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GOVT 2302. The Legislature Contemporary Issues. This week we focus on contemporary issues associated with Congress’ key power: The Power of the Purse. Recall that the increasing power of Parliament over the monarch was based on its power over the purse.

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govt 2302

GOVT 2302

The Legislature

Contemporary Issues

this week we focus on contemporary issues associated with congress key power the power of the purse
This week we focus on contemporary issues associated with Congress’ key power: The Power of the Purse
Recall that the increasing power of Parliament over the monarch was based on its power over the purse.
We will hit a variety of topics including: BudgetingTaxationSpendingBorrowingFiscal PolicyMonetary Policy
We will look at nature of the American economy and the manner in which governmental policies attempt to influence it.
Special attention will be paid to the U.S. and Texas Budgets (where money is drawn and where money is spent) and Budgetary Process
We will look at the nature and history of each, and come to terms with the current budgetary circumstances on each level.
Several constitutional clauses touch on related issues - taxing, borrowing, and such – but there is no language tying it all together.

The power of taxation – to collect revenue - is granted to Congress in the first part of Section 8 of Article 1 of the constitution. This is calledTaxing and Spending Clause


Article One, Section Eight, Clause OneThe Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States


As we will see below, a variety of taxes have been established and imposed over the course of American history. Each has its own set of controversies.


Note also that the authority to spend is not clearly stated – it is assumed.The U.S. Government can spend money on any of the delegated powers listed below.


It is worth noting that in certain Supreme Court cases (United States v Butler for example) the power to tax has also been judged to include the power to regulate. Certain taxes may be imposed not just because they collect revenue, but because they impact economic decisions.


Other cases argued that the clause allowed for any item related to the general welfare – with its own funding course – was constitutional. This applied to Social Security as argued in Helvering v. Davis.


The power to borrow money is established next.Article One, Section Eight, Clause TwoCongress shall have power . . . “To borrow Money on the credit of the United States;”


“When it borrows money ''on the credit of the United States,'' Congress creates a binding obligation to pay the debt as stipulated and cannot thereafter vary the terms of its agreement.”


As we will see further below, establishing a strong line of credit was a goal of Alexander Hamilton and a reason why he pushed for a quick settlement of revolutionary war debt.He made his argument in his First Report on the Public Credit.

Recent controversies over the raising of the debt ceiling brought renewed attention to Section 4 of the 14th Amendment.

“The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”


Borrowing money – or more specifically collecting money by selling bonds on the open market – pumps money into the economy that would not otherwise be collected through taxes. This creates debt.


There is no mention of the need to balance budgets. Hamilton argued that a degree of debt was to be expected as a consequence of the need to invest in public matters.

recent efforts have been made to add a balanced budget amendment of some type to the constitution
Recent efforts have been made to add a Balanced Budget Amendment – of some type – to the Constitution.

As we noted in the previous section, the constitutionally established bill making process says nothing about what happens internally, other than stating that bill for raising revenue (tax bills) must begin in the House of Representatives.


Article One, Section Seven, Clause One All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills.

As we know from the previous section, the Ways and Means Committee has been developed in the House to receive and consider tax bills.
Only one other part of the Constitution touches on anything that comes close to a budgeting process.The Appropriations Clause

Article One, Section Nine, Clause Seven No Money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and Account of the Receipts and Expenditures of all public Money shall be published from time to time.

money cannot be spent unless it is drawn from the treasury upon passage of an appropriations bill
Money cannot be spent unless it is drawn from the treasury upon passage of an appropriations bill.

Appropriations Committees have been developed in both the House and Senate. They have the ability to deny spending on items, even if those items had been approved by other legislation.


Since there is no budgeting process in place, there is no single mechanism for balancing revenue collection, spending, and borrowing. Often these decisions are made separately from each other. No authoritative mechanism exists to maintain a balance between them.

A budgeting process was not considered necessary until the level of government spending began to increase in the late 19th Century.

An early attempt to do so was in the Budget and Accounting Act of 1921.The bill established the Bureau of the Budget – which became the Office of Management and Budget (the OMB) in 1970.


The OMB is an executive branch agency which is intended to “assist the President in overseeing the preparation of the federal budget and to supervise its administration in Executive Branch agencies.”

The current process is based largely on what was established in the Congressional Budget and Impoundment Control Act of 1974.

