The Federal Budget PDF

THE FEDERAL BUDGET The Federal Budget Does the federal government budget and spend your tax dollars wisely? Vocabulary Glossary Vocabulary Cards balanced budget budget surplus federal deficit national debt progressive tax regressive tax entitlement...

THE FEDERAL BUDGET The Federal Budget Does the federal government budget and spend your tax dollars wisely? Vocabulary Glossary Vocabulary Cards balanced budget budget surplus federal deficit national debt progressive tax regressive tax entitlement earmarks Introduction © 2024 Teachers' Curriculum Institute Level: A THE FEDERAL BUDGET President Lyndon B. Johnson delivers his State of the Union address in 1964. On January 8, 1964, the House chamber filled with representatives, senators, Supreme Court justices, cabinet heads, military leaders, and invited guests. They had gathered for the president’s annual message to Congress known as the State of the Union address. The name comes from the Constitution, which says the president “shall from time to time give to the Congress Information of the State of the Union, and recommend to their Consideration such Measures as he shall judge necessary and expedient.” The Sergeant at Arms of the House called out, “Mister Speaker, the President of the United States.” Lyndon B. Johnson slowly made his way to the podium amid handshakes and applause. Once there, he was formally introduced to the assembled leaders and the nation by Speaker John McCormack. Johnson opened his address with words of optimism. He praised Congress for their hard work in the previous session and asked that congressional members continue their hard work in the upcoming session. Johnson then transitioned into what he would do as president. “For my part,” he said, “I pledge a progressive administration which is efficient, and honest and frugal. The budget to be submitted to the Congress shortly is in full accord with this pledge.” Johnson went on to outline an ambitious agenda that included cutting the deficit in half, reducing Federal employment, and cutting total expenditures by almost Level: A © 2024 Teachers' Curriculum Institute  THE FEDERAL BUDGET $500 million while also increasing support for education, health, retraining the unemployed, and helping those struggling economically or physically. These plans were part of Johnson’s vision to help fix the American economy. He went on to describe how together he and Congress could use his budget proposal “not only to relieve the symptom of poverty, but to cure it and, above all, to prevent it.” Less than a month later, Johnson presented the ways he hoped would improve the economy in the federal budget he submitted to Congress. Submitting a budget for the federal government to Congress is one of the president’s most important responsibilities each year. This lesson explores how the process of creating that budget works, both before and after the president delivers the annual State of the Union address. 1. Who Controls the Budget Process? "The president proposes, Congress disposes." This is how an old Washington saying sums up the process of creating a federal budget. As is true of the legislative process, however, the reality is far more complex. During some periods of our history, Congress dominated budget making. At other times, the president was clearly in charge. Today, control is shared as the two branches work together to shape a budget that reflects their priorities. Budget negotiations take place between the members of the White House and leaders in the House and Senate. While the president proposes a budget, members of Congress may disagree and vote against it. Congressional Control of Federal Spending: 1789–1921 The federal budget is an © 2024 Teachers' Curriculum Institute Level: A THE FEDERAL BUDGET estimate of the money the government will take in and spend on programs over the next fiscal year. A fiscal year is the period of time an organization uses for its budgeting, record keeping, and financial reporting. The U.S. government's fiscal year begins October 1 and ends September 30. The Constitution talks about levying taxes and spending money, but it does not mention budgets. At the time the Constitution was written, the idea of trying to estimate revenues and expenditures a year in advance was new. In general, governments simply collected taxes and then spent money as needed. In times of crisis or during a shortfall in income, taxes were raised to bring in extra money. For more than a century, Congress dominated this simple method of raising and spending money. As the Constitution requires, all proposals for the spending of federal funds originated in the House of Representatives. These requests were then combined into a single spending bill. Once the House approved the spending bill, it went to the Senate for approval. The president's role in this process was limited to signing the spending bill into law or vetoing it. This system worked fairly well during the 1800s. Usually revenues and expenditures came out about even, creating a balanced budget. During some years, the country even had a small budget surplus, with extra funds left over. The only time the country experienced a federal deficit, or a shortfall of revenue, was during wartime. In times of war, the government raised taxes and borrowed money to fund the military campaign. The money borrowed created a national debt. When the war ended, Congress worked to retire, or pay off, the national debt as quickly as possible. Presidential Dominance of Budget Making: 1921–1974 The rapid growth of government spending during World War I overwhelmed Congress's old way of appropriating funds. By the end of 1919, federal expenditures were more than 26 times what they had been just five years earlier. Moreover, the national debt had soared to a record $26 billion. Faced with a huge war debt and with what looked to many like runaway spending, Congress enacted the Budget and Accounting Act of 1921. This act set up the Bureau of the Budget in the executive branch to oversee a new budgetmaking process. The bureau was renamed the Office of Management and Budget in 1970. The act also set up the General Accounting Office to improve congressional oversight of federal spending. Level: A © 2024 Teachers' Curriculum Institute  THE FEDERAL BUDGET In 1921, Congress gave the president the job of preparing an annual budget for the national government. In doing so, it hoped to get federal spending under better control. As the graphs show, however, presidential dominance of the budget process has led to deficit spending most years and a growing national debt. © 2024 Teachers' Curriculum Institute Level: A THE FEDERAL BUDGET This cartoon captures the concern that was felt by many Americans in the early 1970s that Richard Nixon was abusing his presidential powers. Under this new budget process, the president was required to submit a