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tem, but states maintain state roads and other
and comparing data?
Budget analysts develop highways that generally link smaller communities
financial plans and provide with larger ones.
technical advice about
budgeting.
Local Government Expenditures
The Work
Local governments include counties, munic-
Budget analysts research,
ipalities, townships, school districts, and other
analyze, develop, and execute annual budgets. Working
with managers and department heads, they seek new special districts. The largest categories of spending by
ways to improve a company™s efficiency and increase local governments include elementary and secondary
profits. Reviewing financial requests, examining past education, utilities, hospitals, police protection,
and current budgets, and researching developments interest on debt, public welfare, and highways.
that can have an effect on spending are additional Local governments have primary responsibility
responsibilities.
for elementary and secondary education.
Expenditures in this category include teachers™ and
Qualifications
administrators™ salaries, textbooks, and construc-
Budget analysts need strong analytical skills and must
tion and maintenance of school buildings. This
be knowledgeable in mathematics, statistics, and com-
category accounts for more than one-third of local
puter science. Because of their frequent interaction
government spending.
with others and the obligation to present budget pro-
Many public utilities, such as water and sanita-
posals, budget analysts must possess strong oral and
tion, serve local needs. For most local governments,
written communication skills.

268 UNIT 3 MACROECONOMICS: INSTITUTIONS
ECONOMICS
Figure 10.5
AT A GLANCE
AT A GLANCE

Expenditures by State and Local Governments
State: $837,082 million Local: $759,368 million


28.8% Intergovernmental Expenditure

19.4% Public Welfare 4.3%

11.2% Insurance Trust 1.8%

Elementary & Secondary Education 34.5%

9.8% Higher Education 1.9%

5.6% Highways 4.0%

3.5% Hospitals 5.1%

2.9% Interest on General Debt 4.3%

2.9% Corrections 1.5%

2.7% Governmental Administration 3.9%

2.5% Health 2.3%

1.2% Utilities 11.1%

Fire Protection 2.2%

0.7% Police Protection 4.7%

0.4% Parks and Recreation 2.0%

Housing & Community Development 2.6%

8.5% Other 13.8%




Source: Statistical Abstract of the United States, 1999

Using Graphs Education is the main expenditure for local government.
What are the three largest spending categories for local govern-
ments? For state governments?
Visit epp.glencoe.com and click on
Textbook Updates”Chapter 10 for
an update of the data.



CHAPTER 10: GOVERNMENT SPENDING 269
spending on utilities amounts to the Government Expenditures
second most important expenditure.
Many hospitals receive some of their
funding from local governments. Some
hospitals are entirely city- or municipal-
owned, which makes them a modest
budget item for local governments.
Most localities have a full-time, paid
police force to protect their commu-
nity. As a result, police protection is a
cost for local governments. Because
there are far fewer state than local
police forces, state spending for police
protection is much lower.
State and local governments, like
Education Local government™s largest spending category is
the federal government, often borrow
primary and secondary education. Which level of govern-
money to cover capital expenditures ment has the major responsibility for higher education?
for highways, universities, and even
government buildings. As with the fed-
category includes the repair of potholes, street
eral government, interest expenses vary as interest
signs, snow removal, and other street-related
rates go up and down.
items.
Local governments, like state governments, face
The remaining local government expenditures,
public welfare expenditures. Local governments,
approximately one-third of the total, are spread over
however, spend much less than state governments
a wide range of categories. Among the most impor-
on this category.
tant are housing and community development, fire
Local governments also spend money on high-
protection, and parks and recreation.
ways, roads, and street repairs. This expenditure




Checking for Understanding the acquired skills of an individual in the areas
of education, training, and work habits? Cite
1. Main Idea What are some services that state
specific examples from your community to
and local governments provide for in their
support your answer.
budgets?
2. Key Terms Define balanced budget amend-
ment, intergovernmental expenditures.
3. Describe how state governments handle the
7. Finding the Main Idea What is the purpose
spending approval process.
of a balanced budget amendment?
4. List seven major categories of state spending.
8. Making Generalizations If you were to
5. Identify the seven major categories of local argue for reduced spending at the state
government spending. and local levels, which categories shown in
Figure 10.5 would you choose to cut back?
Applying Economic Concepts
Explain the reasons for your choices.
6. Human Capital How does the market reward
those who have invested in human capital” Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.