The bill establishes the Congressional Budget Office (the CBO), which a legislative branch agency. It is the “scorekeeper” for Congress. It establishes the costs of different programs. (committee history here)


It is to provide Congress with: (1) objective, nonpartisan, and timely analysis to aid in economic and budgetary decisions on a wide array of programs covered by the federal budget, and (2) the information and estimates required by the Congressional budget process.

The bill also established that standing Budget Committees would be established in both the House and the Senate.

Note: Some past budget committee members have gone on to direct the Office of Management and Budget.Some members of Congress and the executive branch spend their careers on budgetary issues.


For links with further information on the evolution of the budgeting process click on these: - CQ Roll Call: Budget Process.- The process outlined by the Office of Management and Budget.- Budget Process Law Annotated: 1993 Edition.


The budgeting process begins the spring of the year before the start of the fiscal year within the executive branch when the Office of Management and Budget gives each executive branch agency guidance for how to submit their agency’s requests.


During the next two months - October and November - the OMB analyzes the proposals and submits responses. The agencies can appeal any changes by late January.


That January the CBO reports to the budget committees on the economic and budgetary outlook, then in February re-estimates the President’s budget based on its economic assumptions.


Within six weeks of the introduction of the President’s budget, other committees submit their views to the Budget committees (you can see why these are powerful committees).

The other committees want to ensure that their pet projects (like manned space flight) continue to be funded.

BY April 15, Congress is to complete action on the concurrent resolution on the budget.This is effectively Congress’ version of the budget. The resolution is to be finished by June 15.


After May 15, appropriations bills can be considered. These are to be completed by June 30. Money cannot be drawn until the appropriations bills are passed. This is why those committees are important – click here for the wikis on the House and Senate committees.


The appropriations bills must be passed by the start of the fiscal year for money to be available for government agencies. This often does not happen – so continuing resolutions are often passed to provide funding for a limited time.


The appropriations process has turned into a common venue for attempts to cutback spending. There are questions whether this is the appropriate way to do so.


Wikipedia: U.S. Federal Budget.Wikipedia: 2011 U.S. Federal Budget. Wikipedia: 2012 U.S. Federal Budget.OMB: The President’s Budget.WaPo: Federal Budget 2012.


Recent Facts About the 2010 U.S. BudgetRevenue: $2.381 trillionOutlays: $3.552 trillion Deficit: $1.171 trillion Debt: $14.078 trillion


To put these numbers in context, the Gross Domestic Product of the country in 2010 was $14.5 Trillion. One way to compare spending over time is to look at percentages rather than actual numbers.

total revenues and outlays
Total Revenues and Outlays

Percentage of GDP

Gross Domestic Product (GDP): The total market value of goods and services produced domestically during a given period.

Baseline: A benchmark for measuring the budgetary effects of proposed changes in federal revenues or spending. As defined in the Deficit Control Act of 1985, the baseline is the projection of new budget authority, outlays, revenues, and the deficit or surplus into the budget year and out-years on the basis of current laws and policies.

Outlays: Spending to pay a federal obligation.

Revenues: Funds collected from the public that come from a variety of sources, including individual and corporate income taxes, excise taxes, customs duties, estate and gift taxes, fees and fines, payroll taxes for social insurance programs, and miscellaneous receipts (such as earnings of the Federal Reserve System, donations, and bequests).

total budget deficit or surplus
Total Budget Deficit or Surplus

Percentage of GDP

Surplus: The amount by which the federal government’s total revenues exceed its total outlays in a given period, typically a fiscal year.

Deficit: The amount by which the federal government’s total outlays exceed its total revenues in a given period, typically a fiscal year.

debt held by the public
Debt Held by the Public

Percentage of GDP


What are these graphs really telling us? Note that the graphs show revenue and outlays as a percentage of GDP, not absolute numbers. Here is an example of a graph that shows absolute numbers – though they are adjusted per capita.


Current Sources of Revenue FY11Individual Income TaxesSocial Security Payroll TaxesCorporate Income TaxesExcise TaxesMedicare Payroll TaxesUnemployment TaxesCapital Gains TaxesEstate Taxes Borrowing Other


The largest source of revenue is the income tax. This is followed by payroll taxes (Social Security and Medicare), then the corporate tax.