proposed budget to Congress each year. The intent of this requirement was to give Congress better information with which to make spending decisions. The effect, however, was to concentrate budget power in the executive branch. Beginning with Franklin Roosevelt, presidents used their new budget power to promote their own policy agendas. They decided which agencies and programs should be funded and which should not. Congress could override those decisions, but generally it went along with the president's budget. By 1970, however, it was clear that the budget process put in place in 1921 had not led to a new era of balanced budgets. Year after year, presidents sent budgets to Congress that included costly new programs that lawmakers wanted to support. But few in either branch wanted to raise taxes to fund those new projects. The result was year after year of deficit spending—or spending financed by borrowing rather than by tax revenues. As the deficits piled up, the national debt began to rise to levels that alarmed many national leaders. Nixon and Congress Clash Concern over the budget process mounted during Richard Nixon's presidency. Already facing disapproval over the Watergate scandal, Nixon enraged many legislators by using the president's power of impoundment to nullify congressional spending decisions. Impoundment involves the refusal of a chief executive to spend funds that have been appropriated by the legislature. Level: A © 2024 Teachers' Curriculum Institute  THE FEDERAL BUDGET Impoundment was not new. Presidents before Nixon had used this power to make small spending cuts in programs that they viewed as unwise or unnecessary. Members of Congress might grumble when their favorite projects were canceled, but they did not rebel against the occasional decision to impound federal funds. President Nixon, however, used his power to impound funds on a scale never seen before. In an effort to reduce deficit spending, he refused to spend billions of dollars already appropriated by Congress. He also used impoundment to "defund" programs he did not approve of. When asked by reporters about his use of this power, Nixon declared, The constitutional right for the President of the United States to impound funds … is absolutely clear … I will not spend money if the Congress overspends, and I will not be for programs that will raise the taxes and put a bigger burden on the already overburdened American taxpayer. —Richard Nixon, Jan. 31, 1973 Members of Congress saw Nixon's use of impoundment as an assault on their constitutional power of the purse. In 1974, Congress responded by enacting legislation that both increased its role in shaping the federal budget and limited the president's powers of impoundment. Shared Control of Budget Making: 1974 to the Present The Budget and Impoundment Control Act of 1974 created the budget process that is still in use today. This process gives the legislative and executive branches shared control over budget making. The main change brought about by this legislation was the creation of new budget committees in both the House and Senate. These committees are responsible for drafting Congress's own spending priorities, known as the budget resolution. The act also created the Congressional Budget Office to assist Congress in this process. The CBO provides nonpartisan estimates of revenue and spending. It also "scores" proposed tax and spending bills to indicate their impact on future budgets. Many of the lawmakers who supported the new budget process laid out in the 1974 act hoped it would reduce conflict between the executive and legislative branches. In this they were disappointed. Even with responsibility more evenly shared, the budget process frequently leads to power struggles between the two branches. At the center of these struggles are deep disagreements over how revenue should be raised and how the tax dollars collected each year should be © 2024 Teachers' Curriculum Institute Level: A THE FEDERAL BUDGET budgeted and spent. In 1974, Congress revised the budget process to give lawmakers more control over government spending. This change has not led to an era of balanced budgets. By 1994, the national debt was ten time the size it had been in 1974. The national debt continued to increase in the years that followed. 2. The Federal Budget Cycle On February 12, 2018, President Donald Trump released a $4.4 trillion budget proposal for fiscal year 2019. The nation's economy was unsteady, but Trump believed that his proposal would help protect American interests. "The Budget reflects our commitment to the safety, prosperity, and security of the American people," he wrote. Democrats in the House of Representatives were not convinced. In response to the president's budget proposal, the speaker of the House Nancy Pelosi stated that it was "purpose-built to compound the cruelty," and would harm working families. Level: A © 2024 Teachers' Curriculum Institute  THE FEDERAL BUDGET From Congress's perspective, the arrival of the president's budget proposal marks the beginning of the federal budget cycle. From the executive branch's perspective, however, this is the halfway point in a process that spreads over 18 months, from initial planning to the beginning of the next fiscal year. Phase One: The Executive Branch Prepares a Budget Proposal Constructing a federal budget is about more than just money. It reflects the broader vision of the president and Congress about the purpose and activities of the national government. Brian Reidl explains, "A rational budget process should help lawmakers set priorities and separate vital needs from unaffordable luxuries." The task of separating "vital needs" from "unaffordable luxuries" begins in the federal bureaucracy. Months before the president submits a budget to Congress, each department and agency begins work on its own budget request for the following fiscal year. By June, these budget requests are submitted to the Office of Management and Budget for review. The main job of the OMB is to craft a budget that reflects the policy goals and political agenda of the president. During the summer and fall, OMB staffers review the various budget requests. They consider what is vital and affordable based on projected revenue. They also work with the president and his advisers to see how well the various requests reflect the president's priorities. The OMB then prepares a budget proposal for the president to review and revise. By law, the president must submit this proposal to Congress by the first Monday in February. The four phases of the budget process often over overlap. During the spring and summer, federal agencies have to juggle three different budgets. They operate under their budgets for the current fiscal year, they lobby Congress for funds in the next fiscal year’s budget, and they work with the Office of Management and Budget to plan for