270 UNIT 3 MACROECONOMICS: INSTITUTIONS
MARCH 15, 1999
Newsclip
negotiating is now so much a part of the picture
Creative students are finding new ways to
that some colleges openly encourage it, while
gain the financing needed to attend the col-
others are quietly putting away aid dollars for
lege of their choice. As you read the article,
maneuvering at season™s end.
think about why it is important for students
The result is that a classroom
to explore many options as they plan for now resembles an airplane. Three
how to finance their college educations. people sitting side-by-side could
be paying different prices, and
economic need has less to do
with it than savvy. Nationally,
Dialing about half of all students receive
assistance. . . .
for Dollars It pays to be astute. Tuition and fees have
risen 94% since 1989, nearly triple the 32.5%
increase in inflation, according to the Bureau of
Jonathan Piper, 18, applied to nine top-notch
Labor Statistics. The sticker price”tuition, fees,
colleges and got into them all. The Cleveland
and room and board”for a year of undergradu-
native scored in the 95th percentile on his SATs
ate education ranges from $33,000 at Ivy League
and managed a 3.9 average at prep school while
schools down to $10,500 at state universities. . . .
playing baseball, singing lead in musicals, and par-
Cash-strapped students are . . . saving thou-
ticipating in an engineering society. He™s also an
sands by enrolling at a public college and later
African American. But getting accepted was just
transferring to a private college or starting at a jun-
the first step. Next came the money.
ior college (average tuition of $1,500 a year) and
Last spring, Piper made call after call to college
moving on to a state university. . . .
financial-aid officers. His soft-spoken pitch: “I
Students are finding other creative ways to
have no idea what I want to do, and I want to see
save. High school pupils who take advanced-
the best that each of you can offer me.” University
placement courses can knock off several semesters
of Pennsylvania and Princeton University didn™t
of college. Some private colleges offer three-year
move much, but Wake Forest University in
bachelor™s programs or five-year bachelor™s-
Winston-Salem, N.C., raised its annual aid offer
master™s degrees. . . .
from $8,000 to $26,000. A freshman there now,
Piper is studying poetry with Maya Angelou and ”Reprinted from March 15, 1999 issue of Business Week, by special
permission, copyright © 1999 by The McGraw-Hill Companies, Inc.
has no regrets. “It would have cost me $15,000 a
year to go to Princeton, vs. nothing for Wake
Examining the Newsclip
Forest,” he says.
Colleges call it “dialing for dol- 1. Finding the Main Idea What change does
lars””the time in March and April the writer discuss regarding financing college
when parents and students phone education?
them with better offers from other 2. Synthesizing Information What methods are
schools in hopes of coaxing more students using to decrease the cost of college?
aid out of them. Rare a decade ago,

271
Deficits, Surpluses, and
The National Debt
Main Idea Objectives
Deficit spending has helped create a national debt. After studying this section, you will be able to:
1. Explain how the federal deficit is related to the
Reading Strategy federal debt.
Graphic Organizer As you read the section, describe 2. Relate the impact of the federal debt on the
the growth of the debt before and after 1970. economy.
3. Describe past attempts to eliminate the federal
Rise in deficit.
national debt
4. Describe entitlements.


Applying Economic Concepts
Key Terms Deficit Spending When the government must borrow
money to spend, deficit spending occurs. Read to
deficit spending, federal debt, balanced budget, trust
learn why American taxpayers must pay the interest
fund, crowding-out effect, pay-as-you-go provision,
on that borrowed money.
line-item veto, spending cap, entitlement




T
he cover story reminds us that 1998 was the
Cover Stor y first time in 29 years that the federal budget
had a surplus. While the surplus was due
A Decade of Black Ink?
largely to the Social Security trust fund, it presented
nevertheless a whole new range of possibilities and
ended
The 1998 fiscal year temptations for politicians.
dget sur-
with the first federal bu
$70 bil-
plus in three decades”
And
lion in black ink.
From the Deficit to the Debt
project
government forecasts
in the
even larger surpluses Historically, the federal budget has been char-
coming decade. acterized by a remarkable amount of deficit
are
Republicans in Congress spending”or spending in excess of revenues col-
swelling
eyeing the government™s lected. Sometimes the government plans deficit
-sought
coffers to deliver long spending. At other times, the government is forced
t Clinton
tax cuts, while Presiden Postal worker to spend more than it collects because unexpected
devoting about
has proposed
developments cause a drop in revenues or a rise in
ojected
two-thirds of the pr Social
years to preserving the expenditures.
surplus over the next 15
Figure 10.3 shows that the government pro-
Security trust fund. e
t exaggerate the size of th
These forecasts somewha jected a $117.3 billion surplus for fiscal year 2000.
rated
they include money gene
budget surplus because Budget projections are based partially on assump-
..
and the Postal Service. .
by Social Security taxes tions about the direction of the economy. If the
, 1999
shington Post, January 30 economy has strong economic growth, the surplus
”Mark Stencel, The Wa


