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What is an externality, and how can its occurrence be manipulated?
· A case of bad property rights in that most actions you take will affect someone other than yourself--effect may be positive (thus producing a benefit) or negative (thus imposing a cost) (examples included my bees and your flowers, a company's pollution of your air, and smoking cigarettes at a gas station)--in other words, it is un-benefited benefits or costs that are received by an individual who is not part of a given transaction
- · The occurrence can be manipulated by government
- subsidies for positive externalities (those that produce a benefit) to encourage more consumption of the good or government-levied corrective taxes for negative externalities (those that impose a cost) to discourage consumers from using products that might harm them and/ or someone else (note: the government could also pay producers and/ or consumers of positive externalities to produce the same result as subsidies)
What is a public good?
· A good that satisfies the conditions of non-excludability (it is not possible to prevent non-payers from consuming good) and non-exclusivity/ non-rivalry (no one's consumption of a good can reduce the amount available to anyone else)--this type of good thus requires government regulation so that everyone who wants to use the good can use it (examples included national defense)
What is competition failure, how can it be reversed, and is it always good or bad?
· An incomplete market that occurs when a monopoly produces a lower quantity of a good but charges a higher price for it, thus creating unfair barriers to entry (for new, competing companies looking to enter the market for a good, which would naturally lower prices and increase production)
o Note: This does not include natural monopolies (when it is cheaper for a single company to have a monopoly on an industry than to have competition) (examples include water, electrical, and telephone companies)
· The government can reverse it by regulating markets and enforcing antitrust laws, thus removing unfair barriers to entry and encouraging competition
· The good of the solution: the government can reverse it by enforcing antitrust laws that prevent too many barriers to entry (thus the market continues running smoothly, and the government oversees the market to ensure that it continues running smoothly)
· The bad of the solution: sometimes, though, the government overreaches (remember Jamaica cell phone example)
What is asymmetric information, how can it be reversed, and is it always good or bad?
· An incomplete market that occurs when the producer gives incomplete information about the product so that the producer knows more about the product than does the consumer (or vice versa, although more problems and a need for government regulation arise when the producer knows more than does the consumer)
· Especially when the withheld information can harm the consumer, the government intervenes and demands that the producer warns the consumer about the product (examples include warnings/ labels on alcohol, cigarettes, and nutrition facts)--that way, if the consumer is harmed by the product or if someone experiences a negative externality arising from a consumer's use of the product, he/she knows that by law, the company owes him/ her money (government "bail out")
· The good to government “bail out”: asymmetric information can worsen adverse selection (incomplete market that occurs when the producer of a good prevents those who need it most from using it because of costs) (used health insurance example to explain better: insurance company can’t tell sick from healthy, so charge average price--healthy not willing to pay average price because don’t really need insurance, so only sick pay and insurance company at a loss because treatment costs more than average price, and more than sick are willing to pay (this is why some insurance companies won’t take people with pre-existing conditions)--when government intervenes, mandating health insurance for healthy, insurance company can afford to charge average price for insurance and to take people with pre-existing conditions)
· The bad to government “bail out”: asymmetric information can also worsen moral hazard (participating in risky behavior because know someone else pays cost) (illustrated with car insurance example: I can leave my car door open because I know that if someone steals it, I get money from insurance)
What is market failure, and what are two ways of preventing it?
· Market failure is an event caused by competition failure, asymmetric information, or externalities
· The federal government can prevent market failure in two ways:
1. Economic stablization (i.e., to stabilize the macroeconomy, or in other words, to prevent high unemployment rates, high inflation rates, market failure from occurring at all, and to improve possibilities for economic growth and a better quality of life) (e.g., a low stable inflation rate can result in a low unemployment rate)--there are two types of policies that do this:
a. Monetary policy manipulates the amount of money available to the public and the terms under which credit is provided (this was partially paraphrased and partially quoted from the book)--it manipulates interest rates which eventually affects unemployment rates--it is much faster to implement because it does not need to get approval from any houses of government (in the U.S. and most developed countries, the Federal Reserve or central bank handles this--in developing countries where central bank independence is weak, the government helps with this, too)
b. Fiscal policy manipulates taxes and expenditures, which in the end will affect unemployment rates--it takes much longer to implement because it must get approval from different houses of government; however, since 2007 when interest rates neared zero and there was not enough money left in Federal Reserve, fiscal policy had to be used
2. Redistrubute wealth (income requires access to valuable resources in market economy like property, skills, etc.--if access is restricted by family ties or something else, then sometimes need government to step in and help (sometimes, not always, because the poor don't always suffer in a pure capitalist society (i.e., without government intervention)))--government can intervene with progressive taxes (inefficient and less targeted, so more than target group is affected) or transfer programs (able to reach target group much more efficiently and accurately with these)
What is a common-pool resource?