the budget after that. Phase Two: Congress Crafts a Budget Resolution Once the president's budget proposal reaches Congress, the House and Senate budget committees take over. © 2024 Teachers' Curriculum Institute Level: A THE FEDERAL BUDGET Their job is to analyze the proposed budget and to recommend changes that reflect Congress's spending priorities. The two budget committees are assisted by the Congressional Budget Office. The CBO's main job is to compare how well the president's budget matches its own estimates of future revenues and expenses. As a nonpartisan agency, the CBO does not make policy recommendations to Congress. During March and April, House and Senate budget committees hold hearings on the president's proposed budget. They hear testimony from OMB staffers about their analysis. They quiz agency officials and consult with other committees to hear their views and estimates about next year's budget. Each budget committee then prepares its own budget resolution. A budget resolution sets guidelines for how much money Congress should spend in 20 broad categories, including national defense, agriculture, and health. A budget resolution is not a detailed spending plan like the president's budget proposal. Nor does it have the force of law. But it does guide Congress over the next few months. After each chamber passes its own budget resolution, the two versions go to a conference committee to be reconciled. The final version is supposed to be approved by the full House and Senate by April 15. Phase Three: Congress Enacts Appropriation Bills Beginning as early as March, the Senate and the House Appropriations Committees start work on Congress's 13 appropriation bills. Each bill deals with one of the spending categories laid out in the budget resolution. These bills make up the final budget. This work continues through the spring and summer. During this time, the president pays close attention to the budget process. If all goes well, most of the work on the 13 bills will be completed before Congress recesses in August. When Congress returns in September, it works out any differences between the appropriation bills passed by the House and Senate. The bills then go to the president for approval. The president may sign or veto some or all of the bills. In the latter case, Congress can either seek to override the veto or revise the bill to gain the president's approval. Ideally, all 13 appropriation bills are law and the budget is in place before the new fiscal year begins on October 1. Level: A © 2024 Teachers' Curriculum Institute  THE FEDERAL BUDGET Most of the federal government’s tax revenue comes from individual income taxes. Each year, an individual or a married couple who earns income is required to submit their taxes by mid- April. Taxes help fund the U.S. military, interest on national debt, federal agencies, and other programs. Phase Four: The New Fiscal Year Begins … Or Does It? It sometimes happens that the president and Congress are not able to reach agreement on the budget by October 1. Usually in this situation, Congress enacts and the president signs a continuing resolution to keep the government working. A continuing resolution allows government programs to operate at current funding levels for a fixed period. During this time, both sides try to work out their differences on the budget. If Congress and the president cannot reach an agreement by the time the continuing resolution ends and another one is not enacted, the result is a budget crisis. In extreme cases, a budget crisis can lead to a shutdown of "nonessential" government activities. Such shutdowns have occurred many times over the years, sometimes for a few hours, sometimes for several days. One of the most serious budget crises began in 1995, when budget negotiations between President Bill Clinton and Congress broke down. A continuing resolution was passed to keep the government going for a few weeks. When that time ran out, Congress and the president could not agree on another resolution, much less a final budget. As a result, many agencies of the federal government were shut down for nearly a month. The crisis ended the following January, when the president and Congress agreed © 2024 Teachers' Curriculum Institute Level: A THE FEDERAL BUDGET to another continuing resolution. As he signed the resolution, Clinton expressed his hope that "no Congress will ever again shut the federal government down in this way." Unfortunately, Clinton's hopes would not be realized. Since 1995, numerous budget crises have resulted in government shutdowns. In December of 2018, the United States entered its longest government shutdown after negotiations about border security collapsed. 3. Where the Money Comes From and Where It Goes In 1948, Florida businessman Dallas Hostetler sat down and calculated how many days he had to work each year to pay his tax bills. According to his estimate, every penny he earned from January through March went to pay taxes. Hostetler called the first day that he began earning money that he could keep for himself Tax Freedom Day. Over time, Tax Freedom Day has been pushed back on the calendar. Experts estimate that the average American today works four full months to fund government at the national, state, and local levels. The Federal Government's Revenue Sources The most important revenue source for the federal government is the individual income tax. This is a tax levied on an individual's or a married couple's annual income. Individual income is taxed whether it comes from wages or from earnings on investments. Social insurance taxes are a second major source of federal funding. You may have seen these taxes in the form of Social Security and Medicare deductions from a paycheck. These payroll taxes are used to fund pensions and health insurance for the elderly. They also fund unemployment insurance and disability insurance for workers who are laid off or injured on the job. The third-largest source of federal revenue is the corporate income tax. This is a tax paid by businesses on their profits each year. For this reason, it is sometimes called a profit tax. The government also raises money with excise taxes. These are taxes levied on the sale of goods, like alcohol, and services. Your family probably pays federal excise tax on its local telephone service. Federal taxes differ in both what they tax and whether they are progressive or regressive. A progressive tax is one in which the tax burden falls more heavily on Level: A © 2024 Teachers' Curriculum Institute  THE FEDERAL BUDGET wealthy than poor taxpayers. The term progressive refers to the way tax rates progress from low to high as one's income rises. Individual and corporate income taxes are progressive taxes. In contrast, a regressive tax is one in which the tax burden, as a percentage of income, falls more heavily on poor taxpayers than on wealthy