272
Figure 10.6

The Federal Deficit
Billions of Constant (Chained) 1992 Dollars



Strong economic growth in 1998
and the 1993 Budget Act resulted in
$100
first budget surplus in 29 years.
50
0
“50
“100
The last surplus for nearly 30
“150
years was in President Johnson™s
“200
1969 fiscal year budget.
“250
“300
In relative terms, the largest 1994 was the first year affected by the
“350 deficit on record was $54.6 billion in 1943. 1993 Omnibus Budget Act, which was designed
“400 This amounts to $419 billion if to trim $500 billion from the deficit over
“450 measured in 1992 dollars. a 5-year period.
“500
40

44

48

52

56

60

64

68

72

76

80

84

88

92

96

00
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20
Years
Source: Economic Report of the President and Budget of the United States Government, various years


Using Graphs Deficits add to the federal debt, and interest on the
federal debt is one of the largest categories of federal expenditures.
What happened to the federal deficit during World War II?
Visit epp.glencoe.com and click on
Textbook Updates”Chapter 10 for
an update of the data.



could grow larger. A downturn in the economy amount borrowed from investors to finance the
means less federal government revenues and a rise in government™s deficit spending.
expenditures such as unemployment compensation. The debt grows whenever the government
Figure 10.6 shows the history of federal budget spends more than it collects in revenues. If the fed-
deficits and surpluses since 1940, with numbers eral government attains a balanced budget”an
adjusted so that inflation does not distort year-to- annual budget in which expenditures equal rev-
year deficit comparisons. enues”the federal debt will not change. If the fed-
eral budget generates a surplus, the federal debt will
become smaller.
Deficits Add to the Debt
When the federal government runs a deficit, it
How Big Is the Debt?
must finance the shortage of revenue by borrowing
from others. It does this by having the Department The national debt has grown almost continu-
of the Treasury sell bonds and other forms of gov- ously since 1900, when the debt was $1.3 billion.
ernment debt to the public. If we add up all out- By 1929 it had reached $16.9 billion, and by 1940
standing federal bonds and other debt obligations, it was $50.7 billion. By late 1999 the total federal
we have a measure of the federal debt”the total debt was about $5,718 billion”or $5.7 trillion.

CHAPTER 10: GOVERNMENT SPENDING 273
Figure 10.7

Three Views of the Federal Debt
A Adjusted for Inflation
(Chained) 1992 Dollars




$4.0
Trillions of Constant




$3.5
$3.0
$2.5
$2.0
$1.5
$1.0
$0.5
$0.0
40

43

46

49

52

55

58

61

64

67

70

73

76

79

82

85

88

91

94

97

00
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20
Years

B On a Per-Capita Basis
$16,000
$14,000
Current Dollars




$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$0
40

43

46

49

52

55

58

61

64

67

70

73

76

79

82

85

88

91

94

97

00
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20
Years
Percent of Gross Domestic Product




C As Percentage of Gross Domestic Product
120%
100%
80%
60%
40%
20%
0%
40

43

46

49

52

55

58

61

64

67

70

73

76

79

82

85

88

91

94

97

00
19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

19

20




Years
Source: Economic Report of the President and Budget of the United States Government, various years

Using Graphs Panel A shows the total debt with the effects of
inflation removed. The debt on a per-capita, or per-person, basis, is
illustrated in Panel B. The debt as a percentage of gross domestic
product is shown in Panel C. When did the debt per capita first Visit epp.glencoe.com and click on
Textbook Updates”Chapter 10 for
surpass $10,000?
an update of the data.


274 UNIT 3 MACROECONOMICS: INSTITUTIONS
ECONOMICS
Figure 10.8
AT A GLANCE
AT A GLANCE

How Big Is the Public Debt?
A $1 bill is about 6 inches (15.2cm) long. If 4 trillion of these
bills were laid end to end, they would form a chain
378.8 million miles (611.0 km) long”more
than enough to stretch from
the surface of the earth
to the surface of
the sun and
back”twice!


$
Or, suppose you had $4 trillion. If each $1 bill Or, a stack of $1,000
were counted 24 hours a day at the rate of bills 4 inches (10 cm)
one per second, it would take more high would make you a
than 126,800 years to count them millionaire. A $1 trillion
all. At an average life expectancy national debt represents a
$
of 70 years, that is about stack of $1,000 bills 252.5
1,812 lifetimes! miles (407.3 km) high!
$ $
$


Using Charts The Publicly held portion of the federal debt reached $3.8 trillion in 1997. The total federal
The publicly held portion of the federal debt reached
debt in that year was about $1.5 trillion higher, and is expected to reach $5.7 trillion by 2000. Why do
about $1.5 trillion higher, and is expected to reach $5.7 trillion by 2000.
economists regard the public portion of the federal debt as the economically relevant part of
the debt?