Related TopicsThe 16th AmendmentTax RatesThe Laffer CurveProgressive TaxationState Income Taxes
social security payroll taxes the social security act of 1935 legislative history social security
Social Security Payroll Taxes. The Social Security Act of 1935Legislative HistorySocial Security

Excise Taxes are generally imposed as additional charges on items to impact (usually discourage) behavior, or address consequences of the action. These are also called sin taxes and are imposed on alcohol, cigarettes and gasoline.


The tax serves a regulatory tool. Proposals are regularly made to legalize activities like drug consumption and prostitution and tax them as well.

smaller sources of revenue include unemployment taxes estate taxes capital gains taxes
Smaller sources of revenue include: Unemployment TaxesEstate TaxesCapital Gains Taxes

Rarely does government collect enough in taxes to pay for spending. Money not collected in taxes is borrowed, largely by selling bonds in the open market.

BorrowingGovernment Debt.The Bond Market.Government Bond.U.S. Treasury Securities.Bureau of the Public Debt.

Overtime, repeated deficits have lead to the development of a large debt. Since 1917, Congress has set a limit on how much debt the government can hold – the debt ceiling. It tends to be pushed back when necessary.


Current Policy OutlaysSecurity DiscretionaryNon-Security DiscretionarySocial SecurityMedicareMedicaidOther Mandatory ProgramsNet Interest


Discretionary spending refers to spending that is optional, that means it has to be renewed one a yearly basis. The largest category of discretionary spending is defense.


Non-Discretionary spending refers to spending that is mandated by law. Some are entitlements such as Social Security and Medicare. Some, such as payments on the national debt are necessary in order for the nation to remain solvent.


It’s been suggested that people may have a clearer idea of what their money is being spent on if their tax bill comes with a receipt.Here’s an example.

The Texas BudgetThe process for the 2012-2013 biennium from the Legislative Reference Library of Texas.
recent facts about the 2010 2011 texas budget revenue 182 188 billion outlays 182 188 billion
Recent Facts About the 2010 – 2011 Texas BudgetRevenue: $182.188 BillionOutlays: $182.188 Billion

RevenuesGeneral Revenue Funds: $80.6 B (44.2%)Federal Funds: $65.5 B (36%)Other Funds: $29.6 B (16.3%)General Revenue – Dedicated Funds: $6.3 B (3.5%)


OutlaysEducation: $75.4 B (41.4%)Health and Human Services: $59.7 (32.8%)Business and Econ. Dev: $20.7 B (11.4%)Public Safety and Criminal Justice: $10.7 B (5.9%)ARRA: $5.6 B (3.1%)General Government: $4.4 B (2.5%)

The Budgetary Process in TexasBudget 101: A Guide to the Budgetary Process in Texas2010 Texas Fact Book
recent facts about houston s budget revenue outlays deficit debt
Recent Facts About Houston’s BudgetRevenueOutlaysDeficitDebt

Can governmental activities impact the economy? Specifically, can it impact Gross Domestic Product, Unemployment and Inflation? Not to say the quality of life in general.


What is the state of the economy right now?Current Numbers: The United States Economy at a Glance, from the Bureau of Labor Statistics.Wikipedia: BLSTimes Topics: BLS

First, some data on the US economyGDP since 1960.CIA Fact Book. Recent Growth Rate.Economy of the United States.

Unemployment (Dec 2010): 9.4%Inflation (Nov 2010) : 1.1% GDP (2010): $14.6 TrillionLatest numbers can be found at the Bureau of Labor Statistics.

together these figures describe the state of the macro economy the overall economy of the nation
Together these figures describe the state of the macro economy – the overall economy of the nation.

Persons are classified as unemployed if they do not have a job, have actively looked for work in the prior 4 weeks, and are currently available for work. – from the Bureau of Labor Statistics.


Unemployment for Texas are kept by the Texas Workforce Commission. Click on Google public data for a great way to generate your own unemployment data.


Controversy: What responsibility does the national government have to promote employment?Is this fully a state concern? Click here for a list of labor related legislation.


A rise in the general level of prices of goods and services in an economy over a period of time.Specifically as determined by the Consumer Price Index.

It is argued that an inverse relationship exists between inflation and unemployment.The Philip’s Curve.

High levels of unemployment are argued to correlate with low levels of inflation and vice versa. When unemployment is high, the cost of labor is low.

The gross domestic product (GDP) is the market value of all final goods and services produced within a country in a given period of time.