· A good that satisfies the public good requirement of non-excludability (it is not possible to prevent non-payers from consuming good) but does not satisfy the requirement of non-exclusivity/ non-rivalry (since this is not satisfied, one's consumption of a good reduces the amount available to everyone else) (examples included fishing grounds)--this type of good thus requires government regulation so that everyone who wants to use the good can use it
What is a toll/ congestible good?
· A good that satisfies the public good requirement of non-exclusivity/ non-rivalry (no one's consumption of the good can reduce the amount available to anyone else) but does not satisfy the requirement of non-excludability (since this is not satisfied, non-payers cannot use the good (examples included toll roads and cinemas)--this type of good can be privatized
What is a private good?
· A good that satisfies neither the public good requirement of non-excludability (since this requirement is not satisfied, non-payers cannot use the good) nor the requirement of non-exclusivity/ non-rivalry (since this is not satisfied, one's consumption of the good reduces the amount available to everyone else) (examples include washing machines, lined paper, etc.)
What are government outlays?
· What the government spends in purchases or transfers
o Purchases: government purchases something from private organization or person and gets something in return (i.e., purchases represent the government’s direct contribution to gross domestic product (GDP)) (approximately 60% of federal outlays)
§ Examples include:
v Current goods and services (labor, supplies, utilities, contractual services, information processing equipment, etc.)
v Investment (in buildings, highways, and other infrastructure, etc.)
o Transfer: government purchases something and gets nothing in return, at least not directly (i.e., transfers have an indirect impact on GDP—what impact (if any), exactly, depends on the expenditure pattern of recipients) (approximately 40% of federal outlays)
§ Examples include:
v Social security, public pensions, unemployment compensation, etc.
· This implies that outlays are greater than purchases
What are three important tools for fiscal analysis?
· Dividing outlays between “more stuff” and higher prices
o GDP is a good approximation of how large government spending is relative to the total size of the economy—this is because it automatically adjusts for prices (prices are in both numerator and denominator of the ratio)
· Annual growth rate
o Annual growth rate, or compound annual growth rate, is different than the growth rate between two periods
o Annual growth rates differ slightly for current annual expenditure, real annual expenditure, and price (index) growth rates
· Simple forecasting
o Forecasting, not fact, is what drives budgets because budgets are about the future
o Often use simple growth projections to create forecasts—the further into the future you’re forcasting for, the more likely are to use simple growth projections
o Sometimes, long range simple growth projections can allow government officials to see a disaster coming and prevent it from occurring
o Although budgeting involves planning for the future and budget preparation requires forecasting of future conditions, a budget request will not be a spending forecast or a projection (if you know what you’re doing)
What are the three components of growth in purchases that are typically used in budgets, and what does each involve?
· Total outlays: number of units x price of each unit
o Growth in outlays can come from more physical units, higher prices, or a combination of the two
o Higher outlays from higher prices will not lead to greater services provided
· Price deflators: weighted average prices that compare price levels in one year due to prices in a base year
o Prices of things that are more important in the total get a larger weight
o Meaning of resulting index (explained with example): price index of 120 in 2005, base year 2000, means that prices in 2005 are on average 20 % higher than they were in 2000
· Real outlays: take price movements out of change in total outlays
o Constant (or deflated or “then-year”) dollars = current (or “now-year”) dollar outlays/ deflator
What is a budget, what are the two parts to it, and what needs to be estimated in each part to create the budget?
· A financial plan that conveys the financial implications of carrying out a particular planned response (reaction) to anticipated operating conditions—in other words, it is a clearly defined course of action to deal with differences between revenue and expenditure
o It also forecasts into the next five to ten years
o It is also a policy plan, or an overview of the government’s policies—a different policy means a different budget
· To create a budget, the government must forecast/ estimate expenditures and revenues for the next fiscal year
§ Needs to consider/ set the size of the public sector, establish what is provided, how it is provided, and who gets it
§ Need to determine who will pay for the expenditures, although this part of the federal budget does not say how this cost will be distributed (with the exceptions of progressive taxes and some goods/ services)
· There is no direct link between the revenue and expenditure sides of the budget, although there can be in some cases
What are the three types of budgets, what do each of them describe, and what are the four "years" that will be in any budget document?