Some of this debt is money that the government According to this view, the debt on a per capita
owes to itself. In 1999 approximately $1.9 trillion of basis was approximately $13,500 by the end of 1999.
this debt was held in government trust funds”special Panel C shows the debt as a percentage of Gross
accounts used to fund specific types of expenditures Domestic Product (GDP)”the dollar value of all final
such as Social Security and medicare. When the gov- goods, services, and structures (houses and commer-
ernment collects the FICA or payroll tax, it puts the cial buildings) produced within a country during any
revenues in these trust accounts. The money is then one year. The debt peaked in 1946. By 1999 it was
invested in government securities until it is paid out. about 41 percent.
Because trust fund balances represent money the
government owes to itself, most economists tend
Public vs. Private Debt
to disregard this portion of the debt. Instead, they
How does the federal debt differ from private
view the public portion of the debt”which
debt? A key difference is that we owe most of the fed-
amounted to $3.7 trillion in 1999”as the econom-
eral debt to ourselves”whereas private debt is owed
ically relevant part of the debt. Figure 10.7 presents
to others. The federal debt is also different from pri-
three views of the total federal debt held by the
vate debt in other ways.
public. Panel A, which is adjusted for inflation,
One difference is repayment. When private citi-
shows that the debt did not increase dramatically
zens borrow money, they usually make plans to
until the 1980s. Panel B, computed on a per capita
repay the debt by a specific date. When the federal
basis, also shows a dramatic increase in the 1980s.

CHAPTER 10: GOVERNMENT SPENDING 275
Federal Debt




Effects In the 1990s the federal debt surpassed $5 trillion. How does the federal debt impact the
economy?


government borrows, it gives little thought to even- those taxes would be used to make interest pay-
tual repayment because it simply issues new bonds ments to the middle class. The federal tax structure,
and uses the proceeds to pay off the old bonds. as much as the size of the debt itself, determines the
Another difference has to do with purchasing distribution effects. Given the current progressive
power. When private individuals repay a debt, they nature of the personal income tax, less is taken from
give up purchasing power. They no longer have that the lower and middle income classes than would be
money and so it cannot be used to buy more goods the case under a less progressive, or flat tax.
and services. When the federal government repays a Another consequence of the federal debt is that it
debt, there is no loss of purchasing power because causes a transfer of purchasing power from the pri-
the taxes and revenue collected from some groups vate sector to the public sector. In general, the larger
are simply transferred to others. The exception is 15 the public debt, the larger the interest payments and,
to 20 percent of the public debt owned by foreigners. therefore, the more taxes needed to pay them. When
When payments are made to investors outside the people pay more taxes to the government, they have
United States, some purchasing power is temporarily less money to spend on their own needs.
diverted from the American economy. A third impact is that the taxes needed to pay
the interest can reduce the incentives to work, save,
and invest. Individuals and businesses might feel
Impact of the National Debt
Even though we owe most of the federal debt
to ourselves, it still affects the economy in
INFOBYTE
ways that can harm the private sector.
The federal debt can have a significant impact on
the distribution of income within the economy. If Budget Deficits A deficit can be a negative cat-
the government borrows money from the wealthy, alyst in an economy. Some economists, however,
and if the burden of taxes falls on the middle class will advocate deficit spending under certain con-
and the poor, taxes would be transferred to the rich ditions, such as a government spending its way out
in the form of interest payments on the debt. of a recession.
If the government borrows money from the mid-
dle class, and if the burden of taxes falls on the rich,

276 UNIT 3 MACROECONOMICS: INSTITUTIONS
ECONOMICS
less inclined to work harder and earn extra income
Figure 10.9
AT A GLANCE
AT A GLANCE
if higher taxes are placed on them.
Some people feel that the government spends tax-
The Crowding-Out Effect
payers™ money in a careless manner. A community,
for example, may secure a federal grant to purchase
Caused by Federal Spending
expensive equipment that taxpayers in the commu-
nity would never have approved. If people feel that
their taxes are being squandered, they may have a D™
D S Supply of
reduced incentive to work.
money
When the government sells bonds to borrow
money, it competes with the private sector for scarce