ones. Excise taxes are an example of a regressive tax. A person earning $20,000 a year pays the same excise tax on local phone service as someone earning $2 million a year. But that tax, measured as a percentage of income, is much higher for the low-income person. Another way for the government to fund expenditures is borrowing. When federal spending exceeds tax revenue, the government borrows from private sources and foreign countries. In 2017, the government borrowed about $519 billion to fund the deficit. Mandatory Spending: Entitlements and Interest Only about onethird of government spending is covered by the budget hashed out each year by Congress and the president. That is because most government revenue today is already committed by law to be spent in specified ways. This mandatory spending can be altered only by special legislation that changes the amount to be spent. The government’s greatest source of tax revenue comes from individual income taxes, followed by social insurance taxes, which fund Social Security and Medicare benefits. In 2017, however, borrowing funded much of the government’s expenditure. The government borrows money when tax revenues do not cover federal spending. © 2024 Teachers' Curriculum Institute Level: A THE FEDERAL BUDGET The two main categories of mandatory spending are interest on the national debt and entitlements. Entitlements are programs through which individuals receive benefits based on their age, income, or some other criteria, and they must be provided to any eligible individual who seeks them. Examples include food stamps and Social Security pensions. The amount of money spent on such programs depends on the number of people who sign up for their benefits, not on an annual appropriation. The amount of federal revenue dedicated to mandatory spending has grown significantly in recent years. Discretionary Spending: Defense, Government Services, and Pork The budget debated in Congress is made up of discretionary spending. Funding for discretionary items can be raised or lowered as Congress sees fit. By far, the biggest chunk of discretionary spending goes to the Department of Defense to support the armed forces. The rest funds the many services provided by federal agencies. A frequent complaint about the budget process focuses on the practice of using earmarks to set aside funds for specific projects. The 2005 Transportation Equity Act, for instance, included more than 6,000 earmarks for home-district projects. The most notorious earmark was $223 million set-aside to construct a bridge to a sparsely populated island in Alaska. This much-criticized "bridge to nowhere" was finally removed from the bill, but not before fueling a national debate on the use of earmarks to fund pork-barrel projects. In his 2007 State of the Union address, President George W. Bush called on Congress to begin earmark reform and "expose every earmark to the light of day." Historically, lawmakers could attach earmarks to bills without identifying themselves. In response to the growing chorus of criticism, Congress made earmarking more transparent, or open to public scrutiny. For example, sponsors of earmarks were required to make their identity public 48 hours before floor debate began on the bill to which they had attached spending set-asides. President Obama also supported earmark reform and called on Congress to increase transparency by publishing earmarks on a website open to the public. In 2009, he also asked Congress to regulate earmarks set for private businesses. Soon after, in 2010, Congress banned earmarks to for-profit companies, and in 2011, it banned earmarks entirely. Level: A © 2024 Teachers' Curriculum Institute  THE FEDERAL BUDGET Over the years, the amount of the federal budget dedicated to mandatory spending has grown. Today, about two-thirds of the federal revenue is spent on interest and entitlement benefits. The remaining third makes up the discretionary budget. © 2024 Teachers' Curriculum Institute Level: A THE FEDERAL BUDGET Here, California Assemblyman Phil Ting urges lawmakers to vote for a measure that would fund homeless aid in 2018. Ultimately, legislators approved the measure, which was then voted on and passed by California residents later that year. 4. Funding State and Local Government Like the federal government, state and local governments must make decisions each year about how to collect the revenue they need and how to spend those tax dollars. The chief executive of each state, county, or city usually prepares the annual budget. The budget is then approved by the state legislature, county board, or city council. However, unlike the federal government, state and local governments often face limitations that make the creation of budgets especially difficult. State and Local Versus Federal Budget Making State and local governments, like the federal government, raise most of their revenue from taxes. However, they are often more limited in their power to spend money than is the federal government. Many state constitutions, for example, require their legislatures to approve a balanced budget each year. They are not allowed, like Congress, to borrow money to fill a gap between revenue and expenses. Instead, lawmakers must either cut programs or raise taxes when revenues fall short of proposed expenditures for the state. Level: A © 2024 Teachers' Curriculum Institute  THE FEDERAL BUDGET Some state constitutions prohibit state lawmakers from enacting certain types of taxes. Seven states, for instance, ban the imposition of taxes on personal income. Other constitutions limit how much certain taxes can increase from year to year. In Massachusetts, for example, taxes on property cannot rise by more than 2.5 percent a year. Such restrictions can be changed only if voters approve amending the state constitution. In addition, citizens play a much larger role in tax policy at the local and state levels than at the federal level. Many states and localities require voters to approve tax hikes through referenda. Some states, such as California, require a supermajority of two-thirds of the votes cast to approve increases in many types of taxes. Faced with these limitations, state and local leaders often scramble to generate needed revenue. The list in this section shows eight sources of revenue commonly used to raise money for state and local governments. How State and Local Governments Spend Their Funds At the federal level, the bulk of spending goes to entitlements for the elderly and national defense. In contrast, state and local governments devote large shares of their budgets to services that affect young people and their families in direct ways. The most important of those services is education. By 2017, almost 51 million children were enrolled in public elementary and secondary schools across the United States. The average amount spent on each of these students