· The three types of budgets are administrative, economic, and functional
§ Goes by which agency is responsible for management of funds and provision of goods/ services (e.g., Which agency is responsible for management of funds and provision of goods/ services; fire department, police department, etc.?)
§ Goes by what type of expenditure it is (e.g., What type of expenditure is it; wages, salaries, utilities, etc.?) (line item)
§ Goes by purpose of the expenditure (e.g., What is the purpose of the expenditure; education, health, defense?)
· Four "years" every budget document will have:
o Out years: term for future years—starts with two years from now (year after next year—this is because budget is for next year) and continues on into the future
o Budget year: the next year (the one we are doing the budget for)
o Progress report year: a mid-year review where we reflect on what our plan was for the year and, using what actually happened instead, make revisions to more accurately predict what we now think will happen by the end of the year (the final outcome)
o Final report year: outcome for last year’s report
What are the functions of the budget process, and what does each do?
· Fiscal discipline and control
o Ensures expenditures are limited to available resources
o Guides expenditure patterns to ensure funds are spent for specified purposes only
o Assigns responsibility for resources—is the first defense against corruption
· Response to strategic priorities
o Ensures financing goes to projects that are of greatest current importance (can get an idea of president’s priorities from looking at his budget)
· Mechanism for transparency of fiscal operations (is government’s primary mechanism for transparency)—the longer the budget goes, the more transparent it becomes
· Efficient implementations of adopted budget (tactics)
o Increase control of operating units (i.e., force government agencies and public organizations to (finished on next point)
o Improve efficiency in agency operations (so that they perform their services even better)
What is the budget cycle? Describe its steps.
· Budget cycle: a recurring and overlapping process between legislative and executive branches
· Steps in budget cycle
o Executive Preparation: executive priorities, agency plans, agency client interests, central balancing starts 12-18 months before delivery of executive budget (occurs every year, too)
o Legislative Consideration: legislator priorities, constituency interests, appropriation within limits—starts with presentation fo executive budget and is completed by start of fiscal year (we hope)
o Execution (Service Delivery): agencies use appropriations to deliver services—occurs through the fiscal year
§ Laws provide appropriations every year
v Appropriation: agencies receive authority to make obligations on the treasury, in other words, to buy stuff (funds are in central treasury, not with agency)
§ Appropriations create new obligation authority and the obligation authority produces outlays (expenditures) (can now engage consumers)
v When purchases actually occur, the spending is called outlays
o Audit and Evaluation: external review of budget execution with report to legislature and the public—occurs from end of fiscal year to end of statute of limitations (and beyond)
v Do financial statements follow governmemt accounting principles?
v Did the agency adhere to laws governing expenditure?
v Is the agency spending/ using its resources efficiently?
v Is the agency meeting its objectives?
v Is it possible to meet objectives at a lower cost or achieve higher standards for the same cost?
How does budgetary spending work? Does a budget ever end?
· Budgetary spending works over many years—some money is set aside for future years, some is spent this year, some of the money from last year is spent this year, and some of the money from last year is still saved for future use
· Budgets never end—just move to different phase (at end, just keep evaluating what worked, what didn’t work, why worked or didn’t work, and see if can be useful now or if can use past mistakes to avoid future mistakes)
Who sets the government’s accounting standards, where are the states’ annual financial statements kept, and how do private and public accounting standards differ?
· Government Accounting Standards Board (GASB) sets the accounting and financial reporting standards for the public sector in the U.S.
- · Private · Public
- · Profit · Cash flow, transparency, control
- · Transactions record in one set · Use of fund accounting (Governmental Funds, Proprietary Funds, Fiduciary Funds)
- of accounts
- · Debt is segregated according to use
- · Budgets are strictly adhered to
- · Full accrual accounting · Modified accrual accounting; some government entities use full accrual
How do accouting standards differ among the three types of government funds?
· Governmental Funds
o General Funds: revenues and expenditures are from this account (e.g., income tax, Highway Defense Fund, etc. (indirectly benefits user))
o Special Revenue Funds: only specific revenue and expenditure can go though these accounts (e.g., fuel excise tax, funds that help build bridges, other special interests, etc. (directly benefits users))
o Debt Service Funds: general long term debt servicing costs (principal and interest)
o Capital Projects Funds: for specific projects … fund ends when project ends (this type of fund is main reason have ongoing budget)
o Permanent Funds: only interest can be paid out from these (e.g., Alaska’s permanent fund from oil) (a state’s “rainy day” fund is very similar to government’s permanent fund)
· Proprietary Funds
o Enterprise Funds: covers self-supporting operations of the government (this type of fund is for public organizations that are supposed to be self-supporting (e.g., post office, etc.))
o Internal Service Funds: covers transactions between government agencies
· Fiduciary Funds
o Covers trust funds held by the government for others—cannot be use for government operations (e.g., pension funds for retirement)
What is the difference between cash and accrual accounting?