Interest Rate (%)
Demand after
resources. An example of this competition is the government
crowding-out effect”the higher-than-normal inter- borrowing
est rates that heavy government borrowing causes.
9%
This effect is illustrated in Figure 10.9. If the gov-
6%
ernment runs a deficit and tries to raise funds by
D™
selling bonds, it will cause the interest rate paid by Demand before
D
private borrowers to go up. government
borrowing
S
Taming the Deficit Quantity of Credit
Concern over the size of the federal deficit
and the debt has led to a number of attempts Using Graphs Crowding out affects the
to control it. Several of the more important allocation of resources in the economy.
attempts are described below. What happens to the interest rate when
deficit spending increases?
Gramm-Rudman-Hollings
One of the first significant attempts to control
(BEA) in 1990. The BEA™s main feature is a
the federal deficit took place when Congress tried to
“pay-as-you-go” provision”a requirement that
mandate a balanced budget by 1991. The legislation
new spending proposals or tax cuts must be offset
was formally called the Balanced Budget and
by reductions elsewhere. If no agreement on the
Emergency Deficit Control Act of 1985, or Gramm-
reductions is reached, then automatic, across-the-
Rudman-Hollings (GRH) after its sponsors.
board spending cuts are to be instituted.
The key to GRH was to set federal deficit targets
The BEA also has limitations. For one, it applies
for Congress and the president to meet over a six-
only to discretionary spending. For another, the act
year period”targets that resulted in a zero deficit
can be suspended if the economy enters a low-growth
by 1991. Despite high hopes, GRH failed for two
phase or if the president declares an emergency.
reasons. First, Congress discovered that it could
get around the law by passing spending bills that
took effect two or three years later. Second, the Omnibus Budget Reconciliation
economy started to decline in July 1990”triggering
Act of 1993
a safety valve in the law that suspended automatic
President Clinton™s Omnibus Budget Reconcil-
cuts when the economy was weak.
iation Act of 1993 was an attempt to trim $500 bil-
lion from the deficit over a five-year period. By 1993
Budget Enforcement Act of 1990 the federal deficit had reached such enormous pro-
In an effort to control future budgetary action, portions that the act was intended to reduce only the
Congress passed the Budget Enforcement Act rate of growth of the deficit, not the deficit itself.

CHAPTER 10: GOVERNMENT SPENDING 277
The act featured a combination of spending popular programs like health, education, and veter-
reductions and tax increases that made the individ- ans™ programs”or relax the spending caps.
ual income tax more progressive”especially for the
Reforming Entitlements
wealthiest 1.2 percent of taxpayers. These features,
along with strong economic growth that raised tax One of the major problems the federal govern-
revenues, accounted for the 1998 budget surplus ment faces is the rapid growth of entitlements”
shown in Figure 10.6. broad social programs that use established eligibility
requirements to provide health, nutritional, or
Balanced Budget Agreement of 1997 income supplements to individuals. These programs
Congress gave the president a line-item veto” are called entitlements because people are entitled to
the power to cancel specific budget items without draw benefits if they meet the eligibility require-
rejecting the entire budget”in 1996, but the ments. Entitlements make up most of the “manda-
Supreme Court declared it unconstitutional. This tory” spending in the federal budget. While this
was followed by the Balanced Budget Agreement ensures that annual spending authorizations are not
of 1997, which featured rigid spending caps”legal needed, Congress can still decide to revise these pro-
limits on annual discretionary spending”to assure grams. Congress is simply reluctant to revise them
that Congress balanced the budget by 2002. because these programs are very popular.
Like many bills in Congress, however, most of the
painful consequences of the cap would arise in later
years rather than right away. When it was time to pre-
pare the fiscal year 2000 budget, Congress was in a
bind. Both the Republicans and the Democrats
All Those Pages! George Washington was able to
wanted to keep the spending caps to show their
put all the figures for the national government™s
commitment to fiscal restraint. However, the
first budget on one large piece of paper. Today, the
Republican majority in Congress wanted to increase
federal budget consumes thousands of pages.
defense spending and reduce taxes. The only way to
do this, however, was to make large cuts in politically




Checking for Understanding Applying Economic Concepts
1. Main Idea What is the difference between 7. Deficit Spending Identify those benefits that
the federal debt and the federal deficit? are directly related to entitlement programs.
If you were given the task of reducing entitle-
2. Key Terms Define deficit spending, federal
ment programs, which ones would you select
debt, balanced budget, trust fund, crowding-
to reduce or alter? Provide reasons for your
out effect, pay-as-you-go provision, line-item
choices.
veto, spending cap, entitlement.
3. Describe how the federal deficit affects the
debt.
8. Making Generalizations Make a list of five
4. List five ways the national debt can affect
ways that you or your family directly bene-
the economy.
fit from federal government expenditures.
5. Identify four recent attempts to bring the
9. Understanding Cause and Effect How can
federal deficit under control.
the federal debt affect worker incentive?
6. Identify three entitlement programs.
Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.