exceeded $12,300 per year. Around 90 percent of that money came from state and local governments. Law enforcement and fire protection are also responsibilities relegated mainly to local governments. The United States did not even have a national police force until the creation of the Federal Bureau of Investigation in 1909. In many communities, police protection is the second largest public expense after education. © 2024 Teachers' Curriculum Institute Level: A THE FEDERAL BUDGET State and local governments rely on revenue from various sources and spend their money in different ways. As these graphs show, revenues in 2015 came mainly from taxes and federal funding, while around half of all expenditures went to education, health and social services. Level: A © 2024 Teachers' Curriculum Institute  THE FEDERAL BUDGET State and local governments also fund a variety of health and welfare services, often with assistance from the federal government. Examples include public health clinics for low-income families, health care centers for the mentally ill, and childcare for low-income working families. Many other services are funded at the state and local levels. For example, state and local governments spend money to build and maintain roads and bridges. They create and maintain parks and playgrounds for the public to enjoy. They fund public libraries, civic auditoriums, and museums. All of these services have been developed in response to public demand. The ever-present challenge is finding the money to pay for what the public wants. Summary The federal budget is an estimate of the money the government will take in and spend over a fiscal year. It is created by a long process that involves the executive and legislative branches of the government. Control of the federal budget First Congress and then the president controlled development of the federal budget. The current budget process calls for cooperation between the executive and legislative branches. Federal budget cycle Preparation of a federal budget is a long process that lasts almost two years. It begins with preparation of initial budget requests by federal departments and agencies and ends with a final budget approved by Congress and the president. Revenue and expenditures Most revenue, at all levels of government, is raised through a variety of taxes. At the federal level, entitlements are the largest expenditure. At the state and local levels, education tops the expenditure list. State and local budgets People depend on state and local governments to fund public schools, police and fire departments, roads and bridges, and health and welfare services. State and local governments pay for services through taxation, lotteries, and user fees. U.S. Supreme Court Cases: Case 8: Clinton v. City of New York, 1998 - You © 2024 Teachers' Curriculum Institute Level: A THE FEDERAL BUDGET Make the Call Does a law allowing the president to veto portions of a bill passed by Congress violate Article I of the Constitution? The Story Behind the Case Presidents have long wanted the authority to veto some portions of bills passed by Congress, while approving the rest. In 1996, Congress passes the Line Item Veto Act. President Bill Clinton signs it into law. This act allows the president to delete spending items and tax benefits from a bill within five days of signing it into law. Clinton uses his new power to veto parts of 11 different laws, eliminating 82 provisions altogether. One item cut by the president is money allocated to New York City hospitals in the Balanced Budget Act of 1997. Another is a tax break for Idaho potato farmers in the Taxpayer Relief Act of 1997. Each group files suit in a different U.S. district court challenging the constitutionality of the Line Item Veto Act. The attorneys for both sets of plaintiffs base their arguments on Article I, Section 7 of the Constitution. This section contains what is known as the Presentment Clause. It reads, Every Bill which shall have passed the House of Representatives and the Senate, shall, before it become law, be presented to the President of the United States: If he approve, he shall sign it, but if not he shall return [veto] it, with his Objections to that House in which it shall have originated. The plaintiffs argue that the Presentment Clause requires a president to either sign or veto a bill passed by Congress. It does not give a president power to reject selected portions of a bill. The district court judges who hear the two cases agree and declare the Line Item Veto Act unconstitutional. President Clinton appeals these rulings to the Supreme Court, where the two cases are combined into one. Relevant Case Raines v. Byrd, 1997 As soon as President Clinton signed the Line Item Veto Act, six senators filed suit in U.S. district court, claiming that the act was unconstitutional. The district court judge ruled in their favor. The Supreme Court, Level: A © 2024 Teachers' Curriculum Institute  THE FEDERAL BUDGET however, reversed that ruling without taking a position on the law itself. Instead it declared that the senators lacked what is known as “standing” to file their suit. In law, standing means the legal right to bring a lawsuit. Only a person with something at stake in the case has standing. The senators, the Court ruled, lacked standing to challenge the Line Item Veto Law because they had not been personally harmed by it. Arguments for the Appellant: Clinton The Line Item Veto Act is constitutional. The Presentment Clause of Article I does not explicitly say that a bill must be passed in its entirety. The president already has the power to impound, or not spend, funds appropriated for specific purposes. This law merely gives the president the authority to reject those appropriations in the first place. The plaintiffs lack standing. Neither can show that they have been significantly harmed by the president's actions. Arguments for the Appellee: City of New York The Line Item Veto Act is unconstitutional. The Presentment Clause of Article I makes no provision for the partial approval or rejection of a bill. The line-item veto allows a president to amend legislation after it has been approved by Congress. This gives the president legislative power that was not intended by the framers of the Constitution. The plaintiffs have standing. Both can show that they have been harmed by the president's actions. Does the Line Item Veto Act violate the Presentment Clause of the Constitution? You make the call. U.S. Supreme Court Cases: Case 8: Clinton v. City of New York, 1998 - The Decision of the Court Does a law allowing the president to veto portions of a bill passed by Congress violate Article I of the Constitution? The Decision (6-3) © 2024 Teachers' Curriculum Institute Level: A THE FEDERAL BUDGET The Court first decided that the plaintiffs had suffered enough harm from the president's use of the line