· Modified Accrual Accounting: “However, for revenue recognition to occur on the modified accrual basis, the criteria established in this Statement for accrual-basis recognition should have been met and the revenues should be available. "Available" means that the government has collected the revenues in the current period or expects to collect them soon enough after the end of the period to use them to pay liabilities of the current period.”
· For inflow, expense is when cash is given to someone else
· Earnings are the receipt in income full accruals (very similar, but just haven’t received money yet)
- Cash Full Accruals Modified Accrual
- Inflow Receipts; when cash is received Earnings; income earned but Revenues; when measurable and available (when due)
- not yet received
- Outflow Disbursements; when payment is Expenses; when goods/ services Expenditure; when goods/ services are received
- made are used
How is budgeting a political process, what political roles does budgeting serve, what are the two parts to public organizations’ annual government funding, and what are two budgeting strategies public agencies might use to encourage more government funding and fewer funding cuts?
· It’s a political process because you’re dealing with people—everyone needs some money, so must find way to distribute it—the way the government decides to divide the money among public organizations is somewhat political
o Operating agencies (e.g., fish wildlife services (clientele focused)),
o Legislators (narrow constituency focused),
o Chief executive (broader constituency focused).
· The two parts to public organizations’ government funding are:
o Budget Base (current appropriation)
o Budget Increment (proposed change to increment)
· Strategies public organizations can use to encourage more funding and fewer cuts:
§ Organized clientele (e.g., NASA puts barrier between it and government by getting favor from everyone else so everyone else protests and makes positive noise when government cuts budget—NASA doesn’t have to do anything)
§ Build confidence (keep records so can propose good budget and have evidence of good budget to show that everything adds up—builds confidence in future budget)
o Contingent (base and increment): protecting base, expanding operations, new programs (new programs are usually the greatest political challenge)
In what ways is budgeting politics and decisions with inadequate information?
· Decision makers do not know results of the choices they make:
o What will happen if a certain action is taken?
· Results of those choices are hard to value:
o How much is a particular result worth to the citizenry?
· Different constituents want different services:
o Different strokes for different folks.
· Better information can guide the decision process but it will not eliminate political choices.
Which federal government services have the largest outlays (list the top five, in order)? How might these outlays be deceiving or slightly inaccurate?
· Social Security Outlays are largest share
o Income support for elderly and disabled,
o Not pension program
· National Defense is second
o Recent National Defense surge
· Income Security Outlays third
o Federal retirement, unemployment compensation, food assistance, housing assistance, etc. (this is basically the pension group)
· Medicare is fourth
· Other Health is fifth (research, etc.)
o By function and by agency …
o Approximately 90% of this is Medicaid
· These numbers may be deceiving or inaccurate because they are grouped by function--functions are not administrative departments
o Some functions are the responsibility of several departments (e. g., national defense in defense and energy, among others)
o Some departments contribute to multiple functions (e.g., defense in national security and natural resources)
How do discretionary and mandatory spending differ, and which comprises the larger percentage of the government’s budget?
· Discretionary spending/ expenditures: money that government has power to direct (government can decide what this is spent on and how much it spends on each item (direct control))
· Mandatory spending/ expenditures: money that government cannot direct (government must pay this money based on some rule as long as rule is met (indirect control because can always change rule))
o For example, can always move retirement age up so fewer people get social security
Are debt and deficit the same thing? If not, how do they differ?
· No, they are not the same thing
o Deficit is a “stream,” or the amount added each year to the national debt “pool”
What are some important fiscal institutions, especially in the budget cycle?
· Some important fiscal institutions:
o Office of Management and Budget (OMB) (office of president)
o Congressional Budget Office (CBO) (legislative agency)
o Government Accountability Office (GAO) (legislative “watchdog” agency)
o Operating Agencies (FBI, FEMA, ICE, etc.)
o Authorizing Committees in Congress: policy, substance
o Appropriation Committees (and Subcommittees) in Congress: funding
o Senate Finance, House Ways and Means Committees
o Congressional Budget Committees
· President controls OMB
· CBO controls legislature
· President/ OMB oversee everything