Here are two charts which show changes in GDP in the US over time. The first from 2007 to 2010, quarterly. The second from 1900 – 1999, yearly.


Notice that GDP tends to fluctuate. This is called the business cycle. The upward swings indicate that the economy is expanding, the downward swing indicates that the economy is contracting.


A moderate contraction is called a recession, a major contraction is called a depression. Note: the term “recession” was coined in order to stop calling contractions “crises.”


One controversy concerns whether governmental policies can impact ebbs and flows of GDP. And if so, what types of policies are most effective: fiscal policy or monetary policy. The general term to refer to the study of such efforts is macro economics.


Fiscal Policy refers to the deliberate use of government’s taxing and spending powers to influence the economy, either by pumping money into it to bring it out of recession or to pull money out in order to prevent one. This is referred to as Keynesian Economics.


Strategically running budget deficits allows money to be pumped into the economy. This is done by keeping taxes low and spending high. This is held to stimulate the economy by increasing consumer spending.


Conversely, bubbles are argued to be effectively prevented by running budget surpluses, which pull money from the economy by raising taxes or lowering spending. This helps avoid boom and bust cycles.

the primary instruments of fiscal policy are members of congress and congressional committees
The primary instruments of fiscal policy are members of Congress and congressional committees.

Remember that Congress has the power to tax (at whatever rate it chooses) and to spend (at whatever rate it chooses). It is subject only to the restrictions placed on it by voters.

This creates a problem because there will always be political pressure to run deficits (keep taxes low and expenditures high)
Three key instruments1 – setting short term interest rates2 – buying and selling bonds3 – setting the reserve requirement

The Federal Reserve was established following the Panic of 1907 to ensure that liquidity would be made available in case future economic crises would cause the monetary system to dry up.


It is composed of various individuals appointed to serve as a board – including a Fed chairman – which is argued to remove them from political influence.

The United States economy is mixed. It contains a balance between goods and services provided by the public and private sectors.

Striking that balance is a source of constant conflict. Conservatives – generally support private enterprise – liberals (with exceptions) support the public provisions of good and services.


Question: Are certain goods and services best provided by the public sector? And are other goods and services best provided by the private sector?


More importantly, how can it be determined which is which?And is that decision made dispassionately on objective criteria or is it driven by political self insterest?

Examples of publicly provided services: military protectionpolice and fire protectioneducationpublic utilities
Examples of privately provided services:Design, manufacturing and sale of consumer productsAgriculture
an advantage of the private sector is its efficiency and rapid response to changing circumstances
An advantage of the private sector is its efficiency and rapid response to changing circumstances.
an advantage of the public sector is stability and that goods and services are provided equally
An advantage of the public sector is stability and that goods and services are provided equally.

The recent fight over health insurance is a perfect example.Should the market, solely, determine who gets health insurance, or can government step in and ensure that insurance should be made available to everyone?

Over the course of American history, national, state and local governments have expanded the range of services they provide.

Since the 1930s, government has stepped in to provide services the private sector had no interest in providing.This will be a subject we will cover in more depth when we discuss the executive branch.


Some arguments (political and economic) are made that these services ought to be provided by the private sector because they can perform them cheaply and more efficiently.

One of the economic functions of the federal government has been the promotion of the private sector.

The commercial powers in the Constitution were intended in may ways to foster business development by providing a solid financial foundation, basic security, and policies meant to absorb risk.

hamilton recommended a series of measures to congress intended to spur commercial development
Hamilton Recommended a series of measures to Congress intended to spur commercial development

First Report on the Public Credit.Operations of the Act Laying Duties on Imports.Second Report on Public Credit.Report on the Establishment of a Mint.Report on Manufactures.

Technological development has often been subsidized by the national government.Often through the military.

Proponents of these expenditures argue that they enhance basic research and establish the foundation on which consumer products can evolve.Example: the web.


Opponents argue that private enterprise can fund basic research, and that this funding fosters the development if sub governments and issue networks.

An additional fight concerns whether transactions in the marketplace should be subject to regulations.

The private sector tends to not like regulations since they can limit profits.(unless they can capture the regulatory agency and regulate themselves)

As additional services are provided. The costs of government increases. This leads to problems associated with budgeting.
As we will see, over the past few decades, an imbalance has emerged between federal revenues and expenditures.