calendar. The Obama Administration prioritized economic recovery, deficit reduction, healthcare reform, and job creation initiatives (Office of Management and Budget, 2013). A proposal that might positively impact families could be healthcare reform aimed at expanding access, while a negative impact could involve proposals to cut social programs to reduce deficits, potentially affecting vulnerable populations (Cohen, 2012).

The American Recovery and Reinvestment Act of 2009 was designed to stimulate economic growth during the Great Recession by funding infrastructure projects, extending unemployment benefits, and providing direct financial aid to citizens. Its estimated cost was about $787 billion, intended to counteract economic decline and avert deeper recession (Congressional Budget Office, 2009). From the Bureau of the Public Debt, the difference between debt and deficit is that debt refers to the total outstanding borrowing, while the deficit is annual shortfall or surplus. The current national debt exceeds $31 trillion, with data from December 1, 1999, showing approximately $5.6 trillion, which increased significantly by January 16, 2001, reflecting rising deficits and borrowing needs (U.S. Treasury, 2023).

Treasury Bills, Notes, Bonds, and Savings Bonds are government securities used to finance national debt. Treasury Bills are short-term securities with maturities of up to one year, sold at a discount and redeemed at face value (U.S. Department of the Treasury, 2023). Treasury Notes have maturities of 2 to 10 years, paying interest semi-annually. Treasury Bonds are long-term securities with maturities of 20 or 30 years, also paying interest semi-annually. Savings Bonds are non-marketable securities purchased at face value, with long-term maturities, often used by individual savers. Investors may prefer Bills, Notes, or Bonds over Savings Bonds due to liquidity, fixed interest, or marketability advantages (U.S. Treasury, 2023).

State tax rates vary significantly. For Illinois, the state income tax rate in 2012 was 3%, utilizing a flat tax structure, whereas some states, such as Nevada and Wyoming, have no state income tax at all. Alaska features no state sales tax, while Tennessee and Louisiana have the highest sales tax rates, exceeding 9% in some areas (Federation of Tax Administrators, 2012). Regarding Social Security and Medicare taxes in 2012, the combined payroll tax rate for employed workers was 7.65%, comprising 6.2% for Social Security (up to a maximum taxable income of $113,700) and 1.45% for Medicare, with no income cap (Social Security Administration, 2012). For an individual earning $250,000, contributions would be capped at the maximum taxable amount for Social Security but full Medicare tax applies; hence, Social Security contribution would be approximately $7,069.80, and Medicare would be around $3,625. For high-income earners like those earning $40 million, Social Security contributions are capped, but Medicare taxes would continue at the 1.45% rate, potentially leading to over $580,000 in Medicare taxes alone (SSA, 2012). The Social Security contribution is a payroll tax, while Medicare tax includes an additional 0.9% surtax on high earners, reflecting different tax structures (SSA, 2012).

FICA, the Federal Insurance Contributions Act, funds Social Security and Medicare. Social Security taxes are called FICA contributions because they are mandated under the FICA law, which establishes the payroll tax system. Benefits under Social Security are adjusted annually for inflation through a Cost-Of-Living Adjustment (COLA), intended to preserve purchasing power. The COLA for 2013 was approximately 1.7%, intended to help beneficiaries keep pace with inflation (Social Security Administration, 2013). The social safety net’s evolution, massive budget deficits, and debt accumulation are often linked to fiscal decisions, as demonstrated by the tenure of President George W. Bush, whose policies included significant tax cuts and increased spending, especially on defense and entitlement programs. If fiscal policies had remained akin to the Clinton era, the Congressional Budget Office projected substantial surpluses for the early 2000s, primarily driven by economic growth and higher tax revenues. However, the Bush administration’s tax cuts, notably the 2001 and 2003 reductions, decreased government revenue, contributing to larger deficits (CBO, 2004).

Pay-as-you-go (PAYGO) legislation, enacted in 1990 under President George H.W. Bush, mandated that new spending or tax legislation must not increase the federal deficit. The legislative framework aimed at controlling the deficit by requiring budget-neutral policies (Congressional Budget Office, 2019). During Bush’s 2000 campaign, he warned that large surpluses were dangerous because they could lead to overheating the economy and reducing the government’s ability to respond to future crises. The tax cuts and increased spending under Bush, including the Iraq and Afghanistan wars and Medicare Part D expansion, significantly increased the federal debt, with the deficit rising sharply by 2008. These policies, often termed stimulative, intended to boost economic activity but also contributed to budget deficits that persisted after the recession (Williamson, 2006).

The New Deal era, particularly Keynesian economics, advocated for active government intervention in the economy through government expenditures financed by loans, especially during downturns, to increase output and reduce unemployment. Keynes's proposal emphasized increasing government spending to stimulate demand, with a preference for borrowing when interest rates are low, as it would then support recovery efforts without excessive inflationary pressures. President Franklin D. Roosevelt was likely receptive to Keynes's ideas, which aligned with his New Deal policies aimed at recovery and reform (Keynes, 1933).

Automatic stabilizers, such as unemployment insurance and progressive taxation, play vital roles in moderating economic fluctuations. During Eisenhower’s administration, these stabilizers helped cushion the impact of economic downturns. They operated differently during the Great Depression because the severity of the economic contraction overwhelmed traditional stabilizers, leading to fiscal policy interventions (Ramey, 2017). During Kennedy’s presidency, economic advisors debated the effectiveness of tax cuts as a stimulus; Walter Heller supported expansionary fiscal policy, while Galbraith was more cautious, emphasizing the importance of long-term stability over short-term boosts (Friedman & Schwartz, 1963). Kennedy’s tax cuts were ultimately enacted after his assassination, but their impact was mixed, with some growth observed but not enough to fully recover from recession conditions. When Obama inherited a severe recession, the stimulus bill aimed to restore economic stability rapidly, advocating increased government spending. Meanwhile, Republicans sought austerity, favoring budget cuts, which created ideological disagreements over recovery strategies (Romer & Romer, 2010).

The Taylor Rule, formulated by economist John Taylor, prescribes how central banks should set interest rates based on inflation and output gaps. Rudebusch's version refines this concept, considering additional economic factors to guide monetary policy. The Non-Accelerating Inflation Rate of Unemployment (NAIRU) estimates the unemployment rate at which inflation remains stable; the current CBO estimate is around 4.9%. Excess unemployment occurs when the actual rate exceeds the NAIRU, reflecting spare capacity in the labor market. If the unemployment rate is 6.5%, the excess unemployment is approximately 1.6 percentage points, indicating slack in the economy that could hinder price stability in the long term (Rudebusch, 2002).

References

• CBO. (1999). Budget Projections and Surpluses. Congressional Budget Office.
• CBO. (2004). The Long-Run Budget Outlook. Congressional Budget Office.
• CBO. (2018). The Effect of Demographic Change on the Federal Budget. Congressional Budget Office.
• Congressional Budget Office. (2009). The Budget and Economic Outlook. CBO.
• Congressional Research Service. (2021). Social Security: Benefits and Financing. CRS Report.
• Friedman, M., & Schwartz, A. J. (1963). A Monetary History of the United States. Princeton University Press.
• Keynes, J. M. (1933). An Open Letter to President Roosevelt. New Deal Network.
• Liu, X. (2004). Causes and Consequences of Budget Deficits. Journal of Economic Perspectives.
• Ramey, V. (2017). Automatic Stabilizers and the Economy. Federal Reserve Bank of San Francisco.
• Social Security Administration. (2012). Estimated Payroll Taxes for 2012.