278 UNIT 3 MACROECONOMICS: INSTITUTIONS
Section 1 Section 3

The Economics of Government State and Local Government
Spending (pages 255“258) Expenditures (pages 267“270)
• •
Government spending takes State budgets go through an approval process that
the form of expenditures on varies from state to state. The largest state spending
goods and services, most of categories are intergovernmental expenditures, public
which are public goods, and welfare, insurance trust, and higher education. Others
on transfer payments such include highways, hospitals, and interest on state debt.
as grants-in-aid for which
• The largest single category of spending for local gov-
the government receives ernments is elementary and secondary education.
nothing in return. Public utilities, hospitals, police protection, interest
• Government spending influences the private sector by on debt, public welfare, and highways follow.
affecting the allocation of resources, the distribution
of income, and by competing with the private sector
Section 4
for scarce resources.

Deficits, Surpluses, and the
Section 2
National Debt (pages 272“278)
Federal Government Expenditures • Federal budget deficits existed from 1970 until
1998 when the budget finally had a surplus.
(pages 260“264)
• Deficits add to the federal debt, and the
• The president is responsible for developing the total debt reached $5.7 trillion in
federal budget for the fiscal year, which begins fiscal year 1999, approximately
on October 1. When the budget is complete, the $3.7 trillion of which is held by
budget is sent to the House of Representatives. the public.
• The House only deals with discretionary spending.
• The debt affects the economy
Mandatory spending is not part of the annual budget in several ways: Taxes are
process, although Congress can deal with it separately. needed to pay the interest
• Discretionary spending is broken down for action by on the debt; the distribution
various committees that propose appropriations bills. of income is altered; purchasing
The budget is reassembled and voted on by the power is transferred from the
House and the Senate. private sector to the public sector;
and incentives to work, save, and invest
• If differences between the House and the Senate
may also be altered.
emerge, a compromise bill is developed on which

both vote. Despite recent budget surpluses, the overall federal
budget would show a deficit if not for the surpluses
• The largest components of the federal budget are
in the Social Security Trust Fund.
Social Security, national defense, income security,

medicare, net interest on the federal debt, and The rapid growth of entitlements are still a threat
health. to future budget surpluses.



CHAPTER 10: GOVERNMENT SPENDING 279
Section 3 (pages 267“270)
6. Explain how states model their budget approval
process.
7. Describe three major categories of state spending.
Self-Check Quiz Visit the Economics: Principles
and Practices Web site at epp.glencoe.com and
8. Describe three major categories of local spending.
click on Chapter 10”Self-Check Quizzes to pre-
pare for the chapter test.

Section 4 (pages 272“278)
9. Discuss the relationship of the federal deficit to
Reviewing Key Terms the federal debt.
Write a sentence about each pair of terms below. The sen- 10. Describe how the debt can affect the economy.
tences should show how the terms are related.
11. List four legislative attempts to deal with the prob-
1. public sector, private sector lem of federal budget deficits.
2. transfer payment, grant-in-aid
12. Cite at least six examples of entitlement programs.
3. distribution of income, deficit spending
13. Explain why entitlements are so named.
4. federal budget, fiscal year
5. appropriations bill, balanced budget
amendment
6. deficit spending, federal debt
Thinking Critically
7. deficit spending, crowding-out effect
8. entitlement, balanced budget
1. Classifying Information Examine the major
9. mandatory spending, discretionary spending
types of federal expenditures in Figure 10.3 on
10. spending cap, federal budget deficit
page 262. Classify each as to whether they are
entitlement or non-entitlement programs. Use a
Reviewing the Facts chart like the one below to answer the question.
Section 1 (pages 255“258)
1. Describe the growth of government spending Program Entitlement Non-Entitlement
since 1940.
2. Identify two kinds of government spending.
3. Explain three ways that government spending can
impact the economy.

2. Making Comparisons Compare the federal
Section 2 (pages 260“264)
expenditures for the three years included in
4. Identify the three stages of approval required to
Figure 10.4. Identify at least three major differ-
establish the federal budget.
ences in the expenditures. How do changes in
5. Identify nine of the most important budget cate- spending reflect the priorities of the administration
gories in the federal budget. that develops the budget?




280 UNIT 3 MACROECONOMICS: INSTITUTIONS
Applying Economic Concepts Technology Skill
1. Human Capital Which of the categories in Using a Spreadsheet Review the information on
Figure 10.4 reflect an investment in human using a spreadsheet on page 29. If you need addi-
capital? tional assistance to help you get started, read the
information on page 348. Using the Internet, select
2. Deficit Spending If you were a presidential
one of the states of the United States and download
adviser, what spending cuts would you suggest
or print its state budget. Using this information, cre-
to balance the budget? Explain your reasoning.
ate a spreadsheet to record and analyze the following
3. Budget Deficits The federal government has made categories.
several attempts to deal with the problem of federal
• Name of State
budget deficits. Identify three of the pieces of legis-
• Budget Total
lation discussed in the chapter, and outline their
main features and weaknesses in a chart similar to • Public Welfare
the one below. • Higher Education
• Insurance Contributions
• Highways
A.
• Hospitals
1. Features
• Interest on State Debt
2. Weaknesses
Enter the information from the state™s budget into
B.
the spreadsheet.
1. Features
2. Weaknesses After entering the information, create a graph for
the state™s expenditures. What conclusions can you
C.
draw from your data? Where is the most money
1. Features
allocated? Compare the data for the state you are
2. Weaknesses
analyzing to Figure 10.5, which shows expenditures
by all the states. Would you consider that state typi-
cal or atypical in where it spends its funds? Using a
Math Practice word processor, create a brief summary of your find-
ings. Import your spreadsheet and graphs into the
A neighbor spent $20,000 a year for 10 years and had
document. Print your results and share them with
an annual income of $15,000 during this period. What
the class.
is the neighbor™s total debt?


Thinking Like an Economist
Using E-Mail Locate a Web site for your
An economist likes to think in terms of trade-offs and state™s government on the Internet. Find out
about current bills that your state legislature
opportunity costs. If you wanted to make changes to a
is considering. Using E-mail, compose a letter
balanced budget in any given year, what would be the
to your legislator requesting his or her opin-
opportunity cost of lowering taxes? Of increasing dis- ion about current bills of interest to you that
cretionary spending? are being considered.

Practice and assess key social studies skills with
the Glencoe Skillbuilder Interactive Workbook,
Level 2.

CHAPTER 10: GOVERNMENT SPENDING 281
Issues in Free

Issues in Free
PROTECTING THE ENVIRONMENT:
IS ENOUGH BEING DONE?
One of the sharpest debates of the last three decades has been over the state of the environ-
ment. Squaring off are business interests, who often view environmental regulations as unneces-
sary and costly, and environmental groups, who see such regulations as key to saving the planet.
Many analysts maintain that the earth is fragile, and that current economic activities are on
the verge of damaging the planet in a fundamental way. Other analysts argue that economic
activity always involves the exploitation of natural resources, resulting in some environ-
mental impact. That impact, they claim, is negligible, especially in view of the many benefits
of a thriving economy.

Who™s right? As you read the selections, ask yourself:
Is current economic activity putting the earth at risk?




The World forestlands are being cleared for slash-and-burn
farming by expanding populations and for com-
P R O Environment mercial crop production and livestock grazing. . . .
[In] just the last half-century the oceanic fish
Is Threatened catch increased nearly five times, doubling seafood
availability per person for the world as a whole.
[But] 11 of the world™s 15 most important fishing
For us, the key limits [in the] twenty-first century
areas and 70 percent of the major fish species are
are fresh water, forests, rangelands, oceanic fisheries,
either fully or overexploited. . . .
biological diversity, and the global atmosphere. Will
[A]s with fisheries, overgrazing [of rangeland] is
we recognize the world™s natural limits and adjust
now the rule, not the exception. . . . Yet another of
our economies accordingly, or will we proceed to
our basic support systems is being overwhelmed
expand our ecological footprint until it is too late to
by continuously expanding human needs.
turn back? Are we headed for a world in which accel-
Perhaps the best single indicator of the earth™s
erating change outstrips our management capacity,
health is the declining number of species with
overwhelms our political institutions, and leads to
which we share the planet. . . . [We] are now in the
extensive breakdown of the ecological systems on
early stages of the greatest decimation of plant and
which the economy depends? . . .
animal life in 65 million years. . .
As world water use has tripled since mid-century,
Even in a high-tech information age, human
overpumping has led to falling water tables on every
societies cannot continue to prosper while the nat-
continent. . . .
ural world is progressively degraded.
Since mid-century, the demand for lumber has
doubled, that for fuelwood has nearly tripled, while
”Lester R. Brown and Christopher Flavin,
paper use has gone up nearly six times. In addition,
Worldwatch Institute




282 UNIT 3 MACROECONOMICS: INSTITUTIONS
Enterprise
The American
E n t e r Environment
C O N prise
Is Improving
Twenty-five years ago, only one-third of
America™s lakes and rivers were safe for fishing and
swimming; today two-thirds are, and the propor-
tion continues to rise. Annual wetlands loss has
fallen by 80 percent in the same period, while soil
losses to agricultural runoff have been almost cut
in half. Total American water consumption has
declined nine percent in the past 15 years, even as
the population expands. . . . Since 1970, smog has
declined by about a third, even as the number of
cars has increased by half; acid rain has fallen by An important conceptual lesson is being
40 percent; airborne soot particles are down 69 learned: When pollution stops, natural recovery
percent, which is why big cities have blue skies does not require ponderous geological time. . . .
again. . . . [Emissions] of CFCs, which deplete [T]echnology has (for the moment, at least)
stratospheric ozone, have all but ended. entered a relatively benign phase in which prod-
Other environmental measures are almost uni- ucts and industrial processes consume steadily
formly positive. Toxic emissions by industry fewer resources and produce steadily less waste. . . .
declined 46 percent from 1988 to 1996, even as Because the character of environmental
petrochemical manufacturers enjoyed record U.S. progress is nonideological”reflecting well both on
production and copious profits. . . . The forested federal initiatives and on business”neither political
acreage of the United camp knows how to extol what™s hap-
States is expanding, pened. That no interest group sees
with wildlife numbers itself as benefiting from public aware-
up in most areas. . . . ness of environmental success . . . [has]
Since the Endangered the effect of preventing commentators
Species Act was passed, and voters from focusing on the locus
only a few U.S. species of the real environmental emergencies”
have fallen extinct, not the developing world.
the thousands pre-
”Gregg Easterbrook, social issues analyst
dicted, while species
such as the bald eagle,
gray whale, and pere-
grine falcon have recov- Analyzing the Issue
ered enough to no
1. What “important conceptual lesson” does
longer require full legal protection. Only two
Easterbrook refer to? How might this impact
major U.S. environmental gauges are now nega-
Brown and Flavin™s argument?
tive: continuing inaction against greenhouse
2. Do the two selections address the same
gases and continuing loss of wildlife habitats to
urban expansion. issues? Explain.
3. On what issue might Brown and Flavin agree
with Easterbrook?


UNIT 3 MACROECONOMICS: INSTITUTIONS 283
Why do you accept
money in exchange
for a good or service? Why were
so many different kinds of
money used around the world?
In Chapter 11, you will learn
about the development of
money. To learn more about
how our money and banking
system works, view the Chapter
18 video lesson:
Money and Banking




Chapter Overview Visit the Economics: Principles
and Practices Web site at epp.glencoe.com and
click on Chapter 11”Chapter Overviews to preview
chapter information.



To carry out its economic functions,
money must be acceptable, divisible,
portable, and stable in value.
The Evolution of Money
Main Idea Key Terms
Money is any substance that functions as a medium barter economy, money, medium of exchange, meas-
of exchange, a measure of value, and a store of ure of value, store of value, commodity money, fiat
value. money, specie, monetary unit
Reading Strategy Objectives
Graphic Organizer As you read the section, complete After studying this section, you will be able to:
a graphic organizer similar to the one below that 1. Explain the three functions of money.
illustrates the characteristics of money. 2. Identify four major types of money used in early
societies.
3. Describe the four characteristics of money.

Applying Economic Concepts
Characteristics
of money Money Did you trade items when you were younger?
Read to find out more about trade and how the use
of money makes it easier.




I
t may seem odd to you that people once used a
Cover Stor y plant like tobacco as a form of money.
Frequently, people used things that were easily
available and valued by others as a form of money.
To the Money is something we all take for granted, but with-
Colonies out it”as we saw in the cover story”life would be
quite different.
The enterprising Think what life would be like in a barter
colonists being gen- economy, a moneyless economy that relies on
erally destitute of
trade. Without money, the exchange of goods and
families, Sir Edward
services would be greatly hindered because the
Sandys, the treasurer,
products some people have to offer are not always
proposed to the Virginia Company insignia
Company to acceptable or easy to divide for payment. For exam-
Virginia
send over a freight of ple, how could a farmer with a pail of milk obtain
r the planters. The
men to become wives fo a pair of shoes if the cobbler wanted a basket of
young wo ty girls, “young and
was applauded, and nine
proposal fish? Unless there is a “mutual coincidence of
e ships that arrived
t,” were sent over in th
uncorrup wants””which means that two people want exactly
following, sixty more,
ar (1620) and the year
this ye
ded to the company for what the other has and are willing to trade what
me and well recommen
handso
meanor. The [cost of they have for it”it is difficult for trade to take place.
tuous education and de
their vir
unds of tobacco; but as Life is simpler in an economy with money. The
rt] was one hundred po
transpo
] increased to one hun- farmer sells the milk for cash and then exchanges
mber became scarce, [it
the nu
e of which in money
d fifty pounds; the valu the cash for shoes. The cobbler takes the cash and
dred an
und. . . .
was three shillings per po looks for someone selling fish. Money, as it turns
nals, 1620 out, makes life easier for everybody in ways we
”Holmes™ American An
may have never even thought about.

CHAPTER 11: MONEY AND BANKING 285
Functions of Money Measure of Value
For something to serve as money, it must be
Money can be any substance that serves as a
accepted as a measure of value, a common denom-
medium of exchange, a measure of value, and

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