item veto to have standing. It then held that the Line Item Veto Act violated the Presentment Clause of Article I. It was therefore unconstitutional. Writing for the majority, Justice John Paul Stevens explained, In both legal and practical effect, the President has amended two Acts of Congress by repealing a portion of each … There is no provision in the Constitution that authorizes the President to enact, to amend, or to repeal statutes … The procedures governing the enactment of statutes set forth in the text of Article I were the product of the great debates and compromises that produced the Constitution itself … Our first President understood the text of the Presentment Clause as requiring that he either “approve all the parts of a Bill, or reject it in toto [as a whole].” The Court's decision in this case reinforced the principle of separation of powers by reaffirming that Congress alone has the power to enact or amend legislation. The decision also made it clear that it will take a constitutional amendment to enact a line item veto. Government and the Economy: Making Economic Choices Level: A © 2024 Teachers' Curriculum Institute  THE FEDERAL BUDGET During the Great Depression, the federal government intervened more actively in the economy, and in different ways, than it had before. Since this time, the nation's leaders have taken different approaches to dealing with the economy— the process by which goods and services are made, bought, and sold. Economics and Government in the 1930s When the Great Depression began, most U.S. economists believed a free market economy could best ensure national prosperity. These economists focused on analyzing the decisions of individual producers and consumers in the market. A free market economy is an economic system in which the buying and selling of goods is not planned or directed. When economic activity slowed, these free market economists thought that the slowdown was caused by outside events such as wars and crop failures. They believed that, given time, the economy would adjust on its own. Most Depression-era economists believed that the government should have a small role in the economy. They thought the government should have three main goals regarding the economy. First, keep taxes low. Second, keep government © 2024 Teachers' Curriculum Institute Level: A THE FEDERAL BUDGET spending low. Finally, make sure the nation has a balanced budget, meaning that the government does not spend more money than it takes in. Economists theorized that low taxes meant producers or consumers would have more money to keep businesses active. These economists also believed that the government should not borrow money. The government did regulate some economic activity, but for the most part those regulations sought to make sure the free market operated the way it was supposed to. A New Way of Economic Thinking In the 1930s, the British economist John Maynard Keynes offered a new way of looking at economics. Instead of focusing on the role of individuals in the marketplace, he focused more on the economy as a whole. Keynes wanted to explain why economies experience crises, such as a depression. Keynes's basic idea was simple. During a recession, economic activity slows down and, as a result, many people lose their jobs. The demand for goods and services decreases, because people who are out of work stop spending. In response, businesses cut expenses and lay off even more workers. Some businesses even close down. When that happens, more people lose their jobs. Without jobs, people have less money to buy goods and services. The result is a downward economic spiral. The fastest way to break that downward spiral, Keynes argued, is for the government to get involved to increase the demand for goods and services. The easiest way to increase demand for goods and services would be to increase government spending. When the government spends money, businesses benefit. They earn the money that the government spends. Businesses then have an incentive to use that money to make more goods and services for consumers to buy. This way of thinking about economics says that government intervention is the best way to keep the economy stable. If total spending by individuals and businesses is not enough to stimulate economic growth, then the government should step in to increase demand. Rising demand stimulates production. More production puts people back to work, and the economy begins growing again. To be effective, however, increased government spending should be financed by borrowing money rather than by raising taxes. Higher taxes would only take more money out of consumers' pockets. Like most politicians, Franklin Delano Roosevelt accepted mainstream economic views when the Great Depression began. But by the late 1930s, President Level: A © 2024 Teachers' Curriculum Institute  THE FEDERAL BUDGET Roosevelt moved in Keynes's direction. Despite FDR's efforts to spark a recovery with government spending and job-creation programs, the Great Depression was continuing. "We suffer primarily from a failure of consumer demand because of lack of buying power," FDR said in a radio broadcast to the nation in 1938. "It is up to us [the government] to create an economic upturn." Roosevelt went on to propose a multibillion-dollar spending program. Much of it had to be funded by borrowed money. Even then, the economy was slow to respond. Only with the start of World War II did the federal government pump enough money into the economy to end the Great Depression. Between 1939 and 1945, the unemployment rate dropped from 17 to 2 percent. This benefit had a cost, however. The trade off was that during the same period the federal budget deficit soared from under $3 billion to more than $47 billion, and prices increased by half between 1938 and 1948. Economic Policy After World War II By 1946, most economists agreed with Keynes that the government could—and should—use its power to stabilize the economy. Keynes's theories were put to the test in the early 1960s. During the late 1950s, the economy slowed and unemployment increased. When President John F. Kennedy took office, he called on Congress to speed economic growth by cutting taxes to stimulate demand. When the Kennedy tax cuts were finally enacted in 1964, they helped bring about a long period of economic expansion. Unemployment declined, just as Kennedy had hoped. At the same time, however, the prices of goods and services began to rise. This rise in prices is known as inflation. © 2024 Teachers' Curriculum Institute Level: A THE FEDERAL BUDGET By the end of the 1960s, the idea that the government could "fine-tune" the economy to keep it balanced between inflationary booms and high unemployment busts was widely accepted. Within a few years, however, critics of this policy began to speak up. One of the most well known was an American economist named Milton Friedman. Like Keynes, Friedman lived through the Great Depression. But he had a very different explanation for why it had happened and what should have been done about it. Friedman argued that a major cause of the Great Depression was a drop in the money supply. Between 1929 and 1933, the amount of money in the economy dropped sharply as banks failed and wiped out the accounts of depositors. As the money supply shrank, people reduced their spending and saved what dollars they had. With fewer people buying goods and services, the result was a period of falling prices, rising unemployment, and declining incomes. According to Friedman, the federal government should have reacted to the crisis by increasing the supply of money. With more money in circulation, they argued, spending would have picked up and the economy would have started to grow again. Friedman's followers called themselves "monetarists." Although the process is often referred to as "printing money," the government uses a variety of methods Level: A © 2024 Teachers' Curriculum Institute  THE FEDERAL BUDGET to put more money into circulation. These methods involve the nation's banks and the banking system. When the government takes action to regulate, or control, the amount of money, it is using monetary policy. According to monetarists, changes in the money supply play a primary role in the ups and downs of the economy. If the money supply grows too rapidly, inflation occurs. With more money in their pockets, consumers demand more goods and services than firms can supply, driving prices up. If the money supply grows too slowly, deflation results, and spending and investment slow. Therefore, the goal of monetary policy should be to increase the money supply just fast enough to keep up with economic growth—but no faster. Using Monetary Policy to Fight Stagflation The use of monetary policy to stabilize the U.S. economy was put to the test in the 1970s. In 1973, the economy received a shock when the Organization of the Petroleum Exporting Countries (OPEC) imposed a trade embargo on the United States and cut oil production, limiting supplies to all countries. OPEC is a group of oil-rich countries that includes Saudi Arabia, Iran, Iraq, and Venezuela. A trade embargo is a ban on trade with a country or group of countries. The oil embargo cut off a large amount of the supply of oil that the United States depended on to run its cars and factories. When the supply of a good decreases, its price goes up. The inflation rate, which had already reached worrying levels, soared into double digits. This meant that something that cost $1.00 in January 1974 cost at least $1.10 in December. As the economy struggled with rising prices, business activity slowed, and the unemployment rate climbed. The result was an unhappy economic situation known as stagflation. Stagflation is characterized by an economic slowdown combined with high inflation. Using Fiscal Policy to Encourage Economic Growth Fiscal policy consists of decisions made by the government regarding how much money to spend and how much to collect in taxes. At the national level, Congress makes these decisions based on recommendations from the president. Fiscal policy is used to pursue low unemployment, stable prices, and economic growth. The tools that fiscal policymakers use to achieve those goals are aimed at expanding or contracting economic activity. In the early 1980s, a debate arose as to how tax cuts might best be used to encourage economic growth. On one side of the debate were supporters of Keynesian economics. This school of thought is also known as demand-side © 2024 Teachers' Curriculum Institute Level: A THE FEDERAL BUDGET economics. Demand-siders believe that the best way to deal with a sluggish economy is to stimulate overall demand by cutting individual income taxes. As consumers spend the money they save on taxes on goods and services, business will pick up and the economy will begin to grow. On the other side of the debate were advocates of a theory called supply-side economics. Supply-siders hold that the best way to deal with an economic slowdown is to stimulate overall supply. This can be done by cutting taxes on businesses and high-income taxpayers. As businesses and investors use their tax savings to expand production, the supply of goods and services will increase, spurring economic growth. Inspired by supply-side theories, President Ronald Reagan pushed for major tax cuts in 1981. In response, Congress lowered the corporate income tax rate at the highest bracket from 48 percent to 34 percent. Congress also slashed the top marginal income tax rate from 70 percent to 28 percent over the next seven years. Critics of the Reagan tax cuts argued that the cuts would starve the government of needed revenue. In response, supply-siders claimed that the tax cuts would actually increase, not reduce, tax revenues. They supported their claim with a U- shaped graph, known as the Laffer curve. Popularized by economist Arthur Laffer, the graph shows a theoretical relationship between tax rates and tax revenues. The results of the Reagan tax cuts were mixed. Over the next few years, the economy grew, just as supply-siders had predicted. Tax revenues also increased, although less rapidly than people had hoped. As a result, budget deficits grew and the federal debt ballooned, just as supply-side critics had feared. Today, economists generally accept that both demand-side and supply-side approaches should be considered when developing fiscal policy. Level: A © 2024 Teachers' Curriculum Institute  THE FEDERAL BUDGET President Richard Nixon had tried to stop inflation by putting strict limits on wages (the money people earn for labor) and prices (the money people pay for goods and services) in 1971. As soon as the controls were lifted, however, prices shot up again. In 1974, President Gerald Ford launched an anti-inflation crusade called Whip Inflation Now, or WIN, but inflation slowed little. While running for president in 1976, Jimmy Carter scolded Ford for letting the "misery index" rise to more than 13 percent. The misery index is the sum of the inflation and unemployment rates. But during his term in office, Carter watched helplessly as the misery index reached more than 20 percent in 1980. Near the end of his term, President Carter tried to bring inflation under control. He used monetary policy to slow the growth of the money supply. The strategy worked, but it took a long time. By the time it took effect, the nation had a new president, Ronald Reagan. Inflation dropped from 13.6 percent in 1980 to 3.2 percent in 1983. This achievement was not without a cost, however. During this same period, interest rates soared to historic highs. With the cost of borrowing so high, business activity dropped and unemployment reached almost 11 percent—its highest rate since the Great Depression. © 2024 Teachers' Curriculum Institute Level: A THE FEDERAL BUDGET The Role of Government in the Economy Today Over the past 50 years, most economists have come to agree that the U.S. government should have a role in managing the economy. In an ideal world, policymakers would always make the right decisions to keep the economy growing steadily, while keeping inflation and unemployment low. But that's not always possible. In the real world, the economy still follows the ups and downs of the business cycle, which are hard to predict. Government leaders try to make the best decisions they can with the imperfect information they have. The 2020 Economy In 2020, the economy was greatly impacted by a recession caused by the COVID- 19 pandemic. Globally, it was the worst economic crisis since the end of World War II. In the United States, the recession began in February 2020. It lasted only two months, ending in April 2020. However, the recession lasted much longer globally. Generally, the recession was accompanied by high unemployment, the collapse of small businesses, and several shortages. Much of this led to economic struggles for many people in the United States. Impact on Businesses and Workers A recession was first declared in the United States in early 2020, when GDP decreased by 5.1% in the first quarter. National lockdowns caused many businesses to shut down. This led to an even greater economic contraction in the second quarter of 34.1%. The closure of businesses led to job losses for many people. Many employees were let go. In fact, about 43% of businesses had temporarily closed in April 2020. The most impacted businesses were restaurants, bars, and places for entertainment. Retail stores and personal services, such as hairdressers, were also heavily impacted. About 10 million people filed for unemployment in the first two weeks after March 14, 2020. This was when lockdowns across the country first began. The unemployment rate peaked in April 2020 at 14.8%. This was a huge increase from the pre-pandemic 3.5% unemployment rate in February 2020. The most impacted workers included people of color, lower-wage earners, women, and those with less education. Very quickly, many people—except for those in essential services— shifted to working from home. Level: A © 2024 Teachers' Curriculum Institute  THE FEDERAL BUDGET The Federal Reserve attempted to buoy businesses and banks. To do this, it lowered the target interest rates to between 0.00% and 0.25%. This was a dramatic full point decrease from the previous range. The Federal Reserve announced that they would keep the federal funds rate, or interest rate, near zero until 2023. This was to encourage economic activity. The Federal Reserve also reduced the reserve equipment to zero. This meant that banks could lend out all of their deposits without keeping any in reserve. As a result of all of this, bank lending rates decreased to historic lows. Small businesses in particular were hurt by the pandemic economy. Many small businesses were financially fragile. Many had already let people go or closed within the first few weeks of the crisis. Furthermore, while some received federal aid, many others had difficulty accessing financial help. Impact on Consumers and Federal Aid At the outset of the pandemic, consumer activity largely decreased. Many people began saving money to prepare for the crisis ahead. Retail sales declined by 8.7% from February to March 2020. This was the largest month-to-month decrease ever recorded. In contrast, essential services such as grocery stores and pharmacies saw increased sales. Retail sales began to recover in most sectors once many states lifted social distancing requirements in May 2020. Meanwhile, many unemployed people struggled to afford food, pay rent, and meet other important expenses. In fact, food insecurity doubled for households with children from 2018 to mid-2020. Low-income families with children were the most impacted by the pandemic economy. To help struggling renters, the U.S. government put into place eviction moratoriums. These banned evictions in counties with high rates of COVID-19 transmission. Still, the pandemic overall worsened economic inequality in the United States. Generally, it made the poor even poorer. © 2024 Teachers' Curriculum Institute Level: A THE FEDERAL BUDGET Additionally, Congress spent trillions of dollars to support those struggling financially during the pandemic. In March 2020, Congress approved the Coronavirus Aid, Relief, and Economic Security (CARES) Act. This legislation provided financial aid to people and businesses impacted by the pandemic. Congress later approved the Consolidated Appropriations Act in December 2020. This act sent $600 stimulus checks to eligible taxpayers. Finally, the American Rescue Plan Act was signed into law in March 2021. This program distributed $1,400 stimulus checks to those in need. It also helped fund vaccinations and other aid. Altogether, these three pieces of legislation increased the federal deficit by $5.3 trillion. Other Economic Changes: The Stock Market and Shortages The president declared a national emergency in March 2020, leading investors to panic. This caused the stock market to crash on March 9, 2020. During this crash, the greatest single-point losses in U.S. history occurred. However, the market rebounded fairly quickly by late 2020. Level: A © 2024 Teachers' Curriculum Institute  THE FEDERAL BUDGET Furthermore, lockdowns internationally and domestically also caused economic changes. The hospitality and tourism industries declined amid travel restrictions. The demand for oil similarly decreased due to restricted travel, leading to a decline in oil prices. Industrial production all around the world was also heavily damaged by the pandemic. This affected supply chains everywhere. Disrupted supply chains and increased consumption of some goods fueled several shortages. Many experienced shortages of propane, lumber, steel, semiconductors, and computer chips. Consumer goods such as toilet paper, paper towels, cleaning supplies, canned food, bikes, and other household appliances also experienced shortages. Most importantly, there were shortages of equipment used in hospitals, such as oxygen therapy equipment, ventilators, and personal protective equipment. The U.S. economy continued to recover from the effects of the COVID-19 recession throughout 2021. The return of stock markets and consumer activity was remarkable. Yet the unemployment rate in 2021 still remained higher than pre-pandemic levels. Some sectors, such as leisure and hospitality, continued to be affected into 2021. In contrast, others—such as construction and business services —recovered to pre-pandemic levels. As time goes on, economic recovery may continue to unfold at different rates across different industries and demographics. © 2024 Teachers' Curriculum